Below, I write my initial thoughts stemming from the CME-Google news, but for our subscribers, please know that we’re working on something bigger and more expansive with voices from all across the industry. While we might not always break the news, we do try and provide the best and deepest insights around newsworthy events.

Speaking of which, next week I’ll look at the Trading Technologies acquisition by 7Ridge. It was a busy news week, so I’m having to spread some things out. I hope y’all understand.

It’s a big deal

Last week, the Wall Street Journal reported that Google had invested $1 billion into CME Group in what amounts to a 10-year partnership. It’s the largest investment Google has made to date in the financial services sector. Through the deal, the CME will begin moving its technology infrastructure to Google Cloud, with the exchange’s data and clearing services being the first to migrate.

Naturally, the story quickly spread through the market, but it wasn’t entirely a surprise, either. First of all, exchanges—most notably, Nasdaq—have been exploring ways to provide matching and clearing via a cloud environment. Second, as I wrote in June, there are people who believe that it’s just a matter of time until the major Big Tech providers—namely, market leader Amazon Web Services (AWS), followed by Microsoft Azure, Google Cloud, and IBM—get involved in market data M&A activity.

For that column, I spoke with Bob Iati, managing director of Burton-Taylor International Consulting, and he said that as these cloud providers grow their financial services footprints, they are going to want to get closer to the day-to-day activities of these companies, and that means market data. He’s not alone in that belief. Earlier this year, Burton-Taylor released a survey in which 47% of respondents said that “a leading provider of market data will be acquired by a ‘Big Data’ or ‘Big Tech’ company.”

While the CME-Google pairing isn’t that, it shows the continued shifting of tectonic plates in the capital markets.

“To some extent, I think this represents the snowball rolling downhill. This is the beginning of something where you’re going to see it, and it’s not going to end at ‘one’—it will keep going at some level,” Iati told me last week. “This thing in isolation—eh, big deal—it’s exchanges in the cloud, which is kind of where that’s going anyway. But if it’s a domino effect—if it’s representative of something and continues to support the hypothesis that not only is tech taking over, but Big Tech in particular—it does make you wonder what the markets are going to look like.”

The Front Month Substack newsletter hit on this announcement, noting that it reminded them of when Amazon acquired Whole Foods. “No one saw the news coming or thought Amazon wanted to get into the brick-and-mortar grocery business. Everyone did agree, however, that the industry had been forever changed by Amazon’s entry. I feel similar Amazon/Whole Foods energy from the [CME-Google] headline.”

The writer is also a CME shareholder, and was a bit perplexed by the deal. “I view this deal as CME’s bet that its liquid futures markets are all it needs to keep its high-margin, monopolistic business model intact. While they may be right, I’m not sure I would want to take that risk by inviting a technology behemoth like Google into my backyard.”

After doing some reading and chatting with Iati, here are the initial questions/thoughts I have, for what they’re worth.

* The obvious big question is, will this announcement lead to a domino effect? Amazon’s dominance in the space won’t be hurt by this, but Google becoming the core infrastructure technology provider of the largest exchange in the world is quite the feather in the cap.

As noted before, Nasdaq is vocal about moving its trading tech to the cloud. As the Journal article stated, the Singapore Exchange (SGX) and Aquis Exchange embarked on a pilot project to prove “it’s possible to run an exchange capable of handling ultrafast, high-volume trading on AWS technology.”

Does Google investing in CME lead the other Big Tech cloud providers to strike up similar deals? Or, is this the start of an arms race by the exchanges—fearing that they’re going to fall behind in the innovation space—pushing to sign contracts of their own? Also, can Google do a deal with another major exchange without pissing off CME and souring the relationship right at the jump? (In my humble opinion, I think one thing is for sure: AWS and Jeff Bezos and ICE and Jeff Sprecher are unlikely to join forces.)

* Building on the point above, is it inevitable that Big Tech will go on to own the exchange technology space?

“I’ve been doing this 30 years and I remember when everybody in this business—especially the traders and people at the exchanges—they were real cap markets professionals and it was a relationships business,” Iati says. “Are we concerned that there’s a takeover of biggest institutions by ‘non-financials’ and by technologists that don’t know as much about this business?”

* And tied to that idea, if Big Tech providers begin running the technology of the actual marketplaces, does that create new risks, such as disruption from an outage, a cyber attack, or a Flash Crash-type event?

“We’ve always thought that more tech and more data is good—I wonder if there’s a limit to that?” Iati asks.

