To attempt to supply to the world of high finance, where competition is rather fierce and rivals are the biggest software and consultancy firms takes remarkable focus and boldness. Capital market software developer MillenniumIT’s founder Tony Weeresinghe didn’t have much cash but the two things he wasn’t short on were a hunger to succeed and a foolish sense of idealism about his vision of become a global supplier of capital market trading, clearing and settlement systems.
During his career Weeresinghe has seen firsthand, a number of dominant technology firms that didn’t respond to change quickly enough, become cannon fodder. Baan Corporation and Sun Microsystems, two firms whose software MillenniumIT sold locally have since almost disappeared, their patents and technology becoming cheap pickings. MillenniumIT itself was faced with the same prospect – about a decade later – according to its chief executive, because stock, bond and derivative exchanges had started to develop their own systems. “I realized that we were not going to win any significant exchange,” says Weeresinghe who argued, ‘even a Colombo Stock Exchange automation tender would be beyond the firm’s ability to win, despite its track record and presence here. “Even if we were far cheaper and had better technology they will still like to be associated with one of the big names,” says Weeresinghe who founded MillenniumIT, or MIT, in 1996 after leading a management buyout of Open systems Division of Computer Land – a then distributor of Sun Microsystems ware here. Each of the 12 employees received an equity stake in the renamed firm, and every one of the first 12 employees got an equity stake becoming one of the few employee owned firms here. Anybody who wanted to work in the company at that time had to put some money in recalls Weeresinghe who held a 70% stake which was eventually diluted to institutional investors.
Consolidation among exchanges and capital markets technology firms has changed the industry landscape in the last decade. The integration happened in two different waves. Firstly the big exchanges either invested in their own proprietary trading, depository and settlement systems or bought firms with expertise. Secondly exchanges themselves started consolidating their businesses. NYSE acquired Euronext – a Paris-based operator; Chicago’s two exchanges merged; NASDAQ bought Scandinavian firm OMX in 2007. A decade ago OMX, a then competitor with MillenniumIT supplying trading systems, diversified by owning the exchanges it provided solutions for. When tech listing specialist NASDAQ merged with OMX, the Scandinavian firm controlled eight exchanges including Helsinki, Copenhagen, Oslo, Iceland and others in Nordic and Baltic states.
OMX’s success also highlights the challenges facing MillenniumIT, a peer in terms of technology, which soon found its developing country lineage and small balance sheet were significant impediments to growth. While OMX leveraged its tech platform to build a pan Scandinavian presence, MillenniumIT was finding it could only win alternate exchanges or ones that are small and too poor to aspire to be with capital market blue bloods. “It became very difficult to win a stock exchange at one point and at that time I decided; I need a partner, a stock exchange as well,” says Weeresinghe who started his IT career at Wang Laboratory’s Sri Lankan agent in 1983 before becoming Oracle’s Sri Lankan country manager. Weeresinghe narrowed down three potential partners. IBM was one of the favored because they had the name. Higher ranked was the CME Group, which offers benchmark futures and options trading, who Weeresinghe figured could benefit from Millennium’s faster and more robust trading system.
His top choice was the London Stock Exchange (LSE) which, unusually for that time, didn’t have an IT arm of its own and operated a net based trading system, Tradelect supported by consultancy firm Accenture for £20 million annually. It was also a time of upheaval because LSE was haemorrhaging market share to upstart nimbler bourses and investment banks which had set up their own derivatives and stock trading platforms.
The suave, MillenniumIT founder’s visionary industry view and tenacity are the stuff of legend at the firm. Not content with the Sun Microsystems agency, the firm quickly moved in to systems integration and software development. Later it won a systems integration contract from the Colombo Stock Exchange. However Weeresinghe was not about to let slip the tiny opening the systems integration contract provided although he at that time had little knowledge about equity trading, depository and clearing systems. After some negotiation MillenniumIT had reinterpreted the deal as one to design and install a new straight-through processing system for the exchange. Against significant odds the firm pulled it off and almost by default became a developer of stock trading systems.
