Innovation is inevitable as market participants continually seek to enhance their operations across the board, and stock exchanges and trading venues are perhaps some of the most prominent advocates of embracing emerging technological advancements.
With these entities arguably the heart of the trading world, where the real moves are executed, how is the market set to react as cloud adoption continues to surge and is subsequently pumped into the veins of their surrounding ecosystem?
Recent times have seen a swathe of investments from major cloud providers into leading exchanges. Over the last three to four years significant investments have been made, and long-term partnerships forged across the market, with some of the biggest movers in the space being the usual cloud suspects: Google, Amazon Web Services (AWS), and Microsoft.
“It’s difficult to find a major exchange that hasn’t had a formal partnership or a significant investment from one of the major cloud service providers in the last couple of years,” says Matt Barrett founder and chief executive of Adaptive.
In 2020, the Singapore Exchange (SGX) completed a proof of concept with Amazon to build a cloud-native exchange, whilst Deutsche Bank signed an innovation partnership with Google Cloud the same year. Following this, Google and CME Group struck a 10-year deal in November 2021 to partner and move the exchange’s trading systems to the cloud (with Google at the same time, separately, investing a billion dollars in the business) and in the same month Amazon (AWS) and Nasdaq signed a multi-year agreement aimed at jointly fostering a new cloud-based market infrastructure and migrating every exchange to the cloud by 2028.
More recently, Microsoft and the London Stock Exchange launched a 10-year strategic partnership back in December 2022 also focused on developing cloud infrastructure solutions, whilst in February last year, Google Cloud officially became Deutsche Börse Groups’ preferred cloud partner for the next decade.
But we must ask ourselves – why? Why are these cloud providers – hugely profitable in their own right – injecting money into exchanges and seemingly competing for market share across the capital markets landscape in order to assist the trading ecosystem with their shift?
A method to the madness
Across the entire trading ecosystem, from exchanges to firms themselves, a trend has emerged wherein players are locked into a competitive race to migrate at least some part of their work to the cloud, conscious of the risk of falling behind.
Key benefits associated with financial markets infrastructure moving to the cloud, as highlighted in a recent AWS whitepaper from January this year, include lower barriers to entry when launching new markets globally – in part due to standardisation and harmonisation, the potential to run 24/7 operations, a gateway to ever-more innovative technology, cost reduction, and of course, increased operational efficiency.
However, despite these benefits, the unavoidable fact is that legacy systems were built in a different time, and operations are steeped in historical processes and data. This therefore requires intense investment and attention – needing to be upgraded and altered at a rapid pace – in order to allow market players to empirically execute their goals.
Demonstrably, cloud providers appear of course only too happy to help, having upped their involvement in the capital markets space in recent times.
Speaking to The TRADE, Rohit Bhat, Google Cloud’s managing director for capital markets, exchanges, and digital assets, explains that from his side one of the key focal points was around deeper collaborations with the institutions that represent the value chain of capital markets in order to play a part in the future development of the industry.
“There’s a real opportunity to move the needle on how these markets will evolve over the next decade or even next two decades […] Our approach is truly around collaborating directly with the players that can make a difference in this particular space of financial services.
“We’re really taking the approach of supporting the market, with the venues that are taking a hard look at not just driving costs, but really levelling up and growing in the market through the potential of cloud – we want to be there to help support that.”
This is a key argument across the market, wherein playing a central part in the development of financial operations presents a prime opportunity to have a say, akin to industry agenda-setters.
In a similar vein, John Kain, head of worldwide financial services market development at AWS tells The TRADE that the increasing establishment of formal partnerships between the major exchanges and cloud services providers in recent times is focused on the creation of a more interconnected, and thus resilient, future.
“Nasdaq continues to work closely with AWS to advance the modernisation of markets by driving innovation in the underlying infrastructure that power markets to deliver enhanced performance, transparency, security, resiliency, and integrity. Together, Nasdaq and AWS are transforming what’s possible for capital markets and delivering on a commitment to create an interconnected future—one that is safer and stronger for everyone, in the cloud.”
Greg Ferrari, vice president and head of exchange business management at Nasdaq, agrees, explaining that from the exchange perspective this technology allows for an innovative, hybrid approach: “AWS’ outpost technology has allowed us to combine the best of both worlds – cloud infrastructure and our existing trading environment.”
The shift of liquidity itself
As providers continue with their committed goal of creating a better and healthier future across the financial services industry, it remains an often-unspoken truth that the market in the end needs to develop as one, with each faction committed to playing their parts.
Speaking specifically about the role of venues, Kain made clear the importance of their position across the industry: “Exchanges – like all financial market infrastructure – are critically important, especially within the capital markets space where they tie together the financial services community.”
