Choices Abound As LIFFE Opens its Connect System to Vendors and Customers
Too many vendors?
While LIFFE members wrestle with the selection process, it is also a concern for the vendors. "Electronic futures and options trading is a big, evolving and fast-growing marketplace with a growing number of niche areas. If each vendor finds their own niche, then there is certainly room for 16 and possibly even more vendors," according to Mike O'Hara, managing director of Iris Investment Support Systems.
"But I also think some of the 16 will drop away for various reasons; either they won't find their niche, they'll aim for a niche that another vendor covers better, or there will be consolidation between vendors, as we've seen with PATS and EasyScreen. But as I said, it's an evolving marketplace, so no doubt new vendors will continue to appear," says O'Hara.
Consolidation among the vendors chasing LIFFE's business is expected. Tania Thornton of OM Technology, said "there may be too many vendors for LIFFE Connect at the moment, but there will inevitably be some fall-out either from companies merging, or from their products not being up to scratch, or from their support being insufficient."
Other ISVs were concerned about the size of the customer base. "We do think there are too many vendors offering trading workstations in what is quite a small market. For instance, Datastream/ICV decided not to offer futures support through its workstation and I expect that a number of the workstation vendors will either make the same decision or face supporting very small customer bases," says Chris Aspinwall, managing director of Royalblue Technologies.
"In terms of Royalblue's offering, we are not providing a trading workstation. Instead, we are integrating a LIFFE Connect gateway into our existing Fidessa product to provide another gateway through which our customers can route order flow," Aspinwall explains. "We don't see anyone buying a LIFFE Connect gateway from us if this is their first step towards electronic trading. Rather we see our main market either as firms already using the Fidessa product suite who would like to add LIFFE Connect as another execution service or firms looking to automate a substantial part of their business flow who see LIFFE Connect as a component."
Vladan Jovanovic, managing director of Communicating, Ltd., agrees that "there are too many companies involved." He also asked: "Why this is so, you'll have to figure out for yourself. All I will say is that, in my opinion, the market was sold out between three to four players well ahead of the actual product release and any testing." As an example, he says his firm developed a "very fast" connection using one Dynamic Linking Library that was limited to the futures market "and this is due to the fact that Communicating was invited to join development very late in the game (December 1998)."
Prime Analytics' Shawn McMaster, also said his firm was named an approved vendor in February 1999 which did not give them the needed three months to develop, test and install their software. "We got into the game late," LaMaster said, "but we know that when the trade interface is done it will be top-notch and will be fully compatible with the LIFFE system."
What the system offers
LIFFE designed its Connect platform to handle the large order flows associated with intra-day trading in its major contracts. Operating on a Unix and an NT component platform, the system is comprised of a central host, sophisticated monitoring and a control system. In its early tests, the exchange reported that the system's message protocol was trading "significantly faster than any other similar automated exchange in the world." In a strategic business move, the exchange incorporated an internally developed (API) that allowes external software vendors to develop interfaces that both accelerated the system's development and make it more user-friendly.
Since the exchange made the business decision to be the locus for Euro-money derivative trading (it now has about 86% of the global market share), it also adopted a trade allocation model that would meet its institutional customer demands. Using different types of trading algorithms is a method of allocating trades according to certain time or price criteria. In discussions with member firms, LIFFE said it can select which algorithm is appropriate for certain markets based on trading strategies and market criteria, such as volume and lot size.
For that reason, it chose a pro-rata algorithm that allocates trades according to the best price as the "more appropriate method of trade allocation" for certain types of futures contracts, particularly those which it says employ more complex strategies. This would include short-term interest rate contracts (STIRS), Eurobonds and Euro-Swiss futures, according to Simon Chapman, project director of LIFFEConnect for futures, said.
"The futures trading platform also will be able to select the most appropriate algorithm (pro-rata or price/time) for use on a contract by contract basis. The pro-rata method shares business among all the orders at a given price, rather than strict price/time priority which allocates trades on a first-come-first-serve basis," LIFFE's Chapman said.
The first contracts to trade on the new system (version 2.0) will be LIFFE's Bond futures contracts-starting with the Gilt contracts-followed by all of LIFFE's other financial futures products, including stock index futures and Euroyen, by the end of the third quarter 1999. LIFFE's STIR futures contracts is scheduled to trade on LIFFE Connect in early July, inaugurating the use of version 2.1 of the system. This new update will also include strategy windows for full-implied volatilities for calendar spreads, butterflies, condors, and strips.
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