04 January 2010 Features

 

Feature: Platform alteration

Tom Groenfeldt

The London Stock Exchange's decision to dump its Microsoft .Net and SQL Server-Accenture-HP system in favour of technology from the previously little-known MillenniumIT, demonstrated the intense pressures on incumbent exchanges in the face of competition from new equities trading venues. Reaction to its outage at the end of last month, the second in recent months, showed just how critical exchange systems are in an era of electronic trading, although the LSE attributed that failure to connectivity problems rather than the trading platform.

With its unlikely headquarters in Colombo, Sri Lanka, Millennium IT offers a highly skilled, relatively low-cost development group of 450 working on Linux. The question some industry experts raise - will the LSE deploy MillenniumIT largely as it is or use it as a development shop to build a platform - has yet to be answered. The company's exchange system runs on Linux or Unix with an Oracle database. While the company said it has achieved 130 microsecond latency in its trading platform during tests at Intel's fasterLAB, it has not proven its ability to scale: its financial clients tend to be relatively small - nowhere near the scale of the LSE.

Still, the decision highlighted the unique demands of equities trading - high and spiky volumes, demands for low latency that test the limits of physics, and a requirement to keep costs low. The LSE spent £40 million upgrading TradElect, against a MillenniumIT purchase cost of £18 million, an indication of the scope of the problem. The Exchange estimates the move to MillenniumIT will save at least £10 million a year. The operating expenses for TradElect over 2010 and 2011 are expected to be £25 million and £6 million respectlely.

Industry analysts suggest that the incumbent LSE technology providers, global leaders in broad horizontal businesses, weren't paying attention to the importance of threats from the multi-lateral trading facilities, the electronic exchanges that use the latest technology to make markets in the highest volume of London exchange stocks.

"Accenture and Microsoft both claim to be world class technology companies," observed Brian Taylor, chief executive of BTA Consulting in London, a consultant who works with exchanges around the world, "so they should have worked out what will happen in the industry. With all these new entrants, none of whom have chosen Accenture or Microsoft, they should have asked ‘Why?' Is it too expensive, too slow, unreliable? It never seems to have crossed their minds, and as a result they will lose their only reference site."

Taylor says that .Net is too slow in today's trading world and the system built for the LSE is too reliant on programmers to maintain it and it has proven to be unreliable.

"One doesn't know whether that is an Accenture problem or a Microsoft problem but it doesn't exist on other platforms." All have the occasional outage, but nothing like the LSE's very public experience. The exchange has never explained what part of its technology is the source of the failures."

Stevan Vidich, industry technology strategist for worldwide financial services at Microsoft, declined to go into details about the LSE or Accenture, saying it would be inappropriate for him to comment.

"We are not responsible for the design of that core trading or data dissemination system, we provide technology on top of which Accenture can build," he said. The LSE has a much broader range of products and its business logic is much more comprehensive than its alternative venue competitors, he added.

One industry expert familiar with the LSE said the .Net/Accenture project failed to achieve any of its objectives, especially low cost.

"It was not cheaper and it turned out to be a much more complex environment [than expected] and it didn't have the availability and performance characteristics they needed." When Bill Gates was chairman of Microsoft, he and LSE CIO David Lester evangelised the benefits of a Microsoft platform for exchanges, he added.

"But once Gates retired, that dissipated. The reality of the systems, their failures and their costs became a factor. In London they realised that in order to achieve the same levels of performance which they had in [the legacy HP] NonStop they had to continue to add redundant servers. Every time they added redundant servers, they had to add a cadre of software licenses. The result was not only an operations nightmare but the costs kept going up and it didn't perform close to Non Stop."

Vidich at Microsoft says the company has recently benchmarked its technology for a major international stock exchange with a representative workload and achieved 100 milliseconds end-to-end throughput with C++, C# and .Net managed code. He pointed to recent announcements of extremely fast benchmarks from Microsoft partners such as Rapid Addition and Spryware running on Windows Server 2008 which has been redesigned for ultra low latency. He said it demonstrated cost-leading results which are relevant to core trading for an exchange.

But industry insiders sound as if it is already too late for Microsoft to get back into this game, although there are reports that Microsoft has offered to port Millennium to a Windows platform. Vidich would not discuss this and the LSE said it would not be drawn into a debate of Linux vs. Windows.

Exchanges have faced some difficult decisions after regulations in the US and Europe opened the way for competition from all-electronic trading venues. CIOs at exchanges had been accustomed to using fault-tolerant platforms such as Tandem and Open VMS. Those platforms were expensive and, as fault tolerance moved into software, commodity servers seemed to provide the answer.

HP, which ended up with the Tandem Non Stop platforms after it acquired Compaq, appears to have faded from the exchange space, although it did recently win a deal on a low latency data distribution with Quanthouse at LSE, beating a bid from IBM. HP declined to comment for this story.

"Tandem and HP are now on the fringe," said Taylor. "They are being taken out all the time. Tandem is being lost or being replaced by commodity servers ... they are just too expensive and too slow."

Linux and commodity hardware that can run at extreme speeds hurt the older technologies because of the cost, said an exchange technologist.

HP is in a defensive mode, but they would deny it, said Bob McDowall, research director for Europe at TowerGroup. "They are trying to hang on, but the needs of the exchanges are getting more specific and changing with greater frequency. Organisations like HP and IBM are not small enough and nimble enough to give that quick response."

