Why cloud technology can not be ignored

06 February 2017 in THE BOND MARKET by Tim Binnington

By Usman Khan, Co-founder and CTO at Algomi

While capital markets innovation is often implemented at a slower rate than other industries, the migration of fixed income trading operations to the cloud has picked up significantly of late, as firms recognise the value that software as a service (SaaS) delivers in integrating and scaling new technology quickly and efficiently.

But as compliance demands build and financial technology continues to advance at a rapid rate – the need to migrate trading operations to the cloud has never been more pertinent for those that continue to rely on a complex network of legacy systems.
As we embrace the start of 2017, fixed income traders will increasingly compete on a technological basis – and those that fail to tap into the potential cloud systems offer could suffer the long term impact – with technology savvy institutions already building a healthy pipeline of new tools that can be quickly set-up and extended.

Leveraging cloud to develop holistic insight

Generally speaking, trading technology is designed to trim costs, create greater operational efficiencies by automating manual processes, or increase revenue generating opportunities. But in a challenging environment, where sell-side fixed income revenues remain markedly lower than their pre-crises levels of 2008, the need for trading tools to deliver on this promise is key.

One way in which new trading tools deliver in some, or even all three of these areas, is by focusing on an enterprise wide approach to adoption, usage and system maintenance. Cloud technology provides the means to achieve this, cutting down deployment times from multiple months to weeks, while minimising running costs and creating the much needed flexibility to roll out software updates.

Such a focus on scalability and flexibility is needed. Consultancy firm, Accenture, point towards the existence of siloed IT governance as an issue often linked to physical hardware in large institutions. This often occurs when technology is managed along product lines or geographical regions – a factor that hinders a holistic view of trading activity (Source: Cloud computing users in a new era for capital markets, Accenture, Bob Gach).

For those institutions that operate a myriad of trading systems and consequently face challenges storing, standardising and interpreting data, or identifying revenue generating trades – the benefits of a homogenous solution are clear.

Yet, market competition has played a key role in driving progress in this area. With the number of fixed income e-venues now surpassing 100 globally, the need for these providers to on-board users quickly and efficiently is vital. Amazon’s flagship web services platform has already played a key role in this area and will likely continue to reduce the cost and time spent integrating third party trading tools – all benefiting end-users.

But using trading tools that are inherently flexible by virtue of their cloud credentials also has significant business continuity benefits. Ultimately, it greatly minimises the risk of system outages and disruption when upgrade work takes place; an advantage that reduces IT risk.

Minimising barriers to adoption

So with the benefits of cloud computing abundantly clear, why do many large capital markets firms continue to operate using physical IT hardware? The answer is perhaps two-fold. Migrating trading systems onto the cloud can be a resource intensive activity and many large trading institutions remain occupied with the need to ensure regulatory compliance, while also channeling resources into areas most likely to generate revenue.

Understandably, the larger, more complex and typically global institutions, often face a greater challenge that their comparatively smaller more nimble counterparts, namely second and third tier banks and major buy-side firms. Yet, the benefits of successful integration will also be magnified on a larger scale, resembling a key competitive advantage.

While the second barrier, which relates to perceptions around cyber security of cloud-based systems is changing. Today, large firms are becoming more comfortable adopting and using the cloud as a secure online system in a way that may not have been feasible only a few years ago.

2017 outlook

Looking forward to the year ahead, we are likely to see the continuation of end-to-end cloud adoption that incorporates middle and back office functions at large institutions. Firms will also continue to recognize the inefficiencies of siloed IT governance and opt to develop holistic strategies designed to enable, rather than prevent technological progress.

In terms of the specific tools supported by cloud systems – machine learning and artificial intelligence will certainly play an increasingly important role – as trading institutions compete along technological lines. Last, but not least, cloud is likely to play a vital role in the adoption of distributed ledger technologies – enabling blockchain based applications to be rapidly and effectively implemented and updated. This will enable significant improvements in post-trade functions such as counterparty identification, settlement and clearing.

While capital markets continue to lag in integrating cloud solutions as a standalone alternative to traditional hardware, momentum is building at a rapid rate as the operational benefits the technology delivers become increasingly apparent. As a greater number of firms overcome barriers to adoption – those institutions that are making the transition today will be best placed to exploit a competitive advantage among their peers tomorrow.

This article appears in TABB Forum.