Weeresinghe also pledged to build, in three years, a salubrious Silicon Valley inspired campus in the outskirts of Colombo, when at the firm, a daily hat collection funded provisions for evening tea, according to a former colleague. It took longer than three years to complete, but build it he did.
The campus is designed to offer software engineers a worry free, creative environment. The Google pre dating facility offers free meals, recreation and sports facilities, a mini hotel for those staff working long hours to meet deadlines and a nursery for staff with young children. Weeresinghe quickly transformed his role to one of chief visionary and chief of sales after MIT automated its first exchange in Colombo. Since there was no more business to be had here and to give confidence to customers whose business MIT was pitching for, Weeresinghe setup a U.S office in Boston in 2001.
Racks of servers are the showpiece, at MillenniumIT’s Malabe campus double height glass facade lobby; the beating heart of the firm’s attempts to build the world’s fastest trading platform. At the world’s largest exchanges it’s not just traders that enter orders but computer systems of hedge funds and the like running complex algorithms out to exploit the tiniest of price movement. Often shares are held for only a few seconds before being sold. This so called High Frequency Trading already accounts for around 60% of equity volume in the U.S and demand for high speed is growing. Millennium Exchange is capable of a transaction at a tenth of a millisecond, or 125 microseconds, which is a millionth of a second, helping LSE remain competitive against the competition.
At the heart of the shakeup were EU reforms which made it easier for upstart exchanges that charged lower fees to compete across the continent against established national ones. Unlike in small markets like Sri Lanka where one exchange monopolises trading, in bigger markets traders can transact in any regulated exchange, have choices on the depository – which electronically hold the shares – and clear and settle those deals elsewhere. In Sri Lanka for instance, all three of these functions, trading, depository and clearing and settlement are monopolies of the Colombo Stock Exchange.
Before the EU liberalised cross border trading the London Stock Exchange had over 95% market share in equity trades on top UK companies. Following reforms however Multilateral Trading Facilities, or MTFs, which were nimbler, cheaper and faster rivals – like BATS Europe and Chi-X – grabbed business, halving LSE’s equity trading market share to 48%. The decline was aided when – frustrated with its high pricing structure, arrogance, bureaucracy and outdated technology – nine investment banking clients set up their own MTF, Turquoise. Investment banks often bypass exchanges when both buyers and sellers are their clients. Using exchanges share prices as a benchmark, they conclude transactions in so called dark pools, where trading volume or liquidity are not revealed to the public and transactions are anonymous. Transactions at London based Turquoise cost only half of that charged by established exchanges and it offered pan European trading opportunities in a dark pool.
LSE Group’s new Chief Executive Xavier Rolet, a debonair Frenchman who runs an award winning winery, has kept bees, taught at the French air force academy and been an investment banker, hit it off with Weeresinghe. Although MillenniumIT emerged at the top of a technical eventuation – its lineage; having its software development centre in a then war ravaged country – was an obstacle. Weeresinghe assured the fighting with the Tamil Tigers, which was raging in early 2009, will end soon but LSE executives were reminded of the crisis daily by the protestors besieging Westminster a short walk from the Paternoster Square located exchange.
Rolet had to move swiftly to avert LSE losing its global position as in an industry where consolidation will leave but a few global players. NYSE-Euronext and NASDAQ-OMX already had the technology and global alliances to lead the race leaving room for perhaps only one or two more players at most according to industry watchers. Rolet, now credited with the turnaround at LSE, bet that MillenniumIT was going to be its technology trump in this turnaround strategy. Of its three major challenges, two – better technology and lower operating costs – could be achieved with the Linux based Millennium Exchange system it was forecast. However they had vastly discounted what Weeresinghe himself could bring to the table.
Weeresinghe by 2009, when LSE called for request for proposals for a new trading system, had a good rapport with LSE’s technology head. “That helped Millennium get the RFP, otherwise we wouldn’t have even qualified for it,” he says of perhaps the crucial relationship in the eventual sale of the firm to the London Stock Exchange Group. However Weeresinghe – who lived in the US city of Boston closer to Millennium’s potential clients – was always more than a mere stock trading systems technology guy, he understood the business challenges of bourses.
