Lehman, LSE Make Sweet (Algo)rithms Together

Just days after being beaten by Rule Breakers pick NYSE Euronext (NYSE: NYX  ) in a bid to provide the technology for a securities exchange in Qatar, the London Stock Exchange is bouncing back. On Thursday, the 300-year old institution announced that it will partner with an upstart 158-year old broker -- Lehman Brothers (NYSE: LEH  ) -- to create a pan-European trading platform.

Baikal, named after the world's largest freshwater lake by volume, will be a "dark pool" trading facility, giving investors access to securities from 14 different European countries (Dark pools are off-exchange platforms that match buy and sell orders anonymously so that investors can avoid tipping their hands, which can be very costly in the cutthroat environment of trading).

The rise of the computer geek
The LSE's dip into dark pools underscores the rising influence of algorithmic trading (automated trading driven by computer models); Baikal will include sophisticated algorithmic trading functionality supplied by Lehman. Trading-floor rocket scientists have a huge appetite: IBM estimates that 40% of the trades made on the London Stock Exchange are already generated by algorithms!

With LSE's shares down almost 60% this year, CEO Dame Clara Furse faces increasing pressure to demonstrate that the LSE isn't being left behind in a rapidly evolving exchange industry. The London Stock Exchange is up against nimble new entrants and a consortium of investment banks that are set to launch a European trading facility in August (the consortium members include Citigroup (NYSE: C  ) , Goldman Sachs (NYSE: GS  ) , Morgan Stanley (NYSE: MS  ) and Merrill Lynch (NYSE: MER  ) ).

In addition, the LSE is increasingly conspicuous as the No. 3 exchange in a world in which both the No. 1 and No. 2 (NYSE Euronext and Nasdaq OMX (Nasdaq: NDAQ  ) ) have completed transformative acquisitions

A good move, but more is required
Baikal is a step in the right direction, proving there's still plenty of fight in the LSE. However, partnering up with Lehman may discourage other investment banks from trading on the new platform. Lehman and the LSE are speaking with other banks about partnering with them (and the LSE is agreeable to selling equity stakes in Baikal). That's wise; when it comes to a trading venue, more hosts make for a merrier time.

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Alex Dumortier, CFA has no beneficial interest in any of the stocks mentioned in this article. Nasdaq OMX Group is a Motley Fool Inside Value pick. NYSE Euronext is a Motley Fool Rule Breakers recommendation. Try any of our Foolish newsletters today, free for 30 days.


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