The new service - called Exchange Hosting - allows firms to physically locate servers within the LSE's data centre. The UK exchange says this will provide them with sub-millisecond access to the TradElect matching engine and Infolect market data, thereby eliminating network latency.

For member firms connected to the LSE via 100 megabit lines, Exchange Hosting could reduce "roundtrip" trade execution and market data transmission times by another one and a half milliseconds, says the exchange. Further performance benefits are possible for clients using lower bandwidth connections or who are located outside central London.

"This new service underlines our commitment to reducing latency at each stage of the trading cycle and facilitating the structural shifts in trading patterns that are driving growth on our markets," says David Lester, CIO, LSE. "The service will allow customers to host their algorithmic engines next to our core TradElect execution engine and aid further liquidity generation and market efficiency."

LSE says the service will be introduced in two phases. In response to customer demand, phase one will start with an initial release of cabinets in September 2008. This will be followed by a further release of cabinets and an enhanced service in February 2009 when a number of supporting value added services will also be launched.

Phase one of the roll out will be launched in conjunction with upgrades to TradElect capacity and latency. In September, current capacity on TradElect will initially double to 10,000 continuous messages per second. In October, it will double again to around 20,000 continuous messages a second and end-to-end execution latency on TradElect will be reduced by 50% from six milliseconds to three milliseconds, says the LSE.

The exchange disclosed details of the new service on the same day it slashed price tariffs and introduced incentives for liquidity providers in a bid to attract algorithmic traders and fight off competition from alternative trading systems entering its core markets.

LSE shares have been hit this year on concerns that it is will lose market share to new platforms such as Chi-X - which claims a 15% share in FTSE 100 stocks - and the recently launched Turquoise platform.

The back-backed Turquoise platform went live on 15 August and gradually added new markets in its first two weeks of trading. Turquoise had its first day at full capacity - 1300 stocks in 13 European countries - on Friday.