We’re on the cusp of a new arms race. That is the description given to the phenomenon involving the world’s largest cloud service providers competing to invest into the largest financial exchanges. Last year, Microsoft announced an investment of £1.5 billion in London Stock Exchange Group (LSEG) to provide the exchange with data analytics, cloud infrastructure products, and custom Gen-AI models. Before this, Nasdaq partnered with Amazon Web Services to build the “next generation of cloud-enabled infrastructure” and Google invested $1 billion into CME Group.
“Google Cloud is seeing a heightened interest among exchanges and market participants in solving some of the toughest challenges facing the capital markets industry, from pre-trade to clearing and settlement,” says Ashish Majmundar, Director, Global Head of Capital Markets at Google Cloud. “Our customers are looking for cloud solutions spanning from matching engines, to market data distribution, digitization of securities, to post-trade processing that leverages the strength of Google Cloud in performance, security, data and analytics, AI/ML, and more recently in generative AI.”
Yet how will this recent bout of activity affect the rest of the financial exchange industry?
Confronted with this formidable combination of large exchanges and big tech, trading venues of all sizes face a myriad of questions: Is cloud-based trading actually feasible for regulated exchanges? Is it really possible to overcome the obstacles and transition to cloud. And if so, when?
Cloud & SaaS Solutions: Revolutionizing operational models
These tie-ups between cloud providers and large trading venues demonstrate the growing recognition within the financial industry of the potential benefits of cloud-based solutions. Cloud technology offers greater scalability, flexibility, and cost-efficiency, which are crucial for meeting the increasing demands of modern financial markets. By partnering with leading cloud providers and developing purpose-built solutions, exchanges can modernize their infrastructure, enhance trading capabilities, and provide more efficient and innovative services to market participants.
The development of cloud technology has also paved the way for the delivery of Software-as-a-Service (SaaS), providing a revolutionary new method of operating software and receiving services. With a SaaS model, an exchange does not need to worry about the maintenance and support of the system (such as upgrading or testing), but can instead focus time on the more valuable task of operating the market. If built properly, SaaS-based models can enable unrivaled matching and price discovery capabilities, reshaping what’s possible for marketplaces and exchanges.
“Exchanges are increasingly leveraging AWS for more critical workloads. Their use of cloud is expanding beyond data analytics, operational improvements, and the development of customer tools to include low-latency matching engines, and settlement and clearing systems running on AWS,” observes Scott Mullins, Managing Director, Worldwide Financial Services at AWS. “Successful cloud migrations among exchanges involve leadership alignment on the vision and expected value case before communicating it consistently across the organization. There is also a commitment to skill building and talent development.”
It is interesting to note the industry has dealt with similar hurdles in the past with the switch from ‘pits’ to electronic trading, reminding us that change is not always easy, but progression to new technologies has been overcome before. As more exchanges and financial institutions transition to cloud-based SaaS solutions, the industry is poised to experience significant advancements in terms of speed, reliability, and accessibility, which will shape the future landscape of financial markets.
Under the hood of cloud-based trading infrastructure
To unlock the potential for innovation, market operators are recognizing the need to modernize their trading and clearing systems. By migrating to more agile and scalable technology solutions, such as cloud-based infrastructure and microservices architecture, they can surmount the limitations of legacy systems and enable the rapid deployment of new products and services.
However, a significant challenge arises from the fact that not all cloud-based trading technologies can be considered as equal. Many of these trading and clearing systems are built on legacy technology stacks that are 10 to 20 years old. These older technology stacks often include complex and rigid business processes that can prevent innovation and the smooth launch of new markets in modern ways.
The limitations imposed by these legacy systems may result in slower development cycles, increased maintenance costs, and difficulties in adapting to rapidly changing market demands. The lack of flexibility and scalability in these older technology stacks can impede the introduction of new trading instruments, deter the adoption of cutting-edge technologies, and hinder the integration of advanced risk management tools.
In the current landscape, trading venues also often face higher costs - sometimes doubling their expenses - when attempting to upgrade their infrastructure and technology due to the dominance of legacy systems. Exchanges should be wary of vendors peddling aging architectures, as well as noting the persisted reluctance to disrupt current revenue streams from lucrative colocation services. This continued pushing of outdated infrastructure is simply postponing industry adoption of modern technology. It has no place in the next generation of trading technology.
