When it comes to capital markets, realising the promise of Public Cloud seems to have been a long time coming. Over the last decade it’s felt like there’s been an endless stream of conference panels discussing the benefits of Cloud, C-level execs proclaiming that their organisation will adopt a ‘cloud first’ strategy, and large Cloud vendors forecasting how investment banks were about to become the new Netflix. Yet at times actual adoption seemed to be moving at a glacial pace.
Were Cloud Technology companies initially a little naive, perhaps assuming it would be easy to replicate their rapid growth in other industries? It was frustrating to hear the often-repeated excuse that ‘turkeys don’t vote for Christmas’, referring to what vendors saw as resistance from technology executives. This always felt somewhat disingenuous – banks can be ruthless when it comes to cutting cost. However, the capital markets industry is heavily regulated and, consequently, very risk adverse – it was never going to be at the forefront of Cloud adoption. And did Cloud providers really do enough to answer questions regarding IT security, data sovereignty, performance, and migration risk mitigation? Let alone address many of the more industry specific challenges such as facilitating arcane exchange data distribution rules, solving for multicast, interfacing to terrestrial circuits for client and venue connectivity, and so on.
Perhaps there was also an unrealistic expectation of wholesale ‘lift and shift’ for existing infrastructure. While the promise of reduced cost and improved agility are appealing, the reality of migrating large, legacy, business critical and often highly interconnected systems, was always going to be hard to achieve. Conventional software is generally not suited to cloud fail-over models, negating some of the benefits, and in many cases, it is just not possible to deploy legacy technology in the Cloud.
However, there has been genuine traction over the last few years, and we are starting to see Cloud adoption accelerate across multiple different workflows in both sell and buy-side firms. Use of Private Cloud instances is well developed, but Public Cloud has not had the same growth profile given some of the concerns mentioned. However, poor ROE in financial services has pushed firms to reconsider, with the need to achieve more aggressive cost reduction helping to overcome some of the reluctance. It can also be argued that there has been a mental shift from ‘I don’t want to be first’, to ‘I don’t want to miss out’ as adoption has grown amongst peers.
Cloud technology companies have also worked hard to address concerns regarding issues such as security, data sovereignty and performance, with out-of-the-box tools helping arm firms against IT security risks. At the same time. they are taking a more pragmatic approach to targeting incremental or new projects rather than legacy system migration. Smaller, more defined projects can deliver tangible value and positive ROI in much shorter timeframes when compared to the challenges and timelines of large ‘rip and replace’ initiatives.
Provision of third-party services via Public Cloud has also helped accelerate this trend, with a shift to SaaS and managed service models by many application and data vendors. Consuming new services delivered via Cloud is an easier path for financial firms than re-engineering in-house systems. This can help reduce cost of ownership, reduce FTE numbers, and shift expenditure from Capex to Opex, often with the ability to scale up or down in-line with business needs.
Market data has been an obvious target, and the last few years have seen a string of announcements from vendors and exchanges, particularly regarding high-volume static data sets such as tick history (although challenges remain with streaming real-time data). Risk management and post-trade systems are another part of the value chain that are increasingly being deployed in Cloud. But what about trading technology, where concerns of performance and security are perhaps most prevalent?
At Rapid Addition we think Cloud has a big role to play in the trading arena. There is still too much friction in electronic trading and an unnecessarily high cost of participation for the sell-side. Yes, performance is important in certain workflows, for instance enabling DMA and supporting HFT strategies. However, there are many aspects across the broader value chain that can benefit from the cost, agility, and scalability offered by Cloud. It’s important to understand the difference between sending an order and executing a trade, and even different trading types – much of the order flow between traditional fund managers and their sell-side brokers is either care or algo orders that don’t require super low latency. Coordination and orchestration of risk is arguably more important than absolute performance when looking more broadly across trading workflow and at different asset classes and represents an area where Cloud can deliver value.
Order routing networks are meant to improve efficiency, so brokers can receive orders in electronic format (usually FIX) to automatically process them through their E/OMS, pushing more of the flow into a cost-efficient low touch model. Today, order routing networks are generally legacy, proprietary networks that are expensive and difficult to onboard new clients or additional order types. We believe that a secure Public Cloud order routing capability with VPN or FIXS (FIX over TLS) enabled internet connectivity will support the majority of non-HFT order flow and significantly shift cost dynamics, as we have achieved with our own order routing network, RA Net.
Increasingly, 3rd party trading apps and desktops are being delivered via the Cloud, but we believe that buy-side and sell-side firms can shift much more their electronic trading infrastructure to Public Cloud, whether that is data capture to support regulatory and internal reporting tools, or even core sell-side trading infrastructure underpinning, for instance, agency broking operations.
Our core trading technology, the RA Platform, is designed for Cloud, on-prem, and hybrid deployment, giving customers the flexibility to choose the performance profile needed to meet current requirements while also aligning with their future technology strategy. And even where firms aren’t yet ready to fully commit to Cloud, the compatibility of our technology across hybrid environments can deliver significant benefits when it comes to building testing and UAT capabilities or implementing cost-effective disaster recovery and business continuity for their trading platform.
While not every electronic trading use case will be served by Public Cloud, the investment that vendors such as Microsoft Azure are making in their network will start to challenge some of the traditional network specialists when it comes to latency performance. What is important though is that firms can leverage Public Cloud to target specific parts of the value chain, removing cost and management overhead to improve margin and free up resource. It is critical that whatever trading technology they choose gives them the flexibility to deploy in any environment and meet the performance and scaling characteristics that their business demands, as well as align with the future technology strategy of the firm. Ultimately, CIOs and CTOs will need to leverage the right infrastructure solutions to deliver the various service levels required by different teams within the firm, but they will also have to optimise spend and reduce costs to enable their firms to survive in our industry. This is happening at both the sell and buy-side and it is inevitable that Public Cloud will play an increasingly important role going forward.