As we look back on a year most of us would like to forget, I am struck by the enormous change that seemed to happen under our noses in our capital and risk markets—mostly driven by disruptive technology and the convergence of big tech and Wall Street. We have been talking about these things for years; our conferences have been filled with discussions of clouds, blockchain, and big data for some time. But 2021 seemed to be the year that these issues ripened in a big way.
Take cloud technology. Just last month, CME announced its $1 billion dollar deal with Google to move its trading, clearing and data businesses to the cloud. Just to be clear, Google paid CME $1 billion to utilize its cloud and not the other way around (I wish my gym paid me to utilize their equipment). With the convertible preferred shares it received, Google sees this as a long-term partnership over the next decade with more innovations leveraging the CME franchise to come.
A few weeks later, Adena Friedman, the CEO of Nasdaq, travelled to the Amazon Web Services conference in Las Vegas to announce that she's moving Nasdaq's matching engines to the AWS cloud, starting with one of its equity options markets in 2022. Nasdaq has long been using cloud services for things like data, analytics and surveillance, and has announced the ambitious goal of transitioning its 28 markets completely to the cloud in less than a decade. But moving something as latency-sensitive as trading to the cloud opens a whole new chapter in our industry's adoption of this technology.
In April, Nasdaq also announced a partnership with Intel to explore advanced cloud-based encryption techniques that will enable Nasdaq to combat money laundering and fraud without running afoul of privacy and security issues with market participants.
Blockchain is also becoming more of a reality in our markets, but not quite in the way that we expected. For years we have been discussing the potential to use blockchain infrastructure for traditional exchanges. But despite a lot of anticipation and delayed pilot projects, there has been little movement. The main reason is the difficulty of reinventing a complex machine while it’s in motion. In other words, the legacy technology that runs our markets works reasonably well and the pain inflicted by ripping it out would be greater than the replacement value of blockchain.
Enter crypto exchanges. These new trading platforms have been built from the ground up on blockchain technology that leapfrogs years of antiquated green-screen infrastructure and potentially provides faster access to the matching engine and payment rails for buyers and sellers. Until recently, crypto markets were an interesting side conversation for traditional financial players because the relative size of these ventures didn’t make them a direct competitive threat.
That’s why FTX’s recent purchase of CFTC-regulated LedgerX was eye-catching. In my recent interview with FTX CEO Sam Bankman-Fried, it was clear that FTX is not intimidated by forgoing these traditional exchange models and offering a new approach that provides traders with direct access to the exchange without an intermediary. Unlike other exchanges, they also provide free access to their data. And with a valuation of $25 billion (roughly the size of Deutsche Borse), they cannot be ignored by the old guard exchanges. I’m no longer certain in our world who are the hunters and who are the hunted.
Such a dramatic change in technology will have its bumps in the road. At the time of this article’s publishing, Amazon Web Services (AWS) suffered a major outage, leaving cloud-based applications like home security systems and Netflix in the dark. In addition, Capitol Hill also has woken up to the excitement of crypto assets and held hearings on the regulation of crypto exchanges and blockchain, putting uncertainty around how these new technologies will be regulated.
What does all this mean for our markets? My personal view is a positive one. It will drive competition and that always benefits customers. Both cloud and blockchain technologies are simply a means for developing solutions for customers and whatever exchange best utilizes these technologies with that in mind will end up on top. Regardless, it is shaping up to be an exciting year ahead as we watch these evolving developments for our industry.
All I can say is I can’t wait for Boca!
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