The system crashes and your clients keep phoning, asking when the system is going to be back up. You look at your systems and realize they’ve been in place since before Bill Gates dropped out of college. It’s time to improve your infrastructure, but these same systems are at the heart of the business operation — which has now come to a screeching halt.
Many IT executives have faced this challenge, and Stephen Thompson, senior vice-president and CIO of information systems and trading services at the Toronto Stock Exchange (TSE), recently faced it under the glare of media scrutiny and broker frustration.
On March 7, trading at the TSE was halted as Thompson and his team scrambled to find the cause, while angry traders expressed their frustration and media outlets speculated as to the reason for the outage — was it the sheer volume of trades taking place, or the 20-year-old systems being used by the TSE?
Thompson insists the problem was “not volume-related.” He says the TSE has not only anticipated increased trading volume, but has continually upgraded its computer infrastructure to handle more capacity. The TSE system outage in March was the result of a software system problem that occurred after one of the CPUs crashed in the exchange’s communications complex, he says.
During the day’s pre-opening phase, when trading firms post early orders, the problem was detected, but the normal diagnostic and recovery processes were not successful at restoring services. A successful back-up procedure was initiated and application system services were restored. The opening of the trading day was delayed by more than an hour. Unfortunately, later in the day the CPU glitch resulted in more order problems and the market was once again shut down for another two hours.
The TSE has not been alone in experiencing technical problems. The London Stock Exchange was shut down for eight hours recently because of a problem with a component in the London Market Information Link, the networked system that sends real-time prices and information from the exchange’s central computer to market users. The Nasdaq Stock Market’s SelectNet system recently experienced similar problems for a brief time as well. As orders were coming in, Nasdaq technicians had to shift one computerized order file to another and then had to reboot the system.
However, in the case of the TSE, minor infrastructure problems causing trading delays have renewed the focus on upgrading the exchange’s infrastructure. In 1991, the TSE board of governors voted to make the TSE a fully electronic stock exchange. The exchange’s first approach was to create a TSE-built system, but this proved to be impractical, expensive and too time-consuming. In April 1995, after studying other exchanges and available technology, the TSE decided to buy — not to develop its own system. The TSE formed partnerships with suppliers and adapted their technology to its requirements. According to TSE officials, by following this approach, it has decreased development time, minimized costs and successfully fulfilled its commitment to close the trading floor on April 23, 1997.
Zero Latency
Many organizations become fearful to change their system because of the high cost involved. However, the redevelopment cost becomes unimportant if the current system will not communicate with other things important to the business. For example, the business processes of 30 years ago will not help a company today in communicating with its customers and suppliers, says Randall Becker, CEO of Nexbridge Inc., a Richmond Hill, Ont.-based consulting firm.
The goal for business operations today is to achieve “zero latency”, he says. Latency is the time it takes a packet of information to cross a network connection, from sender to receiver. The user perceives that time as a delay between query and response — for example, in the case of a financial institution such as the TSE, an order between the buyer and seller.
“The real crux of what IT has to deal with is the question of how are you going to satisfy your business requirements,” Becker says. “Data is not going to change on a weekly basis. The communication systems are driving how you look at your infrastructure. You might not be able to support your business process without significant reengineering,” he adds.
The main issue for chief information officers and IT planners is planning for the inevitable changes in your current system. “Change is not necessarily in your control; you have to plan for it,” Becker suggests.
TSE Plans
The issue for the TSE is its current system no longer has the scalability for further increases, such as when the TSE and Canadian Venture Exchange (CDNX) merge in the future.
Currently, computerized orders come into the exchange in three ways and are processed by a central system known as CATS (Computer Assisted Trading System). Orders come through either directly to CATS, via a separate Order Management System (OMS), or from independent traders’ desktops using STAMP (Securities Trading Access Message Protocol). OMS was set up for member investment firms that sit on the exchange. Other Canadian markets use STAMP. Thompson says the plan is to eliminate OMS, and have everyone using STAMP by September of this year.
“What we have is a single process bottleneck right now and it’s important for members to go to STAMP,” Thompson says.
