Proliferation of trading venues and applications adding to connectivity challenges
Explosion in regulatory requirements, macroeconomic uncertainty, cost pressures and fintech innovation key drivers for cloud move
New research from Celent has found that the appetite for cloud-based services in capital markets has reached a critical point and that cloud is set to become the main delivery model for certain key functions in the near future. The research, entitled ‘The cloud comes of age in the capital markets’ shows that attitudes towards cloud have softened in the last 12-18 months, with participants showing more acceptance of the security, stability and reliability of cloud-based deployments.
The research paper shows that cloud adoption is being driven by four key factors: increase in regulation (e.g. MiFID II, Dodd-Frank), cost pressures, macroeconomic uncertainty (e.g. Brexit, China’s economy), and the rise of fintech. The cloud has emerged to solve these challenges, offering firms a more agile infrastructure that enables them to address ever-evolving regulatory requirements and the proliferation of trading applications as well as the need to rapidly connect to multiple liquidity sources. Moreover, the cloud is a key driver for fintech innovation as it facilitates the implementation of new ideas and reduces the cost of failure.
These drivers, however, have varied manifestations across the capital markets ecosystem:
– The buy side, in particular smaller firms, is more open to service-based models and has used hosted solutions for most systems, including trade management. Hedge funds are keen to develop insights quickly, making a cloud model more appealing.
– The sell side tends to be more focused on maintaining control of their systems. However, they are eager to explore solutions that build better distribution models and to a lower, variable cost model. Many firms have already created private clouds for key resources while moving less sensitive applications to the public cloud.
The adoption of cloud based deployments also varies across business functions. Whereas there has been a wider acceptance for moving non-core and non-proprietary data to a cloud environment, the move of front office functions and proprietary or client information has lagged behind. However, this attitude is shifting as firms become more comfortable with the performance and security of the cloud. Innovative TradingTech, RegTech, and market data services are also expected to move to the cloud.
Moreover, the research found that there are still barriers to be overcome before widespread adoption of the cloud, namely data storage locations, risk liability and organisational inertia.
According to Brad Bailey, Research Director at Celent: “The barriers to cloud adoption are no longer based on a mistrust of the technology, but rather how to successfully deploy a solution that complies with regulations, and these concerns are common to all technology solutions, cloud-based or not. In many cases the public cloud is now more secure than on premise systems and we are seeing institutions alter their attitude from ‘never’ to ‘how to’ embrace the cloud.”
The capital market space is also seeing a parallel emergence of the need for better connectivity to support secure cloud deployments. Security and performance concerns limit the usability of the public internet as a connectivity option for capital market participants. Private, dedicated cloud access is better suited for capital market requirements, offering better speed and latency as well as superior performance and security.
As participants use more hybrid cloud models and multiple cloud providers, there will be an increased need for managed cloud connectivity models, enabling firms to leverage the cloud. Such managed connectivity solutions, like the Colt PrizmNet financial extranet, make it easier to access value added cloud based services like market data, regulatory solutions and analytics, hence enhancing the user experience.
“Market pressures are forcing firms to focus on their core strengths and shift technology functions to specialists. Therefore it comes as no surprise that the cloud is coming of age in the capital markets, helping firms to address regulatory and cost pressures whilst focusing on the core business. Capital markets firms starting out on this journey need highly secure, on-demand network services that are designed to meet the stringent requirements and speed of the financial markets,” said John Loveland, VP of Capital Markets at Colt.
The cloud comes of age in the capital markets report is available for download here.