Coming out of the Covid pandemic, which entrenched the digitisation of financial markets, what does the future of market infrastructure look like? Volatility generated from external factors including pandemics, war, climate and politics are testing the resiliency of the capital market systems. Increasing coverage of regulation drives the change agenda in banks and broker-dealers across all geographies. And operators will be forced to respond to mounting competition arising from new technologies, asset classes and other innovations poised to transform global capital markets.

All this change coming at the same time risks distracting industry leaders from a growing problem at the heart of the global industry: the ageing infrastructure the system is built on.

An industry study published on Thursday by Nasdaq and the ValueExchange has revealed that 78% of Financial Market Infrastructures’ investment budgets are dominated by maintaining and upgrading legacy technology platforms. A third of these same firms are operating with legacy platforms more than ten years old, with even more planning a major system overhaul over the next five years. This will result in an increasingly competitive search for talent with teams spread thinly over multiple mission-critical change projects.

The combined distraction effect also risks preventing financial market infrastructure providers from both defending their market position and capturing growth opportunities as the market changes around them. Fintechs and new profiles of firm are now offering new platforms that could potentially replace the role of infrastructure providers.

However, as these initiatives grow it should reinforce the need for traditional, centralised and regulated players to interconnect and standardise these emerging pools of digital liquidity. Opportunities are presenting themselves for the industry to transform for the better, but financial market infrastructures need to make sure they are ready to lead that change – and not be caught on the back foot. This means not only investing in technology transformation right now but also acknowledging their new roles as facilitators of ecosystem development.

Where we do see investment in innovation, the transition to cloud platforms is the second largest industry trend behind legacy maintenance. We have seen through periods of extreme volatility that the technology is able to deliver the burst capacity and capabilities needed to run significant compute jobs on-demand, spin-up analytics and test new innovations.

In some cases we’ve seen the combined order, quote and trade messages surpass previous benchmarks by almost double. During these times of significant unpredictability, infrastructures have served as part of the solution, ensuring that trading was largely continuous and without disruption. Bringing the power, flexibility, elasticity, and innovation of the cloud to the capital markets will provide the foundation for the next generation of our industry. The principal hurdle here remains regulatory pushback.

But in other areas there is an emerging gap in technology investment between infrastructures and their institutional participants, particularly in the fields of artificial intelligence (AI) and data, where there will be important opportunities from generating and acting on interpretative data.

AI ultimately has the potential to predict market liquidity, imminent settlement fails, project cash flows and move us to a pre-emptive view of error queues. With management teams and operating platforms being pulled in multiple directions, these growth opportunities must be increasingly factored into legacy technology overhauls.

But change is a difficult journey. Fundamentally it needs to be justified in business results – better operating margins, lower cost and increased capabilities. In any operating budget, significant Capex investment needs to deliver better ROIC (Return On Invested Capital) for the firm. Cases for large scale overhaul of technical debt are both risky and difficult to see a short time to value. Phased transformation with targeted development allows for a much easier path to realisation, especially in highly regulated markets.

The successful management of technology platforms also requires astute management of change culture. Identifying, managing talent to help the organisation process change, as well as developing collaboration with clients and suppliers, is key to delivering effective outcomes.

The financial services industry forms a vital component of every nation’s critical infrastructure. With digitisation now entrenched, it’s important the services sector navigates this transition effectively.