What Tech Do Capital Markets Firms Want to Invest In?

Stock trades can happen in the blink of an eye, which is why stock markets and exchanges need to be on the cutting edge of technology. If they fall behind, a competitor will use that advantage to win business, like a rival stock trader.

Technology is playing an increasingly important role in supporting growth plans for market infrastructure (MI) firms, according to a study released last month by Nasdaq and conducted by Celent, a research firm that advises financial companies on technology.

As consulting firm McKinsey & Company notes, “Capital markets infrastructure providers are the platforms as well as the ‘pipes and plumbing’ of global finance, offering a range of services that support financial institutions, companies, governments and investors in building businesses and contributing to growth in the wider economy.”

The Nasdaq/Cleent report notes that from 10 to 50 percent of MIs’ IT budgets are spent on changing legacy technology and innovating, versus 50 to 90 percent spent for the maintenance of existing systems. Larger firms tend to be split 50-50, according to the report.

Which technologies are capital markets firms actually investing in? According to the report, cloud adoption is becoming more mainstream, and there is strong interest in artificial intelligence and machine learning, especially for data analytics. However, blockchain, a highly touted technology, is still not being embraced by many stock markets, as only 5 percent have deployed some form of distributed ledger technology, the Wall Street Journal notes.

The report was conducted through in-depth discussions with C-suite executives representing 20 different MI organizations across North America, Europe, Middle East, Asia and Latin America, according to Nasdaq. Although the study draws from a limited sample size, it gives some insights into tech trends and investment strategies for major stock markets and exchanges.

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Cloud, AI and Data Analytics Pique Interest

Cloud adoption is becoming mainstream for nearly all participants in the study, Nasdaq notes in its statement: 40 percent are already using cloud in some (non-core) functions and an additional 45 percent are 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,” Nasdaq says. “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.”

Data and analytics are of keen interest to MIs since they are becoming major revenue drivers, according to the report, “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.”

After that, stock market firms want to develop advanced analytics tools with AI and machine learning “to create new solutions for investment decision support, risk management and compliance.” Leading MIs are already developing advanced analytics offerings with AI and ML and by leveraging the cloud, the report says.

AI and ML tools are also being used in operations, especially in risk management for surveillance, fraud and cybersecurity risk monitoring, the report says.

“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,” the report says, without naming those vendors (Google, IBM, Microsoft and others have been investing heavily into AI).

Interestingly, 35 percent of all institutions in the study mentioned they are already using AI, and an equal share are working on pilot projects. However, robotic process automation (RPA), which is a simpler and more cost-effective technology to automate manual processes, is more widely used, and its adoption is growing, with 70 percent of study respondents mentioning they are already using RPA.

Capital Markets Firms Are Wary of Blockchain

Distributed ledger technology promises to be transformative, according to Nasdaq, especially in post-trade market infrastructure. Almost all players are involved in blockchain development projects through partnerships, joint ventures and industry consortia.

However, while 70 percent are involved in some kind of pilot project around blockchain, the study found that 20 percent have “no plans” to develop on or implement the technology, according to the Journal.

“Numerous use cases of DLT are emerging in peripheral functions,” Nasdaq says. “Because it is still a new and complex technology, not every MI is able to experiment with it individually.”

IDC estimates that global corporate spending on blockchain software will reach $2.1 billion this year, up from $945 million in 2017, led by increased investment from distribution, retail and manufacturing companies, the Journal reports.