LME overhauls tech, data stack amid calls for trading floor closure

On January 19, the London Metal Exchange (LME) announced plans to shut down its “Ring” open-outcry trading floor, where commodities trading has been conducted in-person since 1877. But the proposed closure of the ring-shaped trading floor marks the culmination of a push to modernize the exchange’s technology stack and trading strategy that has been in the works for well over two years.  

Prior to the publication of its discussion paper on whether to close the pit, the LME’s head of market development, Robin Martin, spoke to WatersTechnology about how the exchange has spent the last 24 months upgrading its futures trading platform, LMEselect.

When tasked with updating the system, Martin says the exchange mulled whether to buy or build. After first scanning the market for appropriate vendors and sending out requests-for-proposals for commercial solutions, the exchange ultimately decided to leverage existing resources from parent exchange group Hong Kong Exchanges and Clearing (HKEX), and to develop a new futures trading platform based on the technology that underpins HKEX’s cash equities platform, Orion.

Martin says the decision to build in-house means the exchange can guarantee the quality and functional richness of the technology. Another important driver behind the decision to develop in-house was the ability to manage and govern its own technology stack—something which, he says, separates market leaders from the rest. To date, LME has been licensing its trading technology from Swedish trading and clearing technology provider Cinnober, which Nasdaq acquired in September 2018.

“For exchanges, having a leading tech capability is a competitive differentiator. And, if you are sourcing from a third party, you are unlikely to necessarily have the very best of breed, so having our own tech and being in control of our own destiny has been quite an important priority across our group,” Martin says.

From a cost perspective, he says building a trading platform fully from scratch was not a realistic option for the commodities exchange. So over the last 18 months, the LME tech team has worked closely with its HKEX colleagues to recreate a new system using the Orion model to support derivatives trading. 

On the face of it, the new technology will look like a system update from version 9 of LMEselect, but the back end will be built on an entirely new platform. The technology is designed to have faster processing power for managing trades, lower latency, and greater scalability for handling trade volumes. The technology will be updated to the latest Financial Information eXchange (FIX) 5.0 interface specification, and for the first time it will allow automated trading firms to integrate with the platform via a binary protocol. 

In February 2020, the LME also partnered with Chicago-based trading software vendor Trading Technologies to develop its graphical user interface (GUI) by developing rich visuals and functionality for the platform’s Software-as-a-Service front-end display, which will give LME members access to the tech provider’s trading tools.

The exchange plans to roll out the new futures trading platform by the end of the second quarter of 2022.

Data vision

As part of the tech upgrade, the LME has also embarked on a multi-year data transformation project, and has implemented a data office for managing the new strategy. Taking inspiration from the tech world, the exchange has built an event-streaming platform, a technology leveraged by firms such as LinkedIn or Netflix to organize the flow of data within their organizations. Martin says this technology will function as the “underlying connectivity tissue” for moving data between different LME systems.

“It eliminates the need for individual applications to talk to each other on a point-to-point basis, where usually you end up with a spaghetti diagram, which creates a lot of complexity and inhibits change-flexibility. If every system is talking to every other system, any change in one place can have a ripple effect throughout your organization, and that can sort of slow down your change agility,” Martin says.

The new event-streaming system lays the groundwork for the exchange to modernize and simplify its data infrastructure by publishing data into a centralized event-streaming platform. The system will also allow users to better visualize and interact with the data. Martin says the LME is investing in its data warehouse and analytics capabilities to enable internal users and market participants to query or analyze data. In the long-term, he says the LME aims to have advanced data lineage so that individuals working in different parts of the business can be assigned clear controls for governing the data they use.

Today, LME’s existing trading technology uses HKEX’s Source multicast market data system. But for the first time, the event-streaming system will be used to feed Source and bring together both electronic and non-electronic market data items, such as stock reports or closing prices.

“Market data vendors will be able to get all LME data, from super-low-latency order data through to the end-of-day reporting information, all through one single source,” Martin says.

With any major implementation, there are always challenges. For this project, Martin says the biggest hurdle with the streaming platform was getting the right skills to build the technology and share those skills throughout the company.

“With something like an event-streaming platform, it’s a little bit closer to the cutting-edge end of the spectrum, so the organization needs to develop with that as well,” he adds. 

Covid as a tech driver

Now, more than ever, given the pandemic and with many people working remotely, there is a need to digitize and modernize the commodities space, Martin says that the health crisis has further exacerbated the need to automate outdated, operationally risky, and manually intensive processes. This week saw further steps to push commodities trading into the twenty-first century with the proposed closure of LME’s open-outcry floor. While LME members have yet to agree on the consultation, these latest steps reflect the need to fully embrace electronic trading.

“Given the shift away from open-outcry trading on peer markets over recent decades—and the closure of the majority of open-outcry floors—and the fact [that] the LME itself has seen a significant shift towards electronic trading since the launch of LMEselect, it is only natural that some participants question the future of the Ring. The LME considers that this is the appropriate time to review the pricing processes undertaken by the LME, the temporary Ring suspension driven by Covid-19, the future of pricing at the LME, and the Ring itself,” said the LME discussion paper on market structure, announcing the proposal to permanently close the trading floor. 

The consultation comes more than four years after the New York Mercantile Exchange, owned by CME Group, closed its open-outcry trading floor in December 2016. Other trading venues, including the New York Stock Exchange and Cboe Global Markets, still maintain open-outcry floors, though these have been temporarily suspended during the pandemic.