Cloud computing may be taking some industries by storm, but it’s not making much of a dent in core trading systems or brokerage back offices. Nor will it any time, soon.
That’s the key finding of a cloud computing study done the by the Tabb Group in December. The report’s chief author is Tabb Group senior analyst Kevin McPartland, who spoke last week at the International Securities Association for Institutional Trade Communication (ISITC) in Boston.
As for trading systems, relying on computers somewhere in the cloud extends the latency of executing a transaction, which in today’s environment of millisecond competition would put traders at a distinct disadvantage.
But the reason is not technical in the back office. There, regulation means cloud computing is not a real option, yet.
“Technologically, it’s ready, but from both cultural and regulatory [perspectives], financial services are not ready for cloud computing,” he said.
McPartland’s comments echoed sentiments expressed by NYSE chairman Marshall N. Carter in the keynote session earlier in the day (see related story ).
“There’s lots of regulatory issues such a client confidentiality, data storage and keeping data secure on your premises. Cloud computing does not work with those regulations,” Carter said. “From a technical perspective, it does seem like cloud computing is there. It’s not quite clear if [cloud computing] would be ok with the SEC. We could possibly see more of it in the back office, but it takes years for the rules to change.”
Cloud computing works well in some applications common to every industry, including financial services. Examples are the management of human resources, the use of e-mail and maintaining customer relationships, through online programs such as Salesforce.com.
These are neither encumbered by heavy regulation nor the need for split-second performance.
Using cloud computing in the back office, keeping track of details of transactions and positions with counterparties, for instance, could have great cost benefits.
For example, large, medium and small trading firms only use between 37 and 50 percent of the capacity of central processing units (CPUs) in their computers, on average, McPartland’s research shows. With cloud computing, you pay just for the CPU cycles you use.
But McPartland maintains on-premises servers must be place for the handful of days each year a firm has to handle peak loads.
“The volatility on the markets means data fluctuates wildly and you have to ready for the spikes. You can’t have six days a year where you back out of the market while your computers catch up,” he said.
Making a compelling case for cloud computing on the ISITC panel was IBM Cloud Portfolio Executive Christopher Dzieken. One idea he promoted was “time to value.” In short, cloud computing dramatically reduces new system deployment times.
IBM with its 400,000 employees and many divisions used to “disparately build systems over and over and over again” that took an average of 26 weeks to deploy. With the cloud, that has been reduced to two weeks and could go down to hours, he said.
“Where do you want to spend your time? At the end of the day, your IT costs will grow out of control,” he warned.
Also, not all clouds are created the same. They can be tailored. A private cloud operates on the corporate premises and behind the firewall. A hybrid cloud is an on-premises implementation with some data on the outside. A public cloud operates outside the premises and has firewalls “provisioned accordingly.”
The user voice on the panel was moderator Dennis Goodenough, a senior business manager, securities initiatives, SWIFT. He agreed cloud computing is for now applicable to non mission-critical applications in financial services, but admitted it holds some allure. What’s more, his research showed some CPU usage is as low as 15 per cent, meaning do-it-yourselfers pay for CPU cycles which are wasted 85 per cent of the time.
“You don’t own the technology. You rent it,” he said, meaning firms can remove the hassle and expense of dealing with software licenses, version control and upgrades. What’s more, cloud bandwidth on Amazon at 10 cents to $2.88 per hour is ridiculously cheap. These rates apply to Amazon Web Services “instances” which are defined by the CPU, operating system and amounts of memory and storage.
But Goodenough acknowledged that security concerns and new types of contracts assigning responsibility stand in the way of cloud adoption in mainstream financial services applications. Regulation is the major deal-breaker.
“Regulators can’t audit the cloud,” noted Goodenough.
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