Advanced Computing in the Age of AI | Monday, May 27, 2024

Google Bringing Cloud Computing to the Security- and Privacy-Sensitive Global Derivatives Market 

For years, the Chicago Mercantile Exchange – one of the world’s most diverse financial derivatives marketplaces – has run its IT systems and infrastructure in its own data centers and on-premises to keep them secure and running at peak performance.

But in the last few years, the company – known formally as the CME Group – has been experimenting with cloud computing to see how it could drive the derivatives market forward and improve its IT infrastructure and technology systems for clients and investors.

Now, after evaluating those earlier experiments and pilot projects, the CME Group recently signed a 10-year strategic partnership deal with Google Cloud to move all its security- and privacy-sensitive IT systems over to the cloud as part of a transformation aimed at improving its operations.

“Through this long-term partnership with Google Cloud, CME Group will transform derivatives markets through technology, expanding access and creating efficiencies for all market participants,” Terry Duffy, the chairman and chief executive officer of CME Group, said in a statement. “To ensure a smooth transition, we will work closely with clients to implement a phased approach. This partnership will enable CME Group to bring new products and services to market faster – all in a flexible and scalable environment that will create a wide range of opportunities for the marketplace.”

Under the agreement, CME Group will begin to migrate its technology infrastructure to Google Cloud in 2022 starting with data and clearing services, with the goal of eventually moving all its markets to the cloud, the company said.

By using the Google Cloud Platform (GCP), CME Group looks to scale its infrastructure, while increasing access for more market participants, optimizing costs and easing onboarding for new users. GCP will also add real-time data analytics and machine learning capabilities to help the CME Group give its clients on-demand information and toolkits for developing models, algorithms, and real-time risk management.

Under the deal, GCP and CME Group will also work together on creating new products, including risk mitigation tools, analytics services and user-centric platforms, which can benefit both companies, they said in a statement.

To help make this possible for the CME Group while ensuring security and privacy, GCP will use open source technology standards and enhanced cybersecurity protection across its global network to meet the contract’s goals. Financial businesses worry about security even more than most other companies due to regulatory and compliance issues and huge worries about data protection, security and cyberattacks that can harm their business and customers in an instant..

“This is transformational for CME Group,” a company spokesperson told EnterpriseAI. “We believe that the next generation of financial markets will depend on the ability of market participants of all sizes to have easy access to trading anywhere, any time. The best way to ensure that happens is to migrate our technology to the cloud, and Google Cloud provides access to an industry-leading cloud platform with unparalleled engineering expertise and a strong track record of success.”

CME Group has also been working with all the major cloud providers on various applications and technologies in the past, the spokesperson said. “We expect those relationships to continue for the near term. We always review our vendor relationships, changing or evolving as needed to ensure we can best meet our clients’ needs while delivering service by the most efficient means possible.”

As CME Group progresses in moving its systems to GCP under the contract, the company is “committed to taking a measured approach to migrating our technological infrastructure in order to ensure a smooth and orderly transition of our markets,” the spokesperson said. “To achieve that goal, we will work closely with our clients throughout this process. We expect more specific details will become available as we work through migration planning, and we will provide more information to our clients, partners and employees as soon as it becomes available.”

As part of the 10-year partnership, Google also made a $1 billion equity investment in CME Group through a new series of non-voting convertible preferred stock.

“CME Group has a century-long track record of helping investors access new markets and is known for innovation in financial markets,” Thomas Kurian, the CEO of Google Cloud, said in a statement. “Bringing together CME Group’s best-in-class financial talent with Google Cloud’s deep engineering expertise will help accelerate technological innovation in capital markets infrastructure.”

Shelly DeMotte Kramer, analyst

Shelly Demotte Kramer, a principal analyst and founding partner at Futurum Research, called the CME Group deal “a massive win for Google Cloud,” which when combined with the $1 billion investment in CME Group shows that [Google Cloud CEO] Thomas Kurian is not fooling around when it comes to growing market share and trying to make inroads in the financial services industry.”

The financial services sector has long been coveted by the hyperscalers, said Kramer, with Amazon Web Service’s pilot programs in Singapore and Europe being good examples of what needs to happen to continue the transition.

“But it is a high-pressure situation, for sure,” said Kramer. “If in any way this does not work, the impact on the markets and on the brand of the cloud services provider could be significant. But these folks know that.”

For Google Cloud, “this is a big move … especially as it relates to gaining a foothold in the U.S. financial services market and beating others to that,” said Kramer. “Looks like the strategy is sound, dipping toes with non-speed sensitive services like data and clearing, with a plan to do more once those use cases prove out. That is really the only way to do something like this, and it will be interesting to watch, for sure.”

Another analyst, Rob Enderle, principal of Enderle Group, had a more cautious approach about the deal.

Rob Enderle, analyst

“Google is broadly distrusted as a cloud provider because its primary model is selling customer data,” said Enderle. “So, they buy what may be controlling interest in a trading giant, force that giant to use their service, and then plan to use this to open up the financial market. I doubt it will work because this presents like a bribe and buying a controlling interest in a trading firm to force an unwise decision has SEC, DOJ, and FTC heart attacks painted all over it.”

And if there is ever a related security breach that is tied back to Google's services, “it will likely trigger a series of legendary punitive actions against Google regarding fines, penalties and antitrust responses – and we may not even need a breach for this to trigger because it looks dishonest from a regulator's perspective,” said Enderle. “The right fix would be for Google to spin out this effort and keep it at arm's length and then recover the brand to deal with the core trust problem correctly, not buy your way into a market you are not structured to support safely.”

Enderle said Google’s “move is an excellent example of tactics trumping strategy. It does get them a reference account, but the path they took not only destroys the power of that reference – it sets them up for a massive regulatory backlash in their future.”

Overall, the deal could end badly for both parties, said Enderle. “It could also result in legislation barring [Google] from the market. Doing things like this while the tech sector has a target on its back while approaching an election year is even more dangerous as undoing this is a legitimate platform to run on. This move also shows that risk management and compliance may be broken in Google as this should never have been greenlit.”

As a derivatives marketplace, CME Group enables clients to trade futures, options, cash and OTC markets, optimize portfolios and analyze data about their investments. The CME Group is composed of four exchanges – the Chicago Mercantile Exchange (CME), the Chicago Board of Trade (CBOT), the New York Mercantile Exchange (NYMEX) and The Commodity Exchange (COMEX). The CME was established in 1848 as the world’s first futures exchange based in Chicago.