Cloud Computing Has Become a Dominant Force in Financial Services
January 20, 2012
In the span of a few short years, cloud computing has gone from being an enigmatic and somewhat exotic technology management model to a dominant force that is changing how business heads relate to and value the underlying technology that supports business growth. In the financial markets in particular, the implications of cloud computing on the business, however, have been neither clearly defined by the service provider nor clearly understood by the average consumer.
Admittedly, early descriptions and definitions of cloud computing often relied on metaphors and analogies rather than concrete terms and value propositions. (By far my favorite analogy was the comparison to a "Mashup DJ" who blends multiple songs across various music genres into a continuous, uniform audio mix.)…
The Rise of Financial Clouds
The economic downturn in 2008, often cited as the catalyst for greater adoption of cloud computing in the financial services industry, put cloud computing and its applicability in the industry under the spotlight. And while the downturn likely did create a number of new adopters of cloud computing services that were looking to achieve greater cost efficiency in a bleak market, the long-term trend of adoption already had been underway for several years among hedge funds and private equity firms. These earliest adopters in the alternative investments space generally had more-independent business models that afforded them greater agility to adopt new technologies and improve efficiency.
The successes of these early adopters — a group that includes some of the early high-frequency trading firms in 2007 that often leveraged private cloud services to deploy colocated strategies on dedicated hardware — led to a general validation and acceptance of cloud computing’s applicability in finance. It was a tipping point that the industry hit in early 2010. Adoption rates continued to increase in 2011, and the market has indicated that it is ready to adopt cloud computing into the mainstream.
Particularly in the last year, a clear view of cloud computing’s applicability in the financial services industry has begun to emerge. While there has been some high-profile news of firms tapping the public cloud for services such as email and calendars — the deal between Spanish bank BBVA and Google in January is one recent example — the generally accepted model for the financial industry has become the private cloud computing model.
Not to be confused with an internal cloud, the private cloud enables firms to achieve efficiencies through leveraging secure, centralized global network and storage capabilities while also allowing them to use dedicated hardware to run business-critical applications. The private cloud computing model provides users efficiencies without compromising performance or security.
Looking Back for the Cloud Outlook
Looking forward into 2012, we should see a few key developments in how the financial industry uses private cloud computing to increase efficiency and improve access to applications and services. In particular, we’ll see the emergence of clearly defined cloud strategies form service providers such as prime brokers, fund administrators and exchanges. A few initial examples of this trend emerged in 2011.
In April, Conifer Securities, a provider of fund administration and prime brokerage services, announced a joint venture with InvestCloud, a cloud-based software development provider to the investment management community. Dubbed iCon, the joint solution was developed to facilitate on-demand access to Conifer’s full suite of fund administration and prime brokerage services. That was achieved through leveraging the private cloud.
In June, NYSE Technologies announced the launch of its Capital Markets Community Platform, which was the company’s first foray into the cloud computing services space. Again, the primary driver cited was the ability to provide faster access to services through on-demand computing resources.
And in December, our firm, Options IT, announced that Fundamental Interactions had deployed its FIN Virtual Exchange on our Options PIPE Private Financial Cloud services platform. FIN Virtual Exchange enables exchange or alternative trading system (ATS) operators to launch a marketplace on-demand, leveraging a private cloud services platform. While we’ve had many financial vendors deploy their applications on our platform since its launch in 2001, FIN Virtual Exchange was notable because it was the first exchange platform made available as a private cloud service.
Partnerships such as these should continue to increase throughout 2012 as the private cloud will increasingly be viewed by application developers and service providers as an optimal way to bring new technologies and services to market quickly and efficiently. The private cloud also speeds distribution of those technologies and services to the end user.
As similar partnerships increase, private cloud services as a utility will emerge as a dominant new category in the financial services industry. Third-party or independent providers of private cloud services should be better positioned to achieve and provide their partners and clients with the full benefits that scale can bring to the model.
Defining the Future of the Private Cloud
So what is a private cloud services platform, and what utility will it need to provide to the industry? A private cloud services platform will offer access to network, computing, storage and application management resources on-demand. Providers will need to offer low-latency market data and market access, as well as a fast, easy and secure way for technology and service providers to deliver solutions to their end clients.
At the end-user side of the market — investment banks, brokers, market makers and asset managers — consumers increasingly will look to push more sophisticated applications into the private cloud. For example, order management systems, portfolio accounting systems and enterprisewide risk management systems — all of which are applications that were recently thought to be too complex to be deployed outside of the enterprise — will find their way into the private cloud.
The primary drivers among this market segment will be cost reduction in terms of capital investment in the underlying infrastructure and the human resources needed to manage that technology footprint. Another driver for end users migrating complex applications into the private cloud will be the ability to access standardized application management resources and expert systems administration skills that are better suited to be provided at the service-provider level. Meanwhile, end users pushing their technology into the private cloud will speed the vendor community’s movement into the cloud, creating a positive feedback loop that accelerates the industrywide migration into a private cloud environment.
The Financial Cloud Has Landed
These developments, many of which already are underway, are confirmation that cloud computing in the financial space has sufficiently matured and long-held industry concerns with security have been addressed and resolved through the customization of service offerings for financial market participants. Adoption rates should grow quickly, as the technology has hit its tipping point. Thus the long-held positive attributes of cloud computing — cost efficiency, speed to market and flexibility — will increasingly appeal to market participants creating demand for services and prompting new providers to enter the space.
Going beyond 2012, as the number of providers of financial cloud services increases, we anticipate an arms race of sorts to create a dynamic, application and service-rich environment, ensuring end users are able to choose on-demand the technologies and services they want to use to manage their businesses. Cloud service providers that bundle a suite of applications to their offering will likely be seen as being too restrictive to be a sustainable for the end user. The general trend will be toward flexibility and choice for the end user.
And as competition among private cloud service providers leads to a consolidation in the market, a few key providers likely will capture the majority of the market. Those providers will need to place flexibility, vendor diversity and speed to market as a top priority in delivering the service, as end users will increasingly expect to be able to access a broader range of services and markets from the private cloud.