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Financial market infrastructures (FMIs) support the capital markets ecosystem by offering a range of critical services around custody, trade execution, clearing and settlement. They are heavily regulated and subject to strict requirements around resiliency, security, and capacity, which means assessing when to migrate mission-critical functions to the cloud can be challenging. Consultancy Celent has suggested that the typical formula for total cost of ownership (TCO) of a technology stack needs to be specifically amended for FMIs in order to present a clear business case.
In a report commissioned by Nasdaq, Celent said: “Our primary research shows that in comparing on-premises and cloud costs, the traditional TCO formula can sometimes fail to adequately address the unique needs of an FMI.”
FMIs are unique in their public interest imperative and being subject to severe reputational risk due to the impact of any outages on wider financial and economic ecosystems. Their systems need to handle unpredictable and volatile market conditions and ensure fair and equal access for all participants with very limited time for upgrades or maintenance. As such, FMIs have typically been very cautious in pursuing any transformation of essential market infrastructure, whereas they have been quicker to adopt cloud for data and back-of-the-house.
“FMIs must pre-emptively over-provision technology resources, such as compute and networking environments, to meet peak demands and comply with regulatory requirements around capacity planning,” added Celent. “As equipment is typically a capital expense, sunk costs are high.”
Still, the conversation amongst FMIs has progressed from “if” to “when” in terms of mission-critical cloud adoption according to the report. However, due to their unique role and the associated high sunk costs, the standard TCO equation may show little to no cost savings from moving to cloud. Celent suggested the introduction of a new multiplier, “StrategicFriction,” which represents the not just the costs of technology but rather the cost of standing still as markets evolve. The new formula boils down to:
(Capital Expenses + Operating Expenses) x Strategic Friction = Total Cost of Ownership.
“Our primary research shows that in comparing on-premises and cloud costs, the traditional total cost of ownership (TCO) formula can sometimes fail to adequately address the unique needs of an FMI,” said the report. “A new FMI-specific TCO framework is needed to account for intangible costs and better capture opportunity costs.”
Celent identified different strategic drags that can impact an FMI’s business and relevance given the shift to cloud. These frictions include slow time to market, lack of appeal to top talent, and increased costs to maintaining legacy systems.
Migrating to the cloud enables transformation and optionality when it comes to future technologies that can unleash enterprise-level innovation and ignite a network effect leading to exponential growth. FMIs also need to keep pace with their clients who are moving their most critical workloads to the cloud across the trade life cycle. Capital markets participants view cloud as an enabling technology across multiple areas, including leveraging data, supporting resilience, and managing risk. Celent research in 2023 found that 67%, of FMI clients expected to upgrade critical systems to the cloud last year and half, 48%, were looking to move at least one critical workload to the cloud within 18 months.
“Market participants are finding the pace of technology and regulatory change has accelerated to a point where those in the cloud have a material advantage over non-cloud competitors when it comes to supporting innovation,” said Celent.
FMIs are already seeing rising revenues from providing source data, and demand is only likely to rise due to increasing electrification of trading across asset classes and the advent of new asset classes, such as tokenized securities. Celent added: “These are all opportunities for FMIs to grow and diversify client base and revenues.”
Follow this link to download the paper and learn more from a video with the author, Celent’s Monica Summerville.
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