Busting the status quo bias: Why market operators need a new way to calculate TCO for cloud

Market operators have been on an incremental path with cloud adoption. While many have migrated certain functions, such as basic data storage, market entities have typically been more cautious with migrating business-critical, core workloads around trade execution, clearing and settlement.

A measured approach makes sense given the stringent regulatory, resilience, security and performance considerations. Any large-scale transformation impacts not only internal operations but also external services that members and entire financial systems rely on. Thus, the status quo generally prevails as risks need to be managed.

But the industry is at an inflection point with cloud and other technologies like AI. Operators have to make business decisions now: Do they act strategically or wait to move in line with the status quo? Total cost of ownership (TCO) is a critical data point in determining how to proceed, yet businesses need deeper insights than what the traditional equation can deliver.

It’s not just about assessing capital expenses and operating expenses but also opportunity costs. Specifically, market operators need a way to measure the costs of doing nothing as markets and participants evolve around them—something a new paper from Celent and Nasdaq sets out to solve.

The status quo bias and inertia

Doing business as a market operator is a unique proposition. Exchanges, central counterparty clearing houses (CCPs) and central securities depositories (CSDs) are fundamental to the day-to-day functioning of markets. They must straddle the line of fulfilling market operator responsibilities (e.g., fairness and availability) while also doing what’s best for the business from an operational, competitive and customer perspective.

Over time, this can tend to result in FMIs striking a balance on strategic decisions, neither breaking the reliance on legacy tech nor leaning too firmly into transformation. This creates and adds to the status quo bias. Business continuity is critical, as any impact to operations could have catastrophic effects on markets and participants, which only fuels the inertia cast by the status quo bias.

It’s a bit like the mentality of “If it’s not broke don’t fix it.” Yet this belies the reality of the moment at hand. Trading volumes, data and volatility have all strained the limits of current systems post-pandemic. Incremental upgrades to legacy systems can only take FMIs so far, stranding them at a precarious point at which the majority of budget is dedicated to just keeping the proverbial lights on. A recent study from Nasdaq and the ValueExchange found 78% of FMI budgets go toward legacy management, just as members and markets around them evolve at a rapid pace.

How to reach a breakthrough

The status quo may be difficult to breach but not impossible. Cloud is one avenue of progress that FMIs have to modernize their infrastructure and gain the benefits of scale, agility, resilience and innovation capacity. However, the traditional computation of Capital Expenses (CAPEX) + Operating Expenses (OPEX) = TCO may skew the picture and feed the status quo bias.

The issue is the narrow focus on capital expenses and operating expenses, or at least how they’re perceived. In a vacuum, capex and opex costs for cloud-enabled platforms may outweigh continued operation of on-premise system on such a limited assessment, making it hard to develop the business case. This could lead FMIs to delay cloud transformation at a critical point. This is in part why Celent released a new paper, commissioned by Nasdaq, that argues for a reimagined TCO formula. One relevant excerpt reads:

“FMIs are not always fans of change, and for good reason given their role in the ecosystem. However, status quo bias can no longer be excused—it must be confronted. Market, regulatory, and technology changes are accelerating, impacting FMI business models and presenting both opportunities and threats.

Celent’s conversations with CIOs at FMIs found that product and customer-centricity are the top factors guiding their replatforming decisions, but their tech stacks can constrain their ability to experiment, develop, launch, and deliver new products. It also limits available distribution channels, which in turn may make reaching new client segments challenging.

Changing any core platform is not a build-versus-buy decision; it requires a sophisticated balance of buying, building, and partnering. Adding cloud to the mix means enabling real transformation and optionality when it comes to future technologies. By helping to significantly reallocate BAU costs to fund change, cloud can unleash enterprise-level innovation and ignite a network effect, resulting in exponential business growth.”

Capturing opportunity costs

FMIs can get a better assessment of the true cost comparison when using the updated formula (CAPEX + OPEX) x StrategicFriction = TCO. The StrategicFriction variable represents various intangibles that the traditional equation can’t account for.

While each FMI will have its own individual considerations and drivers, the process essentially works like this:

1. FMIs convene a multidisciplinary leadership group.
2. They list intangibles and opportunity cost drivers most relevant to their business strategy.
3. They decide on a scoring scale range. An example being a factor assigned a score of less than 1 decreases friction; equal to 1 has no impact; and above 1 indicates increased friction.
4. Factors are assigned a score and the average is the StrategicFriction multiplier.

Multiplying capex and opex by StrategicFriction gives operators a more comprehensive view into the actual costs of cloud vs. on-prem. When they contextualize traditional TCO with long-term opportunity costs such as slower time to market, reduced innovation capacity, inflexible resourcing and lack of technologist recruiting appeal, operators gain an assessment of the true costs and business considerations that will help inform the decision-making on cloud.

The case for cloud

Cloud strategy must be carefully thought through and the reworked TCO equation is there to give FMIs another data point when making the investment case. Though the status quo bias may loom, it can be surmounted, helping FMIs in their pursuit of well-functioning markets, client responsiveness and business success.

Nasdaq itself has been on a sustained path with cloud, culminating recently in the migration of select exchanges. Visit here to learn more about how our financial technology can help power your growth and accelerate your modernization journey, and remember to download the paper here.