It is always great to see validation in the industry of our research – but I hadn’t expected it to come so soon.Early last week I presented highlights of our Capital Markets Team’s Top Tech Trends for 2022, in Celent’s Technology Trends Previsory series. This included an increased focus on user experience (UX) and platforms, and increased tech investment to decouple infrastructure costs from revenue growth, enabling scaling in other words. A few days later, CME Group announces it has signed a 10-year partnership with Google Cloud with the drivers behind this echoing our view; CME has said the partnership’s focus includes expanding access by allowing CME to scale its infrastructure while optimizing costs, and will co-innovate new products such as user-centric platforms. We expect to see more of this across capital markets.
Celent’s data confirms that many Market Infrastructure (MIs) providers, such as exchanges and CCD/CCPs, are embracing cloud; recent Celent interviews with CIOs at leading Mis found this is common goal.There is quite a long road ahead however. Our research found that today 64% of MIs have their infrastructure fully on premises, with the vast majority of MI CIOs describing themselves as in the early and exploratory stages of cloud migration (see figure below). Investment in cloud technologies was MI CIOs’ top investment priority, and we expect to see a 45% increase in the number of MI providers with fully modernizied technology stacks by 2025.
Market Infrastructures are Early in Their Cloud Journeys
Source: Celent, “CIO Market Infrastructure Survey, 2021"
Industry participants are realizing drastic action may be necessary as the gap between capital markets leaders and followers seems to be widening, with scale becoming increasingly important and technology a key driver of success – it’s a case of the “haves and have-yachts” when it comes to technology prowess.
Those lagging will need to make hard choice around business line viability considering the tech investment required to stay competitive. As James Gorman, Morgan Stanley’s CEO said on the company’s 3Q earnings results analyst call, “…frankly the technology is so demanding and complex that it’s pretty hard to be a winnable or a new entrant trying to break into the group that is dominating the global flow of capital markets.”
Gorman’s comment was directed at banks, but solution and service providers can also have a hard time breaking into the capital markets vertical because the network effect is very strong.Google Cloud currently sits in a distant third place in terms of market share of worldwide cloud infrastructure spend at 8% versus market leaders AWS at 31% and Microsoft Azure at 22% (see exhibit below) – and Celent has found AWS and MS Azure also command leading market share across capital markets.Deals like this may be an effort to leverage the network effect to move up the market share ladder. The CME news follows an announcement last December that Deutsche Bank (DBK) and Google Cloud signed a “strategic, multi-year partnership to accelerate the bank’s transition to the cloud and co-innovate new products and services.” While the DBK press release discussed lending and retail use cases, it also mentioned enhancing Autobahn, DBK’s electronic platform for corporate and institutional clients to create more personalized recommendations and experiences was also mentioned.
Source: Canalys estimates, July 2021
In the Capital Markets Team’s Technology Trends Previsory Webinar, we discussed how financial services leaders that went into the pandemic with modern technology stacks were better positioned for agility and flexibility, often translating to outsize revenues. The “wannabes” must now consider taking drastic steps to effect a step change toward business-enabled tech innovation.
An interesting aspect of the CME and Google deal is Google’s “$1 billion equity investment” in the CME Group, which takes the form of preferred convertible non-voting stock. Google has described it as “skin in the game”.But Is Google taking a leaf from the derivatives market and hedging its bet? The features of this security type mean Google as investor is likely to receive an almost guaranteed income in the form of dividends on its investment—with less risk to the principle than an investment in common shares—but can still capture upside if there is a big rise in the CME’s share price (this is the convertible aspect of the security). In any case, it may be an innovative approach to partnership.
The two entities say they have entered a 10-year partnership to “transform derivatives markets.” To start however, the partnership is focused on low-hanging fruit. According to TechCrunch, which spoke with a Google representative, the CME cloud migration will occur in three stages, starting with “the easiest workloads and the lowest latency requirements.” Data analytics tooling will follow. It will only be in the later phases where the exchange will be “focused on trying to innovate by doing more real time data and analytics.”It is worth noting that CME was already working with Google, becoming the first derivatives exchange to offer cloud-based access to its real-time and delayed market data feed when it launched Smart Stream in 2019 available via Google Cloud Platform.
Market data in the cloud is a topic we have been following and expect more research on cloud in the front office and enterprise data management and cloud marketplaces in the coming year.
Celent subscribers can learn more about all five of Celent’s Previsory top tech tends in capital markets through our research and analyst access, but everyone is invited to catch our highlights session last week, now available here on replay to registered Celent website users (registration is free).