Big techs are getting closer to the capital markets. The partnership announced this week between Microsoft and the LSEG (London Stock Exchange) is the third alliance formed in just over a year.
In November 2021, Google spent $1 billion (R$5.3 billion) and signed a ten-year cloud computing deal with Chicago-based CME.
AWS (Amazon Web Services) and Nasdaq of New York reached a similar agreement in the same month, and last week, Nasdaq completed the transfer of one of its US options exchanges to AWS.
For scholarships, the advantages are clear. “We’re building products together, we’re going to market together,” said David Schwimmer, chief executive of the London Stock Exchange. “It’s about our data and analytics capability.”
US software group Microsoft will help LSEG move its infrastructure to its cloud, which will give it more processing power and allow the company to aggregate its data more quickly and flexibly.
“Going to the cloud is very important as they need to be ready for the next generation of computing capabilities,” said Niki Beattie, executive director of consultancy Market Structure Partners. She added that without that, “it’s going to be difficult to move forward at the pace”.
LSEG’s data and analytics business is the backbone of the company, generating £2.4bn (£15.5bn) in revenue in the first half of 2022. Its clients, which include fund managers, analysts, traders and investment bankers, use your data to make decisions. LSEG says it has data on companies representing 99% of the world’s market capitalization, as well as prices and economic figures from 165 countries.
“Microsoft has intelligence Artificial intelligence and algorithms, they have unique data and the infrastructure to manipulate and create products with it. It is reasonable to assume revenue growth,” said one of LSEG’s top 20 investors.
Could the partnership also develop a “Bloomberg killer”? More than 40 years after Michael Bloomberg founded his data company, his eponymous terminal is still present on every trading floor. Rival product Eikon, acquired by LSEG through its $27 billion takeover of Refinitiv, is losing popularity.
A popular function of the Bloomberg terminal is its messaging application. Microsoft and LSEG intend to create a new unified chat and data platform, combining Microsoft’s Teams messaging system with exchange analytics.
“People use Bloomberg primarily because of the chat function and the creation of this community ecosystem … that’s an important part of institutional financial markets,” said Ben Quinlan, chief executive of consultancy Quinlan and Associates. But he added that Bloomberg’s customers are loyal, and it has long struggled to capture market share.
A person close to the LSEG said it would be wrong to think of this as the next phase of the terminal war. “Of course Microsoft will improve Eikon’s user interface, but that’s not the big prize, this war will never be won,” the person said, noting that Eikon generates a relatively small proportion of Refinitiv’s revenue, about $ 1 billion.
Instead, this source said LSEG’s internal view is that terminal sales would decline because there are fewer human operators. The struggle ahead would be “piping data” through the cloud, feeding data into the computer programs that do the trading — and feeding data into the bespoke systems that banks build for themselves.
Here, Microsoft has the advantage of another product that has been around since the early 1980s: its Excel spreadsheet application. By integrating financial data from LSEG into Excel, companies intend to use algorithms to help analysts create financial models, charts and presentations all in one place within Microsoft Office.
“It’s a pretty ambitious set of proposals,” said Ian White, an analyst at Autonomous Research, adding that “it would be a better integrated, competitive technology offering that addresses some of the bottlenecks.”
So what’s in it for tech groups? There is the financial aspect. Microsoft expects to generate US$5 billion (R$26.4 billion) in revenue through the ten-year partnership, with a minimum spend of US$2.8 billion (R$14.7 billion) guaranteed by the LSEG. Microsoft is also buying a 4% stake in LSEG and taking a seat on the board.
Cloud providers also see proximity to exchanges as helping to secure business with thousands of related financial firms. Nasdaq, for example, has many infrastructure customers that rely on it for trading, clearing and settlement, which means they will also rely on AWS.
“There will be opportunities for us to really form new relationships,” said Scott Mullins, managing director of AWS Worldwide Financial Services. “There are some markets where we still don’t have the infrastructure, and we will have the opportunity to expand,” he added.
MSP’s Beattie said, “Cloud providers definitely want to learn more about financial markets, and the tradeoff is that they’re able to stipulate a minimum spend on their platforms, thereby ensuring future revenues. It was probably critical for Microsoft to get that kind of agreement when its competitors already had something closed”.
Partnerships are not exclusive – analysts say to avoid being caught in the crosshairs of regulators. Lawmakers are expected to take a close look at the growing interest of big tech in global capital markets, especially as a handful of cloud computing companies manage most of the market. Cloud computing services from Amazon, Microsoft and Google had a combined 66% market share globally in the third quarter of this year, according to Synergy Research Group.
The Bank for International Settlements warned in July that a growing reliance by financial institutions on cloud computing software provided by some large technology companies could have “systemic implications for the financial system”.
“The cloud has changed the idea of ​​what a [fornecedor] strategic,” said Lee Sustar, an analyst at consulting firm Forrester Research. “When the cloud becomes the vehicle for all of your IT, it’s a qualitatively different kind of challenge.”
UK companies that outsource their data to cloud providers must comply with FAC (Financial Conduct Authority) rules, including having a plan in place in case the cloud computing company suffers a blackout.
Some are concerned that the growing presence of US tech companies in the infrastructure that underpins global financial markets could evolve into a greater challenge, including becoming the exchanges themselves.
For now, they’re looking to make money by selling cloud infrastructure, “so they don’t want to compete with their customers, but in the long term they want to master the knowledge” and therefore can expand, Beattie said.
In October, the UK FAC began seeking opinions on the role of big tech in finance.
Sheldon Mills, executive director of consumer and competition at the FCA, is assessing the competitive threats and said, “This is vital when considering the role of large technology companies in providing critical technology infrastructure such as cloud services.”
It is an assessment that points out how the big techs can try to take advantage of this new interest in exchanges and their data in the future. “At the moment they need each other, but in the long run the friendly supplier could become a big threat,” Beattie said.
Translated by Luiz Roberto M. Gonçalves
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