At this time last year, the extraordinary hype around generative artificial intelligence had only just touched the finance industry, Yet, as we approach Boca 2024, it is arguably one of the most exciting topics on the industry agenda when it comes to the evolution of financial technology. Financial firms at every level of the industry are exploring the application of GenAI to drive performance enhancement and efficiency gains.
What was being talked about a year ago was cloud computing, and in particular how Big Tech companies such as Amazon, Google and Microsoft were expanding their presence in financial markets. Over the last several years, some of the world's largest exchanges have announced partnerships with these firms to migrate key functions to the cloud.
The rush to the cloud is set to continue in 2024 as the exchanges implement key steps in their migration plans and roll out new services. Hand in hand with this will be a heightened focus on operational resilience as financial institutions and technology companies globally seek to comply with incoming regulations on critical third parties.
For many firms in the industry, the key theme for 2024 will be one of safe and responsible innovation – moving fast to both modernize markets and remain competitive while maintaining a high bar for security and resiliency.
Cloud projects come to fruition
Last year saw a wave of exchanges announce partnerships with cloud provider companies to migrate data, analytics and other functions to the cloud, demonstrating the growing recognition within the financial industry of the benefits of cloud-based solutions.
Cloud computing technology offers scalability, flexibility, and cost-efficiency by enabling a move away from on-premise data centers that are often expensive and time-consuming to maintain. By partnering with cloud technology providers and developing purpose-built solutions, exchanges say they can modernize their infrastructure, provide more innovative services to market participants, and scale capacity up or down, at any time.
In fact, many of the large exchanges point to cloud-based platforms as the next generation of how markets will operate. Nasdaq, for instance, completed the migrations of its MRX and GEMX options markets and the Nasdaq Bond Exchange to Amazon Web Services’ cloud last year and is set to migrate more functions in 2024.
“As a leading market operator and global provider of critical market infrastructure we are committed to continuing our journey to modernize the global financial ecosystem and unlocking the power of cloud technologies,” said Tal Cohen, co-president of Nasdaq.
For AWS, the partnership will likely help it to secure business with thousands of related financial companies given that Nasdaq has many infrastructure customers that rely on it for trading, clearing and settlement, which means they too will be relying on AWS.
Deutsche Börse and CME Group both expanded individual partnerships with Google last year. Deutsche Börse’s CEO Theodor Weimer said on a 3Q earnings call: “We already have 40% of our IT state in the cloud, and by 2026 it will be around 70% with Google Cloud as a preferred partner.”
CME Group working with Google is also moving its IT infrastructure and markets to the cloud. The exchange says that migrating its data has already enabled it to develop new data and analytics products faster than it would have been able to do with traditional technology.
Speaking about its partnership with Microsoft, the London Stock Exchange Group said in October that it was on track for product delivery in the second half of 2024, adding that its shift to the cloud would “fundamentally” change how customers use some of its services.
Operational resiliency
While many believe the industry is poised to experience significant advancements in terms of speed and accessibility, cloud adoption brings new challenges, especially when it comes to regulations and compliance.
At the crux of the matter is a concern about operational resiliency and concentration risk resulting from an over-reliance on a handful of cloud providers and the disruption this would cause if a provider serving many clients went down.
“Obviously, there's a limited number of cloud providers. Some people argue that they have so much more money to invest in their systems, that those systems are going to become more resilient and less prone to cyber-attack,” Don Wilson, chief executive of DRW Holdings, one of the industry's largest principal trading firms, said at an FIA event last year. “I'm sympathetic to that argument, but the flip side is if everybody puts their matching engines into AWS, for example, and AWS goes down, then the global market infrastructure is going to break. That seems pretty problematic.”
Lawmakers are also concerned. In the EU, financial regulators have proposed sweeping new rules to ensure that cloud computing giants and other critical third parties do not endanger the continent’s financial system. While the EU’s Digital Operational Resilience Act, or DORA, acknowledges the vital role cloud technology plays, it highlights the risk a service outage could have on an entire economy.
Serious work
DORA aims to introduce a comprehensive framework on digital operational resilience for European financial institutions. One of the most significant implications of the regulation is that it will bring within the scope of European financial services supervision those third-party service providers that are deemed critical, including cloud technology providers.
This year is expected to be the year when DORA stops being an exploration and the serious work starts for financial institutions and third-party providers to meet the new requirements.
Similarly in the UK, financial regulators have published a consultation proposing new rules where cloud and technology providers would be subject to more robust disclosure requirements, including annual self-assessments and regular scenario testing of their ability to provide services during severe disruptions.
The consultation runs until 15 March with the Bank of England saying any framework should be interoperable with those in the US and EU.
The rise of generative AI
Generative AI exploded on the scene in financial markets early last year following the launch of OpenAI’s ChatGPT. Although financial services firms are experimenting with AI tools internally and for clients, it is still early days for GenAI, with many firms spoken to by MarketVoice believing that starting small is the optimal road to take.
Use cases of GenAI put forward by financial firms include accelerating research and discovery and generating new insights, rapidly scaling the speed and quality of decision-making, improving risk management and compliance, enhancing fraud detection and prevention by providing a better and faster way to monitor traders’ client communications, and delivering more data-led reporting and forecasting.
To be clear, certain types of artificial intelligence such as natural language processing and machine learning have been used by financial firms for years. Algorithmic trading, risk modeling and surveillance programs are obvious examples.
But the big appeal of GenAI – and a differentiator from other AI tech – is its ability to generate new content based on the data that it has. Market participants say that GenAI, when combined with other AI technologies, has the potential to be a massive accelerator of productivity.
Speaking at the FIA Expo conference in October, Roger Burkhardt, capital markets chief technology officer at Broadridge, described generative AI as a “breakthrough in the power of AI”.
“Similar to how in 1995 the World Wide Web provided us with superpowers in accessing data, generative AI provides superpowers in personal productivity and product development. We have taken the view as a firm that we want to learn by doing, but in a safe environment,” Burkhardt said.
Last year Broadridge’s subsidiary LTX launched BondGPT, an application powered by OpenAI GPT-4 that answers bond-related questions and helps traders find liquidity in the sparse world of the corporate bond market.
In the financial legal space, Allen & Overy is one of several law firms that has introduced GenAI-based platforms to their global practices to help lawyers generate and access legal content. While the output needs careful review, A&O says the platform helps to generate insights, recommendations and predictions based on large volumes of data, enabling lawyers to deliver faster solutions to clients.
Banks also have dived into GenAI as a way to overhaul working practices and potentially cut costs. Goldman Sachs, for example, is using an AI-based tool to automate the labor-intensive elements of coding, while Citigroup has used GenAI to analyze thousands of pages of new capital rules.
According to McKinsey’s Global Institute Report published in December, banks using GenAI tools could potentially boost their earnings by as much as $340 billion annually through increased productivity.
While GenAI holds tremendous potential, it is also constrained by risks and limitations. Concerns have been raised by regulators around data privacy, hallucinations, biases and third-party risk, and the reliance on AI for decision-making raises questions about accountability and transparency in financial practices. Financial regulators globally are racing to understand, control, and guarantee the safety of the technology – all while preserving its potential benefits.
Nevertheless, financial participants believe the integration of GenAI technology has the potential to be a transformative, pivotal force. In the derivatives market, the power of AI to improve key functions, such as document review, research and analytics and collateral and risk management could bring enormous efficiencies and savings in the years to come.