IBM would beg to differ, and it is gaining new prominence in the exchange business.

IBM's low latency messaging was the choice of Deutsche Börse and Chi-Tech, the wholly owned technology provider to Chi-X Global, the alternative trading venue.

Hubert Holmes, executive vice president at Chi-Tech, described IBM's low latency messaging as a compelling offering for the exchange technology market. He also likes the role the company plays - it provides consulting and components rather than full-blown products, so rather than a competitor to Chi-Tech, IBM is a complementary partner.

"That appeals to us because Chi-Tech markets a comprehensive product solution, including technology for matching, data management, surveillance and gateways.  The model also appeals to exchanges that want to build a platform themselves. Their developers can take the tools IBM offers, to customise and build applications."

Piet Van de Velde, IBM's worldwide business development director for markets infrastructure, said the company has completely restructured its approach to exchanges and invested in reference architectures and benchmarks. As a result, when it consults with exchanges around the world, it has a portfolio of best practices plus information about threats and opportunities for its clients.

Fred Pennino, who works for IBM in business development with exchanges around the world, consulted with Korea on its plans to consolidate exchanges and a clearing house. He could draw on IBM's detailed intellectual property to show how consolidation had been done in other countries. Rather than starting from scratch, IBM has a thick set of documents - more than 350 pages of detailed information, and it is constantly evolving.

"We use something called the Securities Exchange Reference Architecture and some underlying methodologies such as the Component Business Model," explained Pennino. "It provides for a framework, a methodology and a structure. The Exchange Reference Architecture is a living IP in that we take care to constantly update it with best practices, case studies, etc."

IBM has broken the activity of an exchange into 12 components.

"We will map all the business functions into each of these components and define the services delivered within each component and the data flows between components," said Van de Velde.  "We have applied SaaS (software as a service) which allows you to re-use a lot of the investment you have made in certain applications. It makes for less difficult, more maintainable applications." The company also has a reference architecture for clearing houses.

When incumbent exchanges are forced to compete with lean, fast-moving upstarts, they have neither the time nor the budgets to spend several years, and more millions, on studying their problem.

"We use these on each and every engagement," says Van de Velde, "so we can quickly get a sense of the project and answer some of the key questions without having to do the research again. This knowledge repository cuts the time it takes to get to each of the vexing issues exchanges submit to us."

That's just what exchange technology providers want.

"A high-cost development and operations model is not where exchanges need to be today, as their margins have decreased because of competition from MTFs such as Chi-X," said Holmes.  "They can no longer afford multi-million dollar development efforts and that is probably hurting the large consulting firms who specialise in custom outsourcing of development for exchanges."

To hear Van de Velde describe it, IBM sort of stumbled into this business. About three and a half years ago the Luxembourg exchange called on IBM for help with some problems with performance when a new participant was firing off a fast quote machine, he recalls.

"We realised we needed very high throughput and low latency." The company's research lab in Haifa had invented a new way of doing messaging, and IBM applied it to exchanges branded as low latency messaging.

Gerhard Lessmann, a member of the Deutsche Börse Systems executive board, said the results were impressive.

"We did an extensive benchmarking of various middleware alternatives," he explains. "IBM came out the best of all tested products, with lowest latency, lowest jitter and very graceful behaviour (i.e. almost no increase in either latency or jitter up to near the point of saturation of the network) and highest usability."

Taylor said that for Deutsche Börse, which he describes as a stalwart of "not invented here" scepticism, to use IBM's was very impressive.

"For them to use IBM's tells you how good it is and how fast they see the markets moving."

IBM has also committed research resources to helping Deutsche Börse maintain its edge.

"IBM has been very receptive in considering our requirements for the future development of the product," added Lessmann. "In general, the requirements that we have for our trading systems are pretty extreme. This is in particular true for jitter. A few milliseconds longer processing times from time to time do not matter in most applications - but they do matter for a trading system. Such requirements are often difficult to meet with third party products, including operating systems, BIOS and hardware."

Chi-Tech, another user of IBM's low latency messaging, has achieved some excellent results in the lab, said Taylor, a million messages a second with very low latency, maybe the lowest he has ever seen.

"It is fantastic. You are going to have huge bandwidth soon, and once you provide the bandwidth, people such as high frequency traders and algorithmic traders will use it."

Holmes said that Chi-Tech was achieving 1 to 1.2 milliseconds on its platform some time back; now they are at about 200 microseconds and getting faster. Its continual work on speed and a forward-looking approach is essential for exchanges in today's environment, he said. As one example, the LSE implementation of .Net did not yield the scalable latency needed to compete in today's fast-moving post-MiFID world, he added.

"How long the latency race will go on - who knows - but for the foreseeable future, exchanges and other marketplaces will need to be fast to support demand from the high frequency and other latency-sensitive trading communities."

Alternative exchanges appear to have the momentum, and the leaders continue to invest in technology and expand their reach. Lessmann at Deutsche Börse described their plans: "Primarily, we are designing for very low latency, very low jitter and very good scalability - being able to scale up to high capacity. We also want to be more agile than with our current systems: do more releases a year, significantly reduce the effort of a release introduction at the customer site and do all this at lower costs."