The news of a possible acquisition of Turquoise trading system, which was established by nine leading European investment banks as an alternative to stock exchanges, comes as the LSE embarks on a major technology drive to eliminate network messaging latency and overtake the speed of its dedicated e-trading rivals.
Last month, the LSE announced it will acquire Sri Lankan trading firm Millennium IT for £18 million (US$28.8 million), replacing its Accenture built, Microsoft .Net-based TradElect platform. The new platform is understood to be based on Linux.
In a short statement to the financial markets today, the LSE announced it had "entered into exclusive discussions with Turquoise Trading Limited, which may lead to a transaction". An announcement is expected in the coming days. The LSE declined to comment further.
Ralph Silva, senior analyst at financial technology consultancy Tower Group, said the Turquoise technology was "easily a generation ahead of the LSE" and could be part of the attraction.
But he warned that Turquoise was a relatively new entrant to the market, and its technological capabilities "hadn't been proven" at the high trading volumes the LSE experiences.
The LSE may consider a number of technology options, if it buys Turquoise, Silva said. These could include taking some of the Turquoise technology and deciding a strategy for how this would fit with MillenniumIT's system.
Another option could be to run Turquoise as a "separate algorithmic platform", he said, handling high-volume trading, such as that of hedge funds. Or it could simply be a case of eliminating a competitor, he said.
"Whatever happens, the LSE could get Turquoise now at a good price, before its value increases dramatically as it becomes established," Silva said.
An acquisition of Turquoise would eliminate a key competitor. The platform was backed by nine leading banks: BNP Paribas, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch, Morgan Stanley, Société Générale and UBS.
Meanwhile, at the end of next year the LSE will switch off TradElect platform in favour of Millennium IT's software, aiming for "sub-millisecond" latencies, compared to a reported current 2.7 millisecond time.