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Clock is Ticking on London Exchange

December 14, 2009
By Maria Korolov

Since 2007, 18 new electronic competitors, most known as multilateral trading facilities, have emerged to challenge the London Stock Exchange for trading shares of the 2,825 international and domestic companies listed with it. One, Chi-X Europe, has taken away nearly a fourth of the trades, by recent count.

The London exchange contends it's not losing customers and that technology is key to its competitiveness. A major technology revamp is scheduled for next year, but it's not expected to stop the slide, according to technology analysts.

In fact, the LSE hasn't been able to argue that it's got its electronic house in order, in the meantime. In the past 16 months, the exchange has suffered four outages, starting with seven hours down in September 2008. This year's tally: one hour down on October 14, a partial outage on November 9 and a complete outage on November 26.

In fact, according to Celent analyst Cubillas Ding, all four outages coincided with large spikes in trading volumes, from different economic events.

"This leads me to conclude that the technology cannot handle the spikes in volume related to these events," he said.

In September 2008, for example, the trading outage occurred after the U.S. government decided to bail out its low-income home loan agencies, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, and markets rebounded worldwide. The most recent outage-on Thanksgiving Day-coincided with market turmoil related to debt repayment problems facing Dubai World, the state-owned development company.



Some of these problems have been blamed on the LSE's TradElect system, its current trading platform. TradElect was built by the global consulting firm Accenture and runs on the Microsoft Windows operating system. The platform, which cost $65 million, will be replaced next year by a new platform from MillenniumIT, a Sri Lanka-based trading company which the LSE acquired in October for $30 million. At the time, the LSE said it was buying MilleniumIT because it needed a more up-to-date, flexible system.

The upgrade will save the company $16 million a year starting in the 2012 fiscal year, the exchange predicted in its November interim report, but did not give specifics about where exactly the cost savings would come from.

But the report also showed a 9 percent drop in revenues, to $506 million during the six months ending September 9, from $556 million a year ago. This is reflective of the LSE's falling share of trading volume. According to the Thomson Reuters Equity Market Share Reporter, the LSE's share of trading in its own stocks fell from 75 percent in October 2008, to just 58 percent this October.

The biggest single gainer was BATS, growing from nothing to 7 percent share this year. Chi-X remained the biggest alternative to the LSE, improving its share from 17 percent to 22 percent over the course of the year. But other alternative trading venues-such as Turquoise, Burgundy, and Liquidnet-also gained ground, rising from a combined total 8 percent of the market in 2008 to 12 percent in October 2009.

The LSE's chief executive, Xavier Rolet, admitted that the exchange is seeing "highly competitive and still somewhat uncertain market conditions."

But the exchange is taking steps to address this, he said, in the interim report to shareholders.