This idea of exchanges as the hub tying the industry together could arguably be deemed the crux of why this topic is so significant.
Barrett asserts: “It’s not the compute infrastructure of the exchanges themselves that the cloud providers are interested in, the point is to drag the ecosystem that surrounds those exchanges into the cloud itself. Once the venue moves to the cloud, then financial services institutions will follow, as they have been in increasing amounts over the last 10 to 15 years.”
Thus, whatever the motivations, the inferred end result is clear – an ‘inevitable’ shift of liquidity itself. Venues are, as previously stated, core to financial markets activity – it’s where a large portion of trades execute, where a large part of market data lives, and crucially, where the majority of price formation happens.
Subsequently, liquidity follows. As venues increasingly shift operations to the cloud, albeit at a measured pace, key players will likely need to follow suit in order to stay involved.
“Once venues and liquidity are in the cloud, then the ecosystem of market makers who are latency sensitive, liquidity takers and who need to provide a synthesised order book across a range of different venues to distribute liquidity to their end clients, will all need to move too,” adds Barrett.
However, it appears that the cloud providers themselves are looking through a wider lens across capital markets, as Bhat explains: “The approach is not ‘let’s get them kicking and screaming and drag them to where we want everyone to be,’ rather it’s to observe the market and the ecosystem of providers, participants, makers, leaders in order to slot in where we can to support.
“[…] We’re here not for the value that’s going to come in 2024 only. Our investments are thoughtful enough to go farther out to multi decade.”
An (in)convenient truth?
As fruitful as a future in the cloud is claimed to be, wherein “running markets fully in the cloud will usher in a new era for capital market infrastructure and market participants,” as AWS’ whitepaper puts it, there is an important argument that currently the environment in question is in actuality not yet developed enough in order to support cloud operations across the board.
This point of view cannot – and truly should not – be ignored, it remains a key reason why a, often vocal, subsect of the industry is yet to be convinced. Getting into specifics, the reasonings include latency, performance, resilience… however, those on team cloud are convinced that eventually these topics will be successfully addressed.
The existence of some reticence is arguably less understandable as market moves continue to demonstrate an uptick in adoption.
Addressing this, Kain explains: “Capital markets firms from virtually every component of the trade lifecycle have been leveraging AWS for over a decade to power their important workloads,” adding that a significant number of segments of the capital markets space is already linked to the cloud in various examples – from the financial data which drives investment decisions to the analytics needed for investment research and trading.
“Given how much capital markets infrastructure can and does run on the cloud, there are very few workloads that we haven’t seen migrate.”
Discussing the idea of readiness gaps amongst market participants, in particular those somewhat resisting the uptake, Bhat tells The TRADE: “We believe that we probably need to lower the barriers of understanding of how to leverage our technology. In the context of capital markets, whether you’re a venue, buy-side, sell-side, institutional, etc. We all need to unlock that value together.
“What we’ve found is when you do it in a way which is less rip and replace, and more collaborative, the barriers are lowered more easily. The cloud is no longer something that’s only of value for the digital natives or those born in cloud.”
However, though a large part of the market believes cloud migration is only a matter of time, many are currently investing in systems which, should cloud migration succeed the way many predict, become unusable.
As Barrett highlights, some in the market “are still ordering physical hardware to be deployed in data centres and spending 10s if not hundreds of millions of dollars to roll out physical infrastructure. Those kinds of systems will probably not go live for another five years and by then, I think those firms will possibly be on the wrong side of capital markets technology history. In five years it’ll likely be too late.”
One key example of a recent venue move to the cloud came last November when Nasdaq completed the migration of their third US market to AWS. Nasdaq GEMX, one of Nasdaq’s six options exchanges, was at the time their largest market to move to the cloud so far.
Speaking to the key empirical considerations, Ferrari explains: “Clients want minimal disruption during market migrations […] In the last five years or so, Nasdaq, in particular, has been very focused on delivering deterministic markets, which has a business rationale – it means essentially reducing your variance to anything that is essentially known.
“Nasdaq and our clients have built and modernised the connectivity and hardware necessary to easily access the markets. That forward-looking technological investment has allowed us to seamlessly migrate GEMX to AWS,” Ferrari added.
It is herein where the importance and influence of venues and exchanges truly lies. The binding fact is that it is a predominant requirement for participants across the market to be able to connect to these entities, whether this be through the traditional methods, or through embracing cloud.
As market adoption continues to accelerate, participants are having to take the notion of an irrevocability around cloud migration into hand. More and more it appears that firms are making cloud a centrepiece of their work, conscious of the interconnectedness between entities, market segments, and key processes.
At risk of missing out, players across the industry have demonstrably had to take note of the liquidity factor, this is no longer a question of merely enhancing offerings but truly being at the forefront of market progression.