Clear Street — Modernizing the brokerage ecosystem
Engineering7 min read
Apr 4, 2023

Taking on Legacy Technology in the Capital Markets

Emilio Schapira

Vice President, Engineering

Moore’s Law observes that the number of transistors on a microchip doubles every two years, while its cost is halved over the same period of time. It has provided exponential growth in processing power for the past few decades, allowing many applications to improve performance by upgrading the hardware without fundamental architectural changes. (i)

In the decades since Intel co-founder Gordon E. Moore first made this observation in 1965, consumer technology has continued to rapidly innovate, while the technology powering capital markets has lagged behind. Although recent physical limitations have caused improvements related to Moore’s law to taper off, advancements in distributed systems have continued the march of innovation. Much of the capital markets, on the other hand, have not taken advantage of such technological advancements and still operate in the past.

The $924.5 billion U.S. securities industry still relies on mainframe technology from the 1980s. (ii) The result is fragmented systems and interfaces that leave market participants struggling to react to market changes and to meet the needs of data-hungry investors and regulators.

To understand how we got here today, we need to look under the hood. The mainframes that have supported global capital markets for decades were built to answer specific questions at a specific point in time. Over the years, modern technology has been layered on top of the antiquated infrastructure, only providing a temporary solution. Similar to building a new house on top of an old foundation, sooner or later the base will give way and the whole structure will crumble.

Put simply, the silos have calcified over time to the point where it’s easier for humans to talk to each other rather than find a way for the technologies to communicate. This tech debt creates broken processes that form the operational inefficiency that plague firms today.

Investors, like all consumers, have become accustomed to on-demand service. They expect to be able to react quickly to market events, and are looking to expand into alternative asset classes like crypto. Post-trade operations are challenged to keep up with these demands and provide the granularity, data visualization, and user experience that investors and regulators need.

From Cost Center to Competitive Advantage

For many firms, back-office processes are “out of sight and out of mind” — until something goes wrong. When factoring for borrowed stock, interest costs, balance sheet impact, and penalties, the cost of trade failure is substantial. A global trade failure rate of just 2% is estimated to result in costs and losses up to $3 billion. (iii)

The solution is to minimize manual intervention in favor of automation and cloud-based solutions. To operate at peak efficiency, banks and brokers must reduce the manual processes that increase risk of error and operate in silos in favor of technology that empowers users to make smarter decisions and to identify potential risks throughout the trading process.

Modernizing the post-trade tech stack is estimated to reduce costs by 20–30% in key areas like reference data management, reconciliations, clearing and settlement, middle office, regulatory reporting and overall application footprint.(iv) The ripples of adoption are emerging across the industry — for example, in 2021 Nasdaq partnered with AWS to build the next generation of cloud-enabled infrastructure for the world’s capital markets. (v)

Simplifying the technology behind trading and post-trade functions can transform it from a cost center to a competitive advantage. But for many firms, upgrading would require rewriting many systems with significant technical debt, with massive resourcing and planning costs — a daunting project with low chances of success.

Modern, high-performance computing coexists with COBOL, and microservices with mainframes. But as the value of data continues to rise, those who invest in the technology and capabilities to keep up with fast-paced, intraday market changes will come out on top.

Modern problems require modern solutions

A modern, single-source of truth platform has the potential to optimize operations across teams, asset classes and geographies, reducing cost, complexity and risk. In turn, this makes it easier for emerging managers, professional traders, and institutions to access capital markets. Founded in 2018, Clear Street is a fintech and non-bank prime broker building modern infrastructure to improve market access for all participants.

Our mission is to replace the outdated infrastructure being used across capital markets by starting from scratch to build a completely cloud-native system designed for the modern needs of a complex global market. Our proprietary technology platform adds significant efficiency to the market, while focusing on maximizing returns and minimizing risk and cost for clients.

Our goal is to give all market participants, from emerging managers to large institutions, the tools and services they need to compete in today’s fast-paced markets. It’s never been more apparent that the forces of volatility, regulatory change, and speed are demanding tools that allow firms to make sense of the markets in real-time. In just a few years, we are now processing around 2.5% of the notional U.S. equities volume, which is roughly $10 billion worth of activity through its platform.

Clear Street takes proven technology from the Silicon Valley world and applies it to finance. Our tech stack utilizes modern cloud-native infrastructure, including resilient service orchestration, event-driven real-time processing, and scalable data warehousing — a sharp contrast to the batch processing offered by mainframes. Our entire suite of software systems is built upon this consistent and cohesive technology stack, enabling the components to communicate seamlessly and stay in sync, eliminating the need for tedious reconciliation processes.

It’s time to update the infrastructure powering capital markets. To keep up with the accelerating pace of modernization, firms will need to invest in technology to meet the needs of investors and regulators. Those who do will be part of building the modern, scalable future of capital markets — improving access, speed, and service for all participants.

A version of this article originally appeared in TechCrunch.

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