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Big tech adapts to capital markets. This week’s announcement of a partnership between Microsoft and the London Stock Exchange is the third such alliance to be formed in just over a year.
In November 2021, Google spent $1 billion and signed a 10-year cloud computing deal with Chicago-based CME. Amazon Web Services and New York’s Nasdaq agreed to a similar deal later that month, and last week Nasdaq completed moving one of its US stock options to AWS.
For an exchange, the advantages are clear. “We’re building products together, we’re going to market together,” said David Schwimmer, CEO of LSEG. “This is about our data and analytics capabilities.”
The American software group will help LSEG move its infrastructure to Microsoft’s Cloud, which will give it more processing power and allow the company to package its data faster and more flexibly.
“Moving to the cloud is very important because they need to enable themselves the next generation of computing capabilities,” said Nikki Beatty, CEO of consulting firm Market Structure Partners. She added that without it “it will be difficult to progress at a pace”.
LSEG’s data and analytics business is the backbone of the company, which has revenues of £2.4bn in the first half of 2022. Its clients, which range from fund managers and analysts to traders and investment bankers, use its data to make decisions. LSEG says it has data on companies that make up 99 percent of the world’s market capitalization, as well as price and economic data from 165 countries.
“Microsoft has great AI and algorithms, they have unique data and they have the infrastructure to manipulate and create products with it. It is reasonable to assume revenue growth,” said one of the top 20 LSEG investors.
Could the partnership also develop a “Bloomberg killer”? More than 40 years after Michael Bloomberg founded his data business, his namesake terminal remains ubiquitous on trading floors. The rival Eikon product, which LSEG acquired in its $27 billion acquisition of Refinitiv, is lagging behind in popularity.
One of Bloomberg Terminal’s favorite features is its messaging application. Microsoft and LSEG aim to create a new, unified chat and data platform by combining Microsoft’s Teams messaging system with Exchange analytics.
“People use Bloomberg primarily because of the chat feature and creating that community ecosystem.” . . it’s an important part of the institutional financial markets,” said Ben Quinlan, CEO of consulting firm Quinlan and Associates. But he added that Bloomberg’s customers are sticky and that it has long been difficult to bite into its market share.
One person close to LSEG said it would be a mistake to think of it as the next stage in the final war. “Certainly Microsoft will improve the user interface of Aikon, but that’s not a huge prize, that war will never be won,” he said, noting that Aikon generates a relatively small portion of Refinitiv’s revenue, about $1 billion.
Instead, this person said the view within LSEG is that terminal sales will decline because there are fewer human traders. The future struggle was “data transfer” over the cloud, feeding the data into the computerized programs that do the trading — and feeding the data into the custom systems 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 LSEG’s financial data into Excel, the companies intend to use algorithms to help analysts create financial models, graphs and presentations 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 “will create a competitive, better integrated technology offering that addresses some of the awkwardness.”
So what’s in it for tech groups? There is a financial aspect. Microsoft expects to generate $5 billion in revenue through the 10-year partnership, with a guaranteed minimum spend of $2.8 billion from LSEG. Microsoft is also buying a 4 percent stake in LSEG and taking a seat on the board.
Cloud providers also see listings as a help in securing business with thousands of connected financial companies. Nasdaq, for example, has many infrastructure users who rely on it for trading, clearing and settlement, which means they will also rely on AVS.
“There will be an opportunity to actually establish new relationships,” said Scott Mullins, managing director of worldwide financial services at AWS. “There are some markets where we don’t have the infrastructure yet and we will have the opportunity to expand,” he added.
MSP’s Beattie said: “Cloud providers are definitely looking to learn more about financial markets and the quid pro quo is that they can set a minimum spend on their platforms, thereby guaranteeing future revenue.” It was probably critical for Microsoft to make this kind of deal when their competitors already had something in the bag.
The partnerships are non-exclusive — analysts say they would not be caught in the crosshairs of regulators. Lawmakers are expected to closely monitor Big Tech’s growing interest in global capital markets, especially as a handful of cloud computing companies dominate most of the market. Cloud computing services Amazon, Microsoft and Google had a combined market share of 66 percent globally in the third quarter of this year, according to Synergy Research Group.
The Bank for International Settlements warned in July that financial institutions’ growing reliance on cloud computing software supplied by a handful of large technology companies could have “systemic implications for the financial system”.
“The cloud has changed the idea of what is strategic.” [supplier] is,” said Lee Sustar, an analyst at Forrester Research. “When the cloud becomes the vehicle for all of your IT, it’s a qualitatively different kind of challenge.”
UK companies handing over their data to cloud providers must comply with Financial Conduct Authority rules, including a plan if the cloud computing company faces an outage.
Some worry that the growing presence of US tech companies in the infrastructure that supports global financial markets could evolve into a bigger challenge, including becoming stock exchanges themselves.
For now, they want to make money from selling cloud infrastructure “so they’re not going to be looking to compete with their customers, but long-term they’re going to want to take advantage of the knowledge” and so they can expand, Beattie said.
In October, Britain’s Financial Conduct Authority began seeking views on the role of Big Tech in finance.
Sheldon Mills, chief executive for consumer and competition at the FCA, assesses the threats to competition and said: “This is vital when we consider the role of large technology firms in providing key technology infrastructure such as cloud services.
It’s an assessment that points to how Big Tech could eventually build on this newfound interest in exchanges and their data. “Right now they need each other, but in the long term, a friendly supplier could become a big threat,” Beattie said.
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