Initially, the TSE will continue to use CATS as its trading engine. However, once member organizations have complied with STAMP and the system becomes stabilized, the exchange plans to migrate to a new trading engine. “Once we do this, we will decommission CATS,” Thompson says, although he won’t comment on a target date.
Asked if he expects members to be reluctant to change systems before the September deadline, Thompson replies, “I’m very bullish that we’ll see that achieved.”
Behind the TSE’s System
The TSE is a fully electronic stock exchange. In 1964, the exchange installed a $1-million computer system that not only carried data for all listed stocks, but also extended the scope of the electronic ticker tape to all of North America. Computer power made it possible to add options and futures trading to the TSE market. Between 1960 and 1969, the number of transactions on the exchange more than doubled to 2.5 million and the value of trading increased from $1.2 billion to $5.7 billion.
In the early 1970s, the Exchange introduced automated databases for mailing lists and corporate files and automated several repetitive, labour-intensive tasks on the floor. The exchange developed the first Computer Assisted Trading System (CATS) in the world and installed it in 1977.
Since the conditions for trading from a computer terminal were different from trading on the floor of the exchange, the TSE set separate rules for CATS trading as a precautionary measure until CATS proved reliable — it was limited to less actively traded stocks. CATS quickly gained acceptance from the investment community and many exchanges around the world bought the technology from the TSE because it allowed traders to access information from terminals in their offices.
From 1977 to 1980, the number of transactions increased 136 per cent from 1.4 million to 3.3 million. The volume of shares traded grew from 679.8 million to two billion, an increase of 194 per cent. The value of trading increased from $6 billion to $29 billion, a growth of 383 per cent. The TSE now accounted for more than 80 per cent of the dollar value of the trading on all stock exchanges in Canada and had outgrown its 234 Bay St. facility. In 1983, the Exchange moved into a 30,000-square-foot trading pavilion in the nearby Exchange Tower that could accommodate up to 1,200 traders.
Throughout the 1980s, as new technology became available, the TSE further computerized its trading floor. In 1984, the Order Management System (OMS) was developed, using the Tandem Assembly Language (TAL), as the personal computer became a standard tool and it was possible to work from a remote location. Floor staff began moving to their firms’ offices. Most of the TSE members that have OMS use it because it allows them to have a unique configuration for their business process, explains Stephen Thompson, senior vice-president and CIO of information systems and trading services at the TSE.
Although trading activity continued to rise, the floor population dwindled. It became evident the TSE could save money and improve efficiency by closing the trading floor and operating a fully electronic stock exchange. In addition, investors would benefit from the increased efficiency and lower costs.
In 1991, the TSE board of governors voted to make the TSE a fully electronic stock exchange. The exchange wanted to create a TSE-built system, as it had done with CATS, but that proved to be impractical, expensive and too time consuming.
Following a technology review and a study of other exchanges’ technology strategies, the TSE decided to buy technology — not to develop its own. After the study, the TSE signed an agreement with the Paris Bourse in 1996 to acquire its trading engine technology, and later in the year with IBM Canada to customize the Paris software for the TSE market.
The TSE chose the Paris Bourse for several reasons. The Paris trading system handled 150,000 trades per day, compared with the average of 37,000 trades each day that the TSE was processing at the time. Also, the Paris system has its roots in CATS — Paris bought CATS from the exchange more than 10 years ago and significantly modified the architecture over the past decade. IBM completed its customization of the Paris software in early April 1997.
The TSE plans an extensive upgrade to its computer systems this September. Originally the new system was to be TOREX, but that has changed, Thompson says. The main elements of the system will be a new trading engine (an upgraded CATS), which will process, record and monitor every trade, a Securities Trading Access Message Protocol (STAMP) gateway and infrastructure linking trading devices to the TSE.
An enhanced and greatly upgraded version of the CATS technology that the TSE created in 1977 will serve as the interim trading engine until the new one is installed. CATS capabilities and capacity have been expanded so it can handle the trading of all TSE-listed stocks.
