The London Stock Exchange and investment bank Lehman Brothers are to launch a high speed exchange platform as competition heats up from super-low latency rivals.
The platform, to be called Baikal, will offer dark liquidity pools, which allow anonymity to traders so that their strategies remain secret. This type of trading accounts for approximately £9.5 billion of activity each day.
Baikal will also allow “sophisticated algorithmic trading functionality”, the parties said, and would reduce the costs of trading.
The move comes as LSE faces increased competition from new rival platforms that have blossomed in the past year. One such new rival is London-based Chi-X, which opened a year ago, and said in March it expects to capture a quarter of trading in FTSE 100 stocks by next April.
Exchanges and rival platforms are investing to reduce even nanoseconds of latency on their networks, as traders demand faster business. But financial industry participants recently advised traders to be careful how much they invest in reducing latency, and not to spend more than the benefits they would be likely to gain.
In a statement today, the LSE and Lehman Brothers said of Baikal: “Within the context of an evolving equities trading landscape, Baikal aims to address the growing complexity of order execution requirements by allowing buy-side and sell-side participants to trade larger orders in a trusted environment, thereby minimising market impact.”
Baikal will allow open access to shares in 14 European countries, and will provide real time post trade reporting included in the LSE Infolect information broadcast system.
Clara Furse, chief executive at the LSE, said: “The London Stock Exchange has an over-arching objective to improve market efficiency for the benefit of investors and issuers, and we will continue to innovate to promote that goal.
“Baikal provides an exciting opportunity for the market to transact certain types of business in European equities with the confidence of total pre-trade anonymity, alongside the efficient price formation of the electronic order books of exchanges, where the majority of equities across Europe are traded.”
The parties said a strategic advisory committee and working groups for the project will become operational from the third quarter. Both will continue their businesses as normal, and could still create rivals to Baikal, they said.
A year ago, the LSE launched TradElect, an electronic trading platform. Earlier this month, it switched on an ultra fast trading connection, called Performance Channels, which offers data delivery round the City of London in under one millisecond.