"We've had to pull our commodity futures trading system for a new electronic exchange; this is a disaster waiting to happen that I haven't got time to fix right now."
CIO, Global Energy Trader

Our Brief

A major commodity futures exchange was moving from open-outcry to electronic trading. Our client's six-month electronic trading system implementation was now eighteen months late. The system had been customised to add proprietary functionality to aide regulatory compliance. Although it had briefly gone live, a change in the exchanges systems had caused it to stop working and our client had lost confidence with the trading systems vendor. As there was currently little volume in the electronic market there was no immediate impact, but it was expected that this would change over the coming months as electronic trading hours increased. Because of our experience delivering front office trading systems, we were asked to get them trading the electronic market quickly, and advise on the longer-term electronic trading strategy.

Our Approach

We began by interviewing the mixed vendor/client delivery team and exchange's technical staff to understand the nature of issues to date. We also spoke with other commodity futures trading system vendors to assess their offerings and understand if they had had similar implementation issues. Shortcomings were evident on all sides; our key findings were:

• The electronic exchange launch had been delayed by over a year and this had caused the delivery team to lose focus.
• The proprietary functionality was very complex, and no other vendor could offer this as standard.
• Other vendors had also been impacted by changes to the exchanges systems.
• The system's critical defects needed extremely specific circumstances to manifest themselves. The perception was that all of these needed to be fixed.
• The vendors parent company had long-term viability issues.

Any strategic solution would need to support trading on the other major commodity futures exchange our client traded on, which was also open-outcry. Contrary to trader sentiment, we believed it would become a significant participant in electronic markets inside 18 months; our view was vindicated when it announced less than a year later its intention to offer parallel electronic trading.

Our short term recommendation was to proceed with the incumbent vendor since this was the quickest route to delivering what both traders and compliance staff needed. Additionally, we recommended further investment to support trading on other commodity exchanges, if the vendor's issues surrounding it's longer term viability were resolved. To mitigate against the risk of the vendor failing and potentially leaving our client without a means to trade electronically, we recommended building a tactical fallback.

This was a politically charged situation. Careful management was needed to ensure that all stakeholders bought into our recommendations, since many had been looking for a scapegoat.

To build consensus we facilitated a discussion around critical defects, by describing their impact and likelihood in business terms. This meant traders and compliance staff understood what it meant were they to occur, how they would recognise this, and what actions they could take to recover. This enabled them to sensibly judge the risks of adopting a new system against the expected benefits of electronic trading.

Following this, we set up a go/no-go decision around a deadline to deliver a fixed subset of these critical defects. This gave the vendor a chance to increase confidence through successful delivery, or confirm to the client that they should look elsewhere for a solution.

End Result

The vendor hit the deadline and the system was given the go-ahead to go-live. Because of our success in turning the project around, we were asked to manage the subsequent implementation. When a more financially secure company bought the vendor and the other major commodity futures exchange announced its electronic trading plans, we were asked to consult on the rollout of the system to US traders.

The recommendation to continue with the incumbent had been a close call, but was the right one. Trades were entered just once so back office trade matching exceptions were almost eliminated. The traders loved the new system, because the dull task of keying trades into mid-office systems was eliminated thus saving their time. The system gave traders true anonymity leading to better prices and they saved broker commissions. This translated into yearly multi-million dollar savings.