Anthony Malakian: Regulation Looks Cloudy

With a slew of regulatory changes being dumped upon the shores of North America and Europe, Anthony believes that it only makes sense for firms to start—with some urgency—to get into the cloud.

News flash: The regulatory winds are blowing hard. As Waters went to press, the US Securities and Exchange Commission (SEC) was preparing to vote on Form PF. Across the pond, the European Commission released its review of the Markets in Financial Instruments Directive (Mifid II), which, if adopted by the European parliament, will affect high-frequency trading practices in Europe. And, as has become clear, the US tends to follow Europe’s lead on the regulatory front, so hedge funds running such strategies in the US should be taking notice.

Let’s also not forget that most of the Dodd–Frank Act has yet to be implemented, and that one rule has already been overturned by the District of Columbia Court of Appeals. In short, we’re in a state of confusion.

Holding Back
I’ve been at Incisive Media for two years, and have written 20 profiles of industry CIOs, CTOs and CEOs. I asked all of them how the regulatory environment changes their firms’ IT blueprints. The words “challenge,” “flexibility,” “efficiency,” and “study” came up in most—if not all—of those interviews. But I always came away with the feeling that many of my subjects were holding back. Indeed, in private conversations I’ve had with others in the business, many more forceful words were used to describe the regulatory challenge.

The more I read about how few of Dodd–Frank’s provisions have actually been implemented and how this rule or that proposal is being delayed, the more I understand why there is something of a nonchalant attitude toward them. The industry has been very good at fending off these reforms, all the while making it seem like it is fighting an uphill battle. So when this trickles down to IT, the old strategy of “wait-and-see” becomes far more understandable.

But why sit back when you can be at the vanguard of a trend that is rapidly catching on and will one day be looked at in the same way that electronic trading is now a no-brainer? I’m of course referring to cloud computing. 

I think that it’s universally understood that when it comes to storage compression, efficiency and cost cutting, cloud is a very effective tool. The concern is mainly security, followed by response times. But several regulations affect how firms gather and store data. This is a job for cloud.

One of my profile subjects was John Metzner, president of Plural Investments and the former CTO of Eton Park. He is not overly anxious to leverage cloud computing, even if the firm does employ a few cloud-like internal processes. He told me he’d consider whether or not the firm truly needed an internal database, which is currently right down the hall from Plural’s trading floor. He’s not crazy about the idea of relying on a telecoms firm or a cloud provider, but he’s becoming more comfortable with the notion.

Betwixt and Between 
This opinion sits somewhere between both Majedie Asset Management co-founder Simon Hazlitt and former Credit Suisse CTO Subhra Bose—two of cloud’s staunchest supporters, both of whom have appeared on our cover—and those who are still skeptical of the cloud, such as Irene Aldridge, managing partner at Able Alpha Trading.

Aldridge says eventually a breach will release supposedly encrypted information into the market, causing a panic and, potentially, another Flash Crash.

“Despite the push for the cloud, I think it is a major problem. Encryption is costly and time-consuming. If the next Flash Crash is going to come from somewhere, it’s going to come from security breaches in the cloud,” Aldridge says. Cloud proponents respond that this is what is always said about the application service provider (ASP) model, and we have yet to witness a breach of any significance.   

I’ve found that sophisticated buy-side firms have already begun to at least dip their toes into the cloud. If your firm hasn’t done so yet, now is the time, because it is a change that’s coming. The only question is whether you want to allow the early adopters to create a series of best practices or whether you want to be a part of that first wave and differentiate yourself from the rest of the crowd in a few years.