* This is my opinion (and not an original one), but I think it’s right: Gone are the days of analysts and relationships being the driving force for alpha—it’s all about owning the data AND being able to contextualize it. Rainmakers and smart people will always be of great value, but if you can’t augment humans using AI-driven analytics to find correlations in a widening and deepening pool of data, you’re going the way of the person in the pit screaming orders and flashing hand signals.

I repeat: it’s all about owning the data and contextualizing it…and Big Tech firms do the latter better than anyone, but in the capital markets, they are lacking.

So is there still a deal to be made (as mentioned before) where a Big Tech firm buys a major market data provider? OR, does that deal morph into something closer to CME-Google with, say, a London Stock Exchange Group (LSEG) and Refinitiv, or Intercontinental Exchange and ICE Data Services?

* The $1 billion investment by Google into CME will be nice, but it’s worth mentioning that CME has a market cap of $80 billion. I also wonder if there’s significance in the structure of the deal: new, convertible preferred stock, and there are no voting rights or board seats. So maybe this deal is more cosmetic and might not be as huge as it seems at face value. (I don’t believe that, but that might end up being the case.)  

* Even if the above point proves true, in the near-term there have to be winners and losers beyond other cloud providers and exchanges, right? In a survey conducted by Burton-Taylor at the end of last week, half of respondents think core technology infrastructure providers stand to lose the most. While the report doesn’t specify specific companies, to me, that means the likes of Broadridge, FIS, SS&C, et al.

Also, CyrusOne, the datacenter company that CME sold its Aurora, Illinois, facility to, might be a bit antsy. They thought they had a long-term partner, and now they might lose the CME and the colo clients of the CME. (But, CyrusOne does seemingly have a good relationship with Google…so that’s a bit of reckless speculation, just like my opining on the infrastructure providers above.)

* While the move to the cloud is what’s interesting right now, if CME can REALLY tap into Google’s ML expertise to deliver unique analytics to users, that could ultimately prove to be the game-changer.

“It’s all about the analytics and interpretation, and the way this data can be elevated via analytics, AI, ML. What kind of new correlations can we find that elevates the game? So maybe in clearing—Google’s brilliant analytics can look at what’s going on within CME on the clearing side,” Iati says.

* Will exchanges exploring blockchain technology to power their clearing and settlement systems take pause? A couple of weeks ago, I spoke with Shaul Kfir, cofounder and chief architect of Digital Asset, about the vendor’s distributed-ledger technology (DLT) projects with the likes of Deutsche Börse, Australian Securities Exchanges (ASX), Hong Kong Exchanges and Clearing (HKEx), Nasdaq, and others. While he made a compelling argument for the emerging technology, if the move to the cloud starts to be perceived as inevitable for not just data and clearing, but core matching engines, might that not move blockchain to the back burner?

* Iati had something I never would’ve thought of: Alibaba is a larger cloud provider than Google—what if Alibaba pushed a similar agreement with HKEx?

“Hong Kong and Alibaba—what would that do? The Hong Kong Exchange is a big exchange; Alibaba is bigger than Google is here. What if Alibaba went at it with Hong Kong? Would that affect how we trade in Hong Kong?” he asks.

That’s a good one. Would a Wall Street investment bank be ok with Alibaba—a quasi-Chinese government agency—having access to HKEx data?

* Iati also had one thought that was both interesting and terrifying: What if Google doesn’t necessarily care about becoming a Wall Street powerhouse, but rather they just want the data from the largest exchange to combine with its many, many, many other data sources? We’ll call this the “Black Mirror” effect.

“To what extent can Google use this data, and combine it with all the other data they have?” Iati asks. “They know when I walk downstairs to get a drink and walk back up. They potentially see what’s in your Gmail. With all that information and all the other information that they buy, now if they can identify patterns via trading or other information that comes through the exchange, is that valuable to them outside of the capital markets?”

Sleep well, friends.

(Editor’s note: After this article was published, a spokesperson for Google took issue with this idea, saying that it is “not contractually allowed, nor technically feasible.” Here is their statement: “The customer owns their data. Full stop. We process their data according to their instructions. How their data resides in Google Cloud—data segregation, controls by region, key encryption and revocation—is up to them. We also provide tools that make it easy for customers to take their data with them if they choose to stop using our services, without penalty or additional cost imposed by Google Cloud. In addition, we certify our products against the most rigorous global security and privacy standards, including ISO/IEC 27001, ISO/IEC 27017, and ISO/IEC 27018; financial control standards, including AICPA SOC and Japan FISC; and industry-specific standards like PCI DSS.” 

* I’m likely missing some things or am off on other points…let me know: anthony.malakian@infopro-digital.com.

The image at the top of the page is “Stockyards, Chicago” by Joseph Pennell, courtesy of the Cleveland Museum of Art’s open-access program.