Nasdaq and Celent study on capital markets infrastructure tech

The report was conducted through in-depth discussions with C-suite executives (including CEOs, COOs, CTOs, CIOs and Heads of Strategy) representing 20 different MI organizations across North America, Europe, Middle East, Asia, and Latin America.

"As market infrastructure operators, our economies are reliant on us to provide a seamless ability for buyers and sellers to come together in a fair environment, find the right price, and trade instantaneously. Technology is the lynchpin of this ecosystem," said Brad Peterson, Chief Technology & Chief Information Officer, Nasdaq. "Our study has shown that nearly all executives interviewed worldwide are looking across borders and embracing the global interconnectedness of our markets.

They are tapping technologies such as cloud, APIs, and machine intelligence, while also recognizing the inflexibility and limitations of legacy systems in achieving goals around business expansion and technology scalability. We believe this is a welcomed step in the right direction for the health and longevity of our economies."

"The market infrastructure providers that will stay relevant in the digital age must be agile and flexible players that are not afraid of change," said Josephine de Chazournes, Senior Analyst at Celent and co-author of the report. "They have to be able to reinvent themselves in adjacent businesses, and grasp opportunities even if they are not in their DNA."

"The promised land of digitized capital markets infrastructure does not come without new risks - cyber risk is already a big concern, while money laundering, fraud, and market abuse risks are growing," said Arin Ray, Senior Analyst at Celent and co-author of the report. "It will take industry wide efforts to mitigate the risks."

The key takeaways from the study include:

• Technology is playing an increasingly important role in supporting growth plans. From 10% to 50% of MIs' technology budgets is spent to change the legacy technology and innovating vs. 90% to 50% for the maintenance of systems. The bigger the player the more already amortized are the maintenance costs and thus the split tends to be closer to 50%-50%.
• Data and analytics are becoming major revenue drivers, and all MIs surveyed are transforming data management practices with plans to offer new data solutions and delivery options such as data-as-a-service. The next goal is to develop advanced analytical tools with AI and machine learning (ML) to create new solutions for investment decision support, risk management and compliance.

• There is tremendous interest in adopting new technology such as cloud, artificial intelligence (AI), machine learning (ML), and distributed ledger technology (DLT) because they can help develop innovative solutions, new business models, and contribute to significant operational improvements. New solutions are being developed with of one the new technologies (open architecture, cloud enabled, and/or application programming interfaces (APIs)), or at least with provisions to easily incorporate them in the future by 95%of market infrastructures surveyed.
• Cloud adoption is becoming mainstream for all participants in our discussion except only one, with 40% already using cloud in some (non-core) functions, and an additional 45% working on pilots. Many large players are finalizing their cloud partners and strategies, and smaller players expect their vendors to deliver the promises of cloud to them. Data privacy and sovereignty issues are a challenge for some players, and clearer regulations and industry standards will be needed for expediting cloud adoption for production data.
• Artificial intelligence is gaining prominence with leading MIs developing advanced analytical offerings with AI and ML and leveraging the cloud. It is also being used in operations, especially in risk management for surveillance, fraud, and cyber-risk monitoring. Data management and model governance issues can be challenging for some MIs in adopting AI, and many are using AI-enabled solutions from leading international vendors. In the study, 35% of all institutions mentioned they are already using AI, and an equal share working on pilots. On the other hand, robotic process automation (RPA), which is a simpler and more cost-effective technology to automate manual processes, is widely used, and its adoption is growing - 70% of discussion participants mentioned they are already using RPA.
• Distributed ledger technology promises to be transformative, especially in post-trade market infrastructure, and almost all players are involved in DLT development projects through partnerships, joint ventures, and industry consortia. Numerous use cases of DLT are emerging in peripheral functions. Because it is still a new and complex technology, not every MI is able to experiment with it individually, but 70% of MIs in the study sample are involved in accelerators, pilots, or industry consortia.

• Market infrastructure players are increasingly looking for third party solutions because they are cost effective, and compliant with the latest standards and regulations. In core MI functions, there is growing preference to buy and customize third party solutions instead of reinventing the wheel.
• Cyber-risk is the biggest concern for market infrastructure providers. Indeed all the respondents cited it as such. As MIs engage more with third party providers and fintech startups, everyone in the ecosystem must improve their cyber-security measures, because the system is only as strong as its weakest link. Despite growing recognition of the risks, few are taking concrete steps to address them. It will take industry-wide efforts to overcome these challenges because the new risks will be hard to mitigate by acting in isolation.