In conversations with LSE’s CIO Weeresinghe says he predicted “very soon you’re going to be eaten for lunch by the competition,” which was met by a laugh and a reassured “that will never happen, they will at most take 10%,” recalls Weeresinghe. When the competition did come, Weeresinghe’s prediction proved to be accurate. Traders switched to MTF’s and black pools attracted by their robust technology, lower costs and better client relationships. In two years LSE’s fortunes, as Weeresinghe had predicted, were completely reversed and it became an acquisition target. The weak footing encouraged multiple hostile bids for control in the last decade including three attempts from Deutsche Boerse, and one bid each from Sweden’s OMX, Australia’s Macquarie Bank and Nasdaq.
There was another challenge. Xavier said 30% ownership of Millennium as a condition to award the trading system contract by LSE would give some chance of a deal, but offer 51% control, and “it’s done” he said, according to Weeresinghe. An alliance with LSE was Weeresinghe’s best bet for survival anyway. However he now had to convince both senior employees and venture funds which controlled the firm the deal was one worth taking. “So I told the team, you don’t want to take the chance between offering 30% and being rejected by the board again. 51% is neither here nor there. We’ll give them lock stock and barrel and tell them, ‘we don’t want money but we want your stock’,” he recalls. Both MillenniumIT stock holders and LSE agreed.
The company, which had $28 million revenue in the financial year ending March 2009, was valued for the sale at $30 million and MillenniumIT’s institutional investors got cash. Employees had a different structure based on successfully implementing a new trading system for the exchange. Weeresinghe is cagey about the premium employees received over the initial $30 million valuation which was awarded in LSE stock. LSE Group stock has doubled in price since the deal three years ago.
“The fact that Millennium was a good technology company LSE knew; the challenge was to make them understand that we know their business”, according to Weeresinghe. “But that they didn’t accept. If I tell, this is what you need to do they will say, who the hell are you? That was my biggest challenge.” Because Weeresinghe often talks to a wide spectrum of participants in international capital markets he had an independent view of challenges facing exchanges.
LSE is a capital markets blue blood with a 200 year history, but its arrogance was extracting a high price, and Rolet, its new chief executive, understood the need for change. “Millennium saved LSE from the investment banks and Xavier took bold decisions to change,” explains Weeresinghe who is one of the seven member LSE Group executive team headed by Chief Executive Xavier Rolet.
“It was obviously a very structured organization. We broke it a little bit, we brought in our entrepreneurial spirit of going to customers, finding out what they need and getting it done,” explains Weeresinghe who since the LSE acquisition divides his time between offices in Boston, London and Colombo. Soon enough LSE executives were asking customers ‘what do I need to do for you to send more orders to me and for you to make more money?’. Customers, at first were surprised by the open attitude. But soon started responding to LSE overtures and shifted business back to the exchange as it adapted to accommodate them. “That was my biggest challenge and I managed to achieve it because Xavier was right behind me,” Weeresinghe, who is now the LSE’s Global Development head and MillenniumIT Chief Executive, said during a recent visit to Colombo. “Now LSE looks at us at an entirely different angle, they don’t look at us like a pure technological company.”
The emergence of High Frequency Trading also means that technology is no longer a mere enabler but a relative advantage. Millennium Exchange’s intellectual property is expected to help LSE’s customers lower their trading latency, or the time it takes for a transaction to go through the system, to gain a relative advantage as opposed to others trading the same stocks in a different exchange. The upgrade to Millennium Exchange came at a time when the LSE was struggling to meet demand for sub-millisecond speeds. Its existing system had buckled a number of times and the fee it paid to consultancy firm Accenture annually was greater than the £18m it spent acquiring MIT, together with its intellectual property, infrastructure and a talented workforce of over 300 people. “Speed is still an issue, speed will always be an issue. Everybody wants to be the fastest-whether it helps the business or not. But for some it does; if you can be ahead of the other guy you get the priority.”
