How the front office is the final cloud frontier
The trading industry has been historically slow in the adoption of the cloud. This can be attributed to concerns around data protection, performance and security, to name a few. Nevertheless, a change in approach has begun to emerge in recent years and we are seeing widespread adoption and confidence of…
The trading industry has been historically slow in the adoption of the cloud. This can be attributed to concerns around data protection, performance and security, to name a few. Nevertheless, a change in approach has begun to emerge in recent years and we are seeing widespread adoption and confidence of cloud hosting and in front office technology.
Current industry trends have shown how modern cloud connectivity infrastructures can be utilised to create an efficient and reliable environment for electronic trading to take place, in addition to providing direct market access and consuming market data. These latest technologies enable trading activities to benefit from cloud-based solutions, such as enhanced connectivity and communication, as well as an improvement in performance across the financial markets.
Why has the trading industry been so slow to adopt the cloud?
A key component as to why trade infrastructure has lagged in cloud adoption is due to the complex nature of legacy technology infrastructures, with this being evident in the front office. The reason behind this is trading venues and counterparties are requiring connectivity. When it comes to the exchange landscape, there is a large amount of fragmentation in the form of the physical locations of the execution venues. Despite this, expectations of resilience are sky high since this is critical infrastructure. In traditional capital markets, it is almost impossible to replicate the approach that some types of providers have taken when it comes to starting by building in the cloud.
Further to this, the front office has distinctive technology expectations and needs. They require knowledge or guarantees about the actual whereabouts of trade execution. There are concerns that the cloud will have difficulties when it comes to matching existing infrastructure in terms of latency, particularly in algorithmic trading and market data. Compliance, like MiFID II clock synchronisation and regulatory reporting, is also necessary for the front office. Adding to this, other components including support for multicast and low latency environments are vital to enable data to be shared in an organised and efficient manner. Inevitably, in this interim period, the transition to the cloud still necessitates a hybrid system.
It is also worth noting that both market data and the front office need to be in sync to work in concert in order to bring accurate bid/ask information into the system stack. For instance, investment banks are looking at their internal data distribution systems. Although it is challenging to move the data around, the hybrid cloud model has provided an alternative approach.
What can be transferred into the cloud in the coming years?
The last year and a half have been dominated by the pandemic disrupting workflows in the trading industry. The expectation amongst Chief Information Officers (CIOs) is that there will be large-scale changes by 2025. As per the Celent Thrive to Survive survey, which took place in April 2020, 48 per cent of CIOs said that they planned to increase their use of cloud or Software as a service (SaaS), compared to the strategies outlined prior to the pandemic. When Celent interviewed them again in the first quarter of 2021, this figure had increased by 30 per cent, with 78 per cent of respondents anticipating the near or full adoption of cloud by 2025.
In the coming years, it is likely that globally distributed trading networks will begin to emerge. However, this transition is expected to be gradual as the industry is known for being cautious when it comes to embracing new technologies, in part as a result of the industry being heavily regulated.
Market participants and investors are set to benefit from this ‘brave new world’, as soon as data can be accessed in the cloud all in one place. This will provide access to computing resources and AI/ML analytics, which will enable both the management of big data and data mining that creates valuable insights. From this, any market player will be able to access petabytes of data, levelling the playing field. Evolvements in cyber security tools will facilitate market participants to accelerate their cloud adoption.
While the cloud is now capable of serving as a sandbox for DevOps, