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Capital Markets: The Cloud Services Providers’ Next Play?
Traders Magazine Online News, June 10, 2019
The times they are a changin'.
Though Bob Dylan originally sang those words in 1964, they’ve probably never been truer than they are today, at least when it comes to technology.
Name the industry, and in almost all cases technology-led disruptors have entered and seriously shaken up the status quo. Amazon’s effect on retail is obviously the prime example, but Uber’s impact on the livery industry, Netflix’s impact on content distribution and even Casper’s impact on the mattress industry are others. Perhaps the only major industry to have *not* seen a significant impact due to the entry of new, tech-savy disruptors is the capital markets.
But in the opinion of some, it is only a matter of time before the major global banks – most of whom operate aging, overly-complex technology stacks – will see the same type of competition that other industries have felt.
Complexity Without Cloud
Currently, trying to decipher a problem in a large bank’s capital markets infrastructure is like an archaeological dig, according to Tony Amicangioli, Founder and CEO of capital markets infrastructure technology provider HPR (formerly known as Hyannis Port Research).
“As you cut through the crust of technological layers you might find that in the early 2000s whoever was head of IT thought C++ was the solution to everything. Then they were replaced by a Java devotee and the most recent layers were built by a true believer in Python and their team. Multiply this across different regions – Europe, AsiaPac and the Americas – and again by asset class, with some solutions developed in-house, others by vendors, and it becomes unmanageable. Fixing it seems impossible. How are you going to take all these mission-critical systems off-line and rebuild from scratch?” said Amicangioli.
Firms like Amazon, Apple, Google and Microsoft – the cloud natives, if you will – don’t have this problem. Their foundational technology leverages the Cloud natively and is built to scale. At their essence, they are very simple. Take Google, which is fundamentally a distributed, de facto operating system. Ten Google apps may do ten very different things, but the underlying technology is highly unified. This efficiency and unification have enabled the rapid ascent of these companies.
“Cloud technology is not just about moving applications to a central provider’s data center,” says Amicangioli. “In our view, effectively leveraging the Cloud is about unifying your systems and simplifying your development approaches within a singular and universal computing environment. We see all technology frameworks ultimately destined for this since it almost always represents the most cost-effective, responsive and performant environment.”
Amicangioli knows. He was previously CTO of Tower Research’s Lime Brokerage subsidiary, one of the early winners in the race to sponsor HFT providers. Before that he founded one of the first Cloud startups, and early in his career served as an executive at hardware powerhouse Juniper Networks.
“I’ve been in business long enough to watch the likes of Sun Microsystems and Digital Equipment, once giants in the technology industry, vanish,” he said. “At times I get the same uneasy feeling when looking at some of today’s largest banks given where their technology is in comparison to the entrants we all know are coming. Without a doubt, there will be winners and losers.”
Trend Toward Simplicity
“It’s no secret that the stacks run by virtually all of the tier 1 global banks are in need of a major overhaul, and that is not news to the executives at those firms, either,” said a former bank technology executive who asked to remain nameless. “I think the failure to act has been driven in part by a belief that the regulatory and capital moats that we have in the capital markets will be sufficient deterrents, but I can’t see that being the case for too much longer.”
To that point, being in a highly regulated industry is no protection. Consider Oscar, the health insurance startup that last year attracted a $375 million investment from Google parent company Alphabet. Oscar’s proven that it’s possible to enter a complex market and gain competitive advantages by building a cloud-native technology stack from the ground up, resulting in better efficiency, better margins and ultimately better service to customers.
That’s not to say that Wall Street has been oblivious to the threat from tech-led competitors, however. JP Morgan CEO Jamie Dimon warned in a 2015 investor letter that “Silicon Valley is coming,” and two years ago noted that the bank is spending nearly $10B per year on remaining competitive. Other banks have similarly robust technology budgets, “but far too much of that spending is to fund finger-in-the-dyke projects, and not nearly enough goes to the strategic ones,” says the tech exec.
Some see the capital markets dividing into two camps when it comes to technology: the haves and the have-nots. With the stakes so high, CTO’s fear of making mistakes can induce a form of paralysis, ushering their firms into the have-not category through inaction. As cloud adoption becomes the key driver of success, the industry will see these two camps transform into winners and losers, these people say.
“It’s tempting to see the devolution of large financial services firms as inevitable, but really, it’s not too late – yet,” says Amicangioli. “The bank that locks on to this reality, finding efficiencies through technology, is going to do very well. The potential upside for being the first to truly get this right really can’t be overstated.”
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