Wall Street Looks to Cloud
As a highly data- and information technology-heavy sector, financial services’ move to the cloud represents a seismic shift with broad implications for market-participating firms and technology providers alike.
Cloud migration entails moving data, applications or other business elements from a company’s physical computers to an external network of servers, where data is stored and managed remotely. It is a big and disruptive business — last year, consultancy Gartner projected that more than $1 trillion in IT spend will be directly or indirectly affected by cloud over the next five years.
Asset managers and trading firms are still early in the process of moving to the cloud. Data has been managed via on-site hardware for decades, and massive sunk costs makes those systems sticky; there are also concerns about security, interoperability, and business continuity.
But cloud users and observers say the business-optimizing advantages of cloud, such as agility and flexibility, will win out in the end. This is especially the case for quantitatively oriented traders and investors, whose market influence has expanded in recent years.
“The importance of cloud computing cannot be overstated,” said Manoj Narang, founder and chief executive officer of MANA Partners, a quantitative trading and financial technology firm. “There has been a lot of publicity around the so-called arms race to low latency. Going forward, I think that we are in a different kind of arms race – the arms race around computational complexity.”
“That de facto means, how many calculations can you do per unit of time? The firms that can do more complex calculations per unit of time are very likely to be rewarded,” Narang said. “That’s really the next frontier in terms of the technological arms race in quantitative trading, and cloud computing is absolutely essential to being competitive on that front.”
The sell-side brokerage business is at an “incipient” stage of moving to the cloud, Narang said. Reticence is largely due to concerns about data security, which are being addressed by cloud providers. There is greater adoption on the buy side, especially at the smaller firms that tend to be more innovative in their processes.
“Legacy technology is an impediment to cloud adoption,” Narang said. “That’s one of the things that makes it very appealing to be a start-up with brand new infrastructure.”
As might be expected, some of the largest cloud providers for financial services are household-name tech giants Amazon, Google and Microsoft.
In-house, some large financial firms have taken the first steps toward cloud adoption by bringing in the talent needed to make it happen. For instance, last year J.P. Morgan hired Harish Grama from IBM for a newly created executive role to lead cloud services.
“I think all financial services institutions are at least looking to utilize the cloud,” said Bill Fenick, strategy and marketing director, financial services for Interxion, a provider of European colocation data-centre services. “They’re starting to invest money, perhaps primarily, in the individuals. They need to understand, how do we make the most out of these platforms where all these very large technology vendors are pouring so much money into?”
“One of the biggest questions is about all of the legacy infrastructure,” Fenick said. “Do we hive off the legacy systems and just keep them running? It can be painful to switch to cloud until there’s a strong porting migration strategy, which I don’t think many firms have.”
Financial services’ migration to the cloud is in the early innings. “It is not something that you do overnight,” Fenick said. “This is a long, thought-out process involving a lot of planning and architecture. It might take 18 months just to line up development resources.”
“But you can start to develop and think about how you want the future to look,” Fenick continued. “Maybe the five-year plan is to have the majority of new applications developed to be cloud aware – or better, to run natively on the cloud – and all legacy applications either shut down, or ring-fenced to such a degree that they run with little or no support. That is a pragmatic way of looking at it, for all the reasons that you hear about — cost-cutting, efficiency, etc. — but also because the software/hardware provider might cease supporting older versions of the technology.”
Narang said his previous firm, Tradeworx, was one of Amazon Web Services’ first customers, circa 2006-2007. MANA Partners’ entire research infrastructure is virtualized in the cloud, as the company owns no servers.
Such a setup may be the norm in financial services sooner than people expect. “That day is coming, and it is approaching quickly,” Narang said.
“In the financial industry, I think you probably need a few more tools to make that possible,” he continued. “We have a lot of storage solutions and a lot of support for ‘big data’ queries that tech firms like Google and Amazon give you. But they’re not especially tailored to the needs of the financial industry. I think one or two enterprising vendors can come along to change that.”
For financial firms, describing data security as mission-critical may be an understatement.