Cloud strategy considerations & tech solutions
In essence, financial exchanges need to ensure that new technology is fully enabled to run seamlessly on the cloud. When developing their cloud strategies they should consider the following:
Buy-in of Market Participants: As evidenced by NASDAQ's migration of the first U.S. options market to AWS, cloud-based trading technology offers substantial benefits, including cost savings, scalability, and reliability. While the transition may pose challenges, it is already underway, and exchanges that embrace cloud technology can stay competitive in the evolving market landscape.
Regulators: To address regulatory concerns, it is essential to work with cloud vendors engaged in discussions with regulatory bodies. Transparency regarding data protection and compliance practices can help onboard regulators to the cloud transition, providing better service to traders while ensuring regulatory compliance.
Security Measures: Cloud service providers invest heavily in cybersecurity measures, often surpassing what individual on-premises setups can achieve. These measures include continuous monitoring and rapid response to potential threats, ensuring a high level of security and compliance with regulatory requirements.
Latency-Sensitive Markets: Cloud technology has made significant advancements in achieving ultra-low-latency trading capabilities. Cloud providers are actively seeking tailored solutions to meet the requirements of latency-sensitive markets. Collaborating with the right cloud provider and platform vendor can lead the way to a successful transition to the cloud.
Outdated Business Models: Cloud solutions offer flexibility, adaptability, and elasticity, allowing businesses to scale according to market demands without long-term commitments. Emphasizing these advantages can encourage businesses to embrace cloud technology and modernize their business models.
Migration and Integration: While migrating to new systems always involves some risk, relying on legacy technology and infrastructure can bring even higher risks. With the availability of tools and procedures for seamless transitions, moving to the cloud is a feasible and doable process that can minimize disruptions and ensure a successful transformation.
In addition, it is of utmost importance when comparing potential cloud-based trading solutions, that exchanges take a close look ‘under the hood’ to make sure the latest technologies and operational models are incorporated, including:
Modern Tech Architecture: Updating the outdated technology architecture prevalent in the capital markets is crucial. Traditional systems can be complex and resistant to change, making the introduction of new features a slow and cumbersome process. Adopting modern tech architecture, such as microservices and cloud-based solutions, can streamline development, testing, and deployment (features requests can be completed in a matter of weeks, rather than years). This enables quicker responses to market demands and facilitates the integration of innovative functionalities.
SaaS for Capital Markets: By embracing SaaS solutions, organizations stand to gain enormous efficiencies from working with new business operations models and scalable cost structures. SaaS architecture can revolutionize the capital markets industry by reducing redundant efforts, accelerating updates and ensuring compliance. In addition, SaaS can drive innovation through the encouragement of collaboration among stakeholders.
Asset-Agnostic Solution: A solution that is agnostic to different financial instruments can significantly expedite the rollout of new asset classes and functionalities. By designing systems that can adapt to various asset types, organizations can efficiently introduce innovations without the need for bespoke development for each instrument.
Continuous 24/7 Matching & Trading Engine: An enterprise-grade matching and trading engine provides the capability of offering modern trading with 24/7 availability.
We need modern tech to build future markets
In order for financial exchanges to compete against forward-looking financial exchanges willing to embrace modern trading environments, cloud-based SaaS solutions need to be championed. By doing so, financial institutions can reap the opportunity of opening up new markets and at the same time achieve greater efficiency, reduce costs, enhance security, and improve customer experience.
“We are already seeing widespread movement to the cloud among exchanges,” notes Zac Maufe, Global Head of Regulated Industries, Google Cloud. “Their journey will occur in a ‘crawl-walk-run’ fashion, with low-hanging fruits the first to be picked in the near term while bigger, paradigmatic changes will occur over the medium and long term. Some organizations are starting all three stages simultaneously, understanding that each will move at an independent cadence.”
Yet before making the investment, technologies need to be thoroughly scrutinized as, ultimately, outdated infrastructure hidden behind modern-tech buzzwords will not withstand future scalability. Only through the adoption of modern tech architecture - SaaS models, asset-agnostic solutions, and a transformative organizational DNA - can exchanges quickly launch new markets.
The move towards cloud in support of a more competitive and dynamic financial market ecosystem is inevitable. Not embracing this change and delaying the investment of innovative technology upgrades will only risk your organization becoming irrelevant. Don’t let this be your Kodak moment.
The views, thoughts and opinions contained in this Focus article belong solely to the author and do not necessarily reflect the WFE’s policy position on the issue, or the WFE’s views or opinions.