TECH TUESDAY is a weekly content series covering all aspects of capital markets technology. TECH TUESDAY is produced in collaboration with Nasdaq.
Cloud’s ceiling keeps rising.
Cloud computing will become a necessary component for maintaining business competitiveness by 2028, according to Gartner. The data provider has forecast that global end-user spending on public cloud services will be $679 billion in 2024 and grow to more than $1 trillion in 2027.
McKinsey has estimated that cloud can generate about $3 trillion in earnings by 2030 and the value generated from enabling businesses to innovate is worth more than five times the reduction in IT costs.
The drive toward cloud is fully underway, even in the cautious financial services industry. That’s according to a recent Nasdaq white paper highlighting cloud adoption among financial market infrastructures (FMIs), including exchanges, central clearing counterparties (CCPs) and central securities depositories (CSDs)
Inflection point
The benefits of cloud are well-known: scalability, flexibility and quicker go-to-market. Yet, FMIs have typically leveraged cloud for data, analytics, surveillance, and back- and mid-office functions. Critical workloads, such as matching engines and post-trade workflows, have remained on-prem.
“FMIs must operate with extreme resiliency,” the Nasdaq white paper stated. “While moving markets to cloud generates benefits, it also brings risks and care must be taken not to degrade current levels of resiliency.”
But the landscape is changing as FMIs face down the legacy issue: One-third of all FMI systems worldwide are expected to reach end of life by 2028, and FMIs allocate more than three quarters, of their budgets towards business as usual and incremental changes, rather than innovation and transformation needed to serve modern markets and participants.
While some progress has been made toward mission-critical cloud, challenges exist, including a lack of regulatory precedent, third-party constraints and a lack of standardization. Progress is necessary to make migrations feasible, particularly with respect to gaining regulatory clarity, improving cloud service provider (CSP) technical capacity and establishing operating models for consuming third-party services to support critical market infrastructure.
Tidal change
The good news is that progress has indeed been made in those core areas, the report argues:
· Regulatory authorities including the U.K. Financial Conduct Authority (FCA), European Securities and Markets Authority (ESMA) and the U.S. Securities and Exchange Commission (SEC) have begun investigating third-party cloud considerations.
· Cloud-service providers have evolved their offerings, expanded their geographic coverage and fine-tuned operating models for an FMI audience.
The real-world impacts are following. An example being the migration of Nasdaq’s GEMX options market to the cloud in 2023, the second such market it has migrated to a cloud environment, which delivered an up to 10% improvement in latency and the ability to adjust capacity more seamlessly in response to changing market conditions.
Cloud foundational to innovation
Cloud is so urgent and important for FMIs because it’s the foundation of modernization. Next-gen platforms, artificial intelligence (AI) and emerging business opportunities all hinge on having modernized, cloud-enabled infrastructure.
The key task for FMIs will be to take their cloud adoption from incremental to transformational.
“FMIs need to treat cloud not just as another piece to its tech stack but as a means to maintain strategic optionality and control in an environment where evolution is rapid and unabating,” added Nasdaq. “Cloud is a major catalyst of the wide-scale modernization needed to bring markets forward and centering cloud strategy around this principle can help FMIs drive real progress.”
FMIs should begin positioning for a cloud-enabled future by engaging with cloud service providers by assessing institutional readiness to enact transformative change and working proactively with regulators to understand compliance requirements in their jurisdictions.
Download the white paper here.
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