Open Platform: The Front Office in the Cloud

Larger companies no longer have the IT budgets that they once had, and for smaller institutions, who cannot afford to pay for a large IT infrastructure, outsourcing can significantly reduce their investments and human resource usage. Many businesses already employ a model which is a mix of internal capabilities and outsourcing to a variety of vendors. So, migrating to the cloud can take the pressure off internal resources, freeing them up to focus more on strategic and business building initiatives. Financial companies are leveraging primarily private cloud environments, except for non-critical back office services. This trend is likely to continue until companies get more comfortable with security, privacy, and control issues.

External managed services and cloud providers can offer a number of benefits─their focus typically requires them to stay ahead of the latest innovations in the market, they have the scale to mutualize the upfront infrastructure investments needed, whether it be networks, data centers, hardware, license agreements or other areas, and they provide the environment for skills development across a number of towers, which is hard to do internally due to sub-scale issues. Increasingly, most providers offer "evergreen" contracts, which include upgrades to next-generation technology at no extra cost to ensure service level agreements are met consistently.

The Front Office Cloud
While back- and middle-office functions are more likely to be outsourced to the cloud, there has been a move in recent months to see which front-office functions might also be migrated to this environment. In the past, these have often been seen as sacrosanct and not to be touched. However, upon closer inspection, many specific business solutions could be hosted via the cloud, including front-office market data.

For example, one activity that could be outsourced using the cloud is data for algorithm development. It's logical for quantitative trading firms developing algos to think of using data to test their algos. But, research requires huge amounts of market data─terabytes of both historical and real-time data. Cloud service players can solve the problem of how to get that data from an exchange to an application faster and more efficiently. Analytical and algorithmic development tools can be hosted along with storage for data, with direct and web-based access to enable querying at a fraction of the cost a do-it-yourself solution presents.

Outsourcing of direct market access infrastructure and order management systems is being adopted even by high-frequency trading firms to provide flexible, low cost access to emerging markets and across asset classes. Real-time market data feeds, when provided as a cloud or hosted solution, means common APIs can be used without the need for in-house development or worrying about exchange updates and license costs, while ensuring that customers always have access to the latest data at the lowest latency in any market. Network connectivity and direct exchange access via mutualized cloud providers not only means less cost but also more flexible bandwidth, as well as the ability to quickly enter and exit a particular market if necessary.

Real-time market data feeds, when provided as a cloud or hosted solution, means common APIs can be used without the need for in-house development or worrying about exchange updates and licence costs, while ensuring that customers always have access to the latest data at the lowest latency in any market.

Psychological Barriers
According to the latest outlook by Gartner, published in August 2012, the fastest-growing segment within the IT outsourcing (ITO) market is cloud computing services, which is expected to grow 48.7 percent in 2012 to $5 billion, up from $3.4 billion in 2011. The study found that cloud computing services, while primarily providing automation of basic office functions, will increase as next-generation business applications come to market and existing applications are migrated to use automated operations and monitoring. In the coming years, cloud services are expected to deliver increased value in terms of service, consistency and agility.

While there will be some impact from the ongoing business slowdown due to sovereign debt issues in Europe and slowing exports in China, Gartner expects the ITO market in the emerging Asia/Pacific region to represent the highest growth of all regions.

Of course, one of the biggest barriers to this happening on a larger scale is a psychological one. Migrating to the cloud, especially for front-office functions, will involve getting people across organizations to start talking to one other and interacting on a regular basis. The cloud can break down silos that exist in an organisation, and if there ever was a time when financial instritutions will embrace this trend, it is now, with regulation and low volume creating an imperative for change.

Tanuja Randery is the CEO of MarketPrizm. The views expressed are those of the author and do not necessarily represent those of MarketPrizm or Waters.