Repairing client relations was only one angle of the challenge facing LSE. It helped the exchange reverse the decline in the traditional equities trading business. Market share has so far rebounded to 64% from a low of 47%, which is somewhat unprecedented in international exchanges where reversals lead to doom and takeovers.
Weeresinghe credits Rolet with being able to spot the contribution the MillenniumIT team was capable of making. “He found we were not only technology people but we knew the industry and it was not only Tony Weeresinghe but there was a bunch of people who were intellectual and he really liked that.” Rolet has since taking over confounded his critics in the City, who were sceptical of a Frenchman’s ability to turnaround the most laissez-faire of businesses, a stock exchange.
In parallel to getting client relationships on the mend LSE Group was also working towards deploying the Millennium Exchange trading system. Its first deployment was actually at Turquoise, the rival dark pool set up by investment banks that Rolet had acquired and merged with Baikal a LSE promoted rival pool. However the transition wasn’t glitch free either but the system is now successfully deployed. The glitches forces LSE to take longer than initially forecast to deploy Millennium Exchange at its main trading floor. After implementing better contingency plans the switchover was eventually done at LSE as well as Borsa Italiana which LSE had acquired.
Weeresinghe says MIT has now achieved what it set out to with LSE. The exchanges partnership has swiftly turned around its survival prospects. Analysts, rightly so, credit Rolet with the turnaround, but the role played by MillenniumIT is also being appreciated. A Reuter’s survey of brokers on LSE’s market share gains has highlighted Millennium systems technological superiority as the top contributor. “Millennium saved LSE from the banks and Xavier then took many bold decisions,” explains Weeresinghe. “Currently our strength is that we have better technology, it’s easier to implement, it’s easy to manage operations and you don’t need an army of people and we are cheaper. That’s the current wave but going forward we think we have so many products that will change the business model of that exchange to become so much more profitable,” he adds.
Resolute focus is a hallmark of Weeresinghe’s character. Its best example was the period following the events of September 11th 2001 when two aircraft were used to bring down New York’s World Trade Centre building. The years that followed were the toughest for the company when it was unable to strike any major deal and faced the prospect of bankruptcy. Losses in just one year topped Rs600 million. MIT venture capital investors were urging the company to put on hold continuous improvement of its core products and focus instead on outsourced software development work for corporations. “Everybody thought we would go under.” “Some of the big banks said ‘Tony we can give you business’, $3 million outsourcing business’ I said I don’t want it,” he says. “They said, ‘are you crazy? You are going to go under and you say you don’t want it,’ I said, ‘I’m a product company that’s my focus.’” An argument followed and Weeresinghe ended it urging them to ‘write off their investment in MIT if it was a bad one, but we are a product company and we are not going to change our aim just because we had a bad year.”
“It’s tough sometimes when you start a company, but if you are focused and have a goal then you can make it. That was the success of millennium,” he adds.
Today Weeresinghe is pushing his next big ideas for the stock exchange industry of seamless global trading of listed companies from anywhere in the world. He says there will someday be an ebay.com equivalent for capital markets. The challenges such moves face from regulators – whose job it is to ensure a level playing field – are obvious. However Weeresinghe argues that young people will have little patience for markets that don’t offer them the freedom to trade any stock, commodity, currency or derivative.
As a first step Weeresinghe has negotiated with the Singapore Exchange (SGX) to set up an “international board” to trade each other’s blue chip shares. “It’s never been done before, I am basically trying to do 24/7 trading,” Weeresinghe says. So when Singapore closes, their listed companies can continue to be traded in London and vice versa. “I did the partnership between the two exchanges, that was my brainwave, now I am doing much more and soon I’m sure we’ll find 24/7 trading.”
Stocks are fungible or mutually substitutable, and so lend themselves to be brought in one exchange and sold elsewhere. “My time is more occupied in creating new ideas and convincing the people that it’s the way to go,” explains Weeresinghe. “So it’s quite a difficult job.”