Moore’s Law observes that the number of transistors on a microchip doubles every two years, while its cost is halved over the same period. It has provided exponential growth in processing power over the past decades, allowing many applications to improve performance by upgrading hardware without fundamental architectural changes.
In the decades since Intel co-founder Robert E. Moore first made this observation in 1965, consumer technology has continued to innovate rapidly, while the technology that powers capital markets has lagged. Although recent physical limitations have led to diminished Moore’s Law improvements, advances in distributed systems have continued the march of innovation. Much of the capital markets, on the other hand, did not benefit from these technological advances and still function in the past.
The $924.5 billion US securities industry still relies on mainframe technology from the 1980s. The result is fragmented systems and interfaces that force market participants to struggle to react to market changes and to meet the needs of data-hungry investors and regulators.
To understand how we got here today, we have to look under the hood. The mainframes that have powered global financial markets for decades were designed to answer specific questions at a specific time. Over the years, modern technology has superimposed itself on the outdated infrastructure, providing only a temporary solution. Similar to building a new house on an old foundation, sooner or later the base will give way and the whole structure will crumble.
Simply put, the silos have calcified over time to the point where it’s easier for humans to talk to each other rather than finding a way for technologies to communicate. This technology debt creates broken processes that are the operational inefficiencies plaguing businesses today.
Investors, like all consumers, have become accustomed to on-demand service. They expect to be able to react quickly to market events and seek to expand into alternative asset classes like crypto. Post-trade operations are challenged to meet these demands and provide the granularity, data visualization and user experience that investors and regulators need.
From cost center to competitive advantage
For many companies, back-office processes are “out of sight and out of mind” – until something goes wrong. When factoring in equity borrowed, interest charges, balance sheet impact and penalties, the cost of business failure is substantial. It is estimated that a global business failure rate of just 2% results in costs and losses of up to $3 billion.
The solution is to minimize manual intervention in favor of automation and cloud-based solutions. To operate at peak efficiency, banks and brokers must reduce manual processes that increase the risk of error and operate in silos in favor of technology that enables users to make smarter decisions and identify potential risks throughout the trading process.
It is estimated that modernizing the post-trade technology stack will reduce costs by 20-30% in key areas such as reference data management, reconciliations, clearing and settlement, middle office, regulatory reporting and the overall application footprint. Ripples of adoption are emerging across the industry – for example, in 2021 Nasdaq partnered with AWS to build the next generation of cloud-enabled infrastructure for global financial markets.
Simplifying the technology underlying trading and post-trade functions can transform it from a cost center into a competitive advantage. But for many companies, upgrading would require rewriting many systems with significant technical debt, massive planning costs and resources – a daunting project with a low chance of success.
Modern high-performance computing coexists with COBOL, and microservices with mainframes. But as the value of data continues to rise, those who invest in the technology and capabilities to keep up with rapid, intraday market changes will come out on top.
Modern problems require modern solutions
A modern single-source-of-truth platform has the potential to optimize operations across teams, asset classes, and geographies, reducing cost, complexity, and risk. In turn, this facilitates the access of emerging managers, professional traders and institutions to capital markets. Founded in 2018, Clear Street is a fintech and non-bank prime broker building modern infrastructure to improve market access for all participants.
Clear Street’s mission is to replace the outdated infrastructure used in capital markets from the ground up to build a fully cloud-native system designed for the modern needs of a complex global marketplace. Its proprietary technology platform adds significant efficiency to the market, while focusing on maximizing returns and minimizing risk and cost for clients.
The company’s goal is to provide all market players, from emerging managers to large institutions, with the tools and services they need to compete in today’s rapidly changing markets. It’s never been clearer that the forces of volatility, regulatory change and speed demand tools that enable companies to make sense of markets in real time. In a few years, the company is processing approximately 2.5% of the notional volume of US equities, or approximately $10 billion of activity through its platform.
Clear Street takes proven technology from the world of Silicon Valley and applies it to finance. The company’s technology stack uses modern cloud-native infrastructure, including resilient service orchestration, event-driven real-time processing, and scalable data warehousing – a stark contrast to the batch processing offered by mainframes. . Clear Street’s complete suite of software systems is built on this cohesive and cohesive technology stack, allowing components to communicate seamlessly and stay in sync, eliminating the need for tedious reconciliation processes.
It’s time to update the infrastructure that powers capital markets. To keep up with the accelerated pace of modernization, companies will need to invest in technology to meet the needs of investors and regulators. Those who do so will participate in building the modern, scalable future of capital markets – improving access, speed and service for all participants.
Clear Street is an independent, non-bank prime broker building a modern capital markets infrastructure. The goal of fintech is to create a single platform to serve all types of investors, across all asset classes, globally. For more information, visit https://clearstreet.io.