Financial Operating Systems


Dirk A Zetzsche
Professor of Law and ADA Chair in Financial Law (Inclusive Finance) at the Faculty of Law, Economics and Finance, University of Luxembourg
William A. Birdthistle
Professor of Law at Chicago-Kent College of Law
Douglas W Arner
Kerry Holdings Professor in Law, RGC Senior Fellow in Digital Finance and Sustainable Development, and Associate Director, HKU-Standard-Chartered Foundation FinTech Academy, University of Hong Kong
Ross P Buckley
Scientia Professor and the KPMG Law – King & Wood Mallesons Professor of Disruptive Innovation at UNSW Sydney

The impact of technology on finance (FinTech) is one of the hottest topics in business, law, and regulation, with academics and practitioners considering many issues, including cryptocurrencies, robo-advice, initial coin offerings, and algorithmic analyses of big data. Yet very little analysis has been devoted to the world’s largest financial industry: asset management.

The Rise of Concentrations of Digital Technology: Financial Operating Systems
In our new paper, we identify and explore a topic of major significance in FinTech: the rise of financial operating systems (FOS) and their evolution in the global asset management industry. To name but two, we refer to AntFinancial’s financial ecosystem with more than a billion users, and two Blackrock’s Aladdin risk management system on which some $20 trillion in assets depend, equivalent to 10 percent of the world’s financial assets. Furthermore, we see more and more financial conglomerates to develop front-to-back end financial platforms, in an effort to build scale, liquidity and data control.

As we reveal in our recent article, ‘Financial Operating Systems’, these digital technology ecosystems provide the essential infrastructure for many of the front-office and back-office functions in the global market for investment. As with their software analogs, these operating systems are often relatively inconspicuous but powerful.

FOS already underpin the world’s $50 trillion investment fund industry, where they provide the electronic systems for asset management for pension funds and other institutional investors. So far, commentators have observed only the symptoms of the rise of FOS. The growth of passive index funds, for example, raises issues that touch upon governance by FOS, but analysis has not considered why we observe such significant growth. Our paper provides a central part of the answer.

Financial Operating Systems as Drivers of Industry Concentration
We argue that FOS lie at the core of the remarkable growth of asset and fund conglomerates including Blackrock, Vanguard, and Fidelity, as well as large brokerage houses such as Charles Schwab and TD Ameritrade, linking the services these financial houses deliver. We identify the massive scope of these systems, the reasons for their dramatic evolution and the legal and regulatory implications that arise from their possible failures and successes. These systems can be seen as the logical progression of the combination of information technology, financial evolution and finance theory: they are the combination of economies of scope and scale, network efforts, and efficiency, all combining to produce competitive advantage for those with the resources and capabilities. At the same time, they raise concerns from the regulatory standpoint: are these new systemically important financial institutions or systemically important financial market infrastructure? Further, we highlight the potential for such systems to escape regulation while simultaneously stifling innovation and competition.

From Front-end to Back-end to Financial Ecosystems
In the asset management industry, FOS are evolving into comprehensive, front-to-back financial ecosystems. Probably the most significant of these systems is Ant Financial, which provides a single financial ecosystem that links more than 1.2 billion clients (only 67 percent of whom are Chinese nationals) through its payments services, and also offers (1) a money market fund with more than 300 million investors, the largest in the world, (2) the largest fund brokerage platform in China, and (3) a very sizable insurance business. FOS are underlying a similar trend towards concentration in US markets.

Notwithstanding this enormous size and scope, FOS are still developing and underappreciated, with all the related benefits and concerns. In our paper, we examine the evolution of FOS in large asset management houses—and increasingly of the large banks as well, focusing particularly on Blackrock but highlighting how similar processes are driving Goldman Sachs, JP Morgan and most recently the Morgan Stanley–eTrade acquisition: the combination of scope, scale, network effects and efficiencies of FOS underpin consolidation and perhaps even winner-takes-all or at the least potentially oligopolistic outcomes.

Risks from Financial Operating Systems
We argue that ever-more components of the asset management value chain will be integrated into ever-fewer FOS. Although some service providers such as asset managers and administrators may remain nominally independent, they will in reality come to depend entirely on the FOS. How critical are FOS to these players? ‘Aladdin [the largest US FOS] is like oxygen,’ said Anthony Malloy, CEO of New York Life Investors. ‘Without it we wouldn’t be able to function.’

We predict the economic pressure that FOS generate from their access to data and liquidity will squeeze profits out of the rest of the financial system, leading to fewer and larger service providers. While we focus on the rise of FOS in the asset management industry, similar developments are taking place across the financial sector, as FOS are increasingly driven by efforts to build entire financial services ecosystems (such as that of Alibaba / Ant Financial or that being built by JP Morgan or sought through the Morgan Stanley–eTrade merger). This evolution could be partly beneficial, as disintermediation should drive costs down, but not all innovation is good for all purposes. Societies—and their financial regulations—must seek to remain open to innovation, while balancing innovation against risk. The concentration of FOS in the asset management industry and elsewhere in the financial system will likely hamper both innovation and competition: inevitably the winner-takes-all nature of platform industries—which is what we argue are emerging in finance via FOS.

The Case for Regulating FOS
We explore the possible ways in which FOS could be regulated, ranging from doing nothing to intervening dramatically. On the light end of the spectrum are wait-and-see approaches that foster innovation and encourage innovation; in the middle are moderate regulatory interventions; and at the extreme end are strict regulation akin to those of public utilities or even the final response of nationalization.

The options regulators should take will depend on the stage of development of FOS within their jurisdictions, particularly in terms of their market share or dominance and the systemic significance of the functions the FOS provide. Regulators must be prepared to act fast, however, given the short time needed for big tech firms to evolve from too-small-to-care-about to too-big-to-fail or too-connected-to-fail.

FOS versus FinTech and BigTech
In some respects the rise of FOS reflects the powerful response of massive, established financial institutions to the disruptive efforts by FinTech start-ups: We are witnessing the financial equivalent of the empire striking back. We are only at the beginning of a battle between Big Tech and Big Finance for platform dominance in the provision of financial services.

This post first appeared on the Columbia Law School Blue Sky blog here.


Dirk A. Zetzsche is Professor of Law, ADA Chair in Financial Law (Inclusive Finance), Faculty of Law, Economics and Finance, University of Luxembourg.

William A. Birdthistle is Professor of Law at Chicago-Kent College of Law.

Douglas W. Arner is Kerry Holdings Professor in Law and Director, Asian Institute of International Financial Law, Faculty of Law, University of Hong Kong.

Ross Buckley is Scientia Professor, and the KPMG Law – King & Wood Mallesons Professor of Disruptive Innovation and Law at the University of New South Wales, Australia.


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