I concluded late last year that end-user firms and financial technology providers were quietly entering the next phase of the cloud computing revolution. My analysis, based on anecdotal evidence, is that buy- and sell-side firms ignored the cloud hype three years ago and focused on how to alleviate the initial, justified concerns over data security and other operational barriers.
Once those barriers were adequately addressed, application and service providers of all stripes have been tripping over themselves to get on the cloud.
The concept, of course, is not new and before the Dot Com bubble burst, there was a lot of excitement over software as a service. What happened in the meantime was that the technologies that support the supposed ephemeral cloud — virtualization, networking equipment, storage software and hardware capacity, security controls and data distribution, in particular — got a lot better.
With the underlying technologies more effective and easier to manage, it was only a matter of time before the cloud could claim its rightful place within securities operations.
A recent report from market research firm Aite Group, “Capital Markets in the Cloud: Not Such a Gray Area” by Aite’s Sang Lee, co-founder and managing partner, and Virginie O’Shea, senior analyst, provides some confirmation of my highly unscientific, gut reaction.
Lee and O’Shea have based their study on telephone interviews with sell-side and buy-side firms, exchanges, and vendors “that have committed to
leveraging cloud computing.” They were contacted during March and April of this year.
The analysts acknowledge that there are still concerns about security, but “over the next 24 months, many firms without any clear strategy around cloud technology are expected to become part of the cloud adoption curve — even if that is just in terms of evaluating the space.”
The reasons for this turn of events for the cloud are:
- Stagnant global market growth: Equity markets are back since the Great Recession but “have remained fairly stagnant until the end of 2013,” which compels firms to tighten their belts in all areas and to lay off staff;
- More regulatory pressures: Dodd-Frank, Basel III, the European Market Infrastructure Regulation (EMIR) and the second Markets in Financial Instruments Directive (MiFID II/MiFIR) have taken their toll on the industry and have “collectively focused on creating more transparency and accountability within the various listed and over-the-counter markets, forcing market participants to better manage their risk and provide more information back to their clients,” Aite says. The result is more demand for “data management and analytics as well as tighter control over regulatory compliance;”
- Layoffs and smaller staffs: The layoffs on Wall Street since 2008 have not plateaued and are continuing, Aite has found. “Most firms have been operating with bare bones teams while trying to leverage technology to make up for loss of manpower. This trend is reflected across the pond, with European markets facing similar levels of downsizing,” the researchers say. Fewer people to do the work makes offloading to the cloud very appealing.
- Cost controls and tighter IT spending: Aite says that “since 2008, capital markets have been playing IT-spending catch-up in the marketplace, remaining fairly stagnant in terms of overall spending and focusing on short-term maintenance needs over innovation.” The benefits and cost-savings of cloud computing appear to have the potential for ROIs that would make rivals jealous.
These reasons are driving momentum in the marketplace. “By the end of 2013, estimated IT spending in capital markets for cloud-related initiatives reached over $2 billion and is expected to hit more than $3 billion by 2017,” Aite is predicting.
In addition, the report finds that 82% of those firms already leveraging cloud technology are “expected to increase their IT spending on the cloud over the next 24 months,” the study finds.
“This reflects the phased approach that many firms have taken to cloud technology adoption — they test it out in noncommercially sensitive areas first and, once they are comfortable with the arrangement, they extend it to other areas. The prospect for cloud adoption is also quite bright when analyzing those responding firms that currently lack a cloud initiative; combined, 80% of those firms without a cloud initiative today expect to have something in place over the next 24 months,” according to Aite.
Aite’s interviews with firms also revealed that their top priorities for spending on the cloud are: reference or market data management, 43%; trade analytics, 29%; positional or transactional data, 24%; risk management, 19%; and quantitative research, 19%; regulatory compliance and strategy development and testing are at 14%; and trading infrastructure, 5%.
All is not paradise on the cloud as the study’s participants have concerns over the reliability and availability of service providers; regulatory and privacy restrictions on data storage; performance issues; the lack of control over cloud providers; and persistent concerns over security. In addition, there is always the persistent concern (not addressed by Aite) voiced last year by Todd Gottula, executive vice president and chief technology officer for Advent Software, who said that the cloud could lead to outsourced or outright eliminated back-office staff positions.
Despite those concerns, one of major takeaways from the report is that for the next two years many operational chores could finally be cost-effectively ascending to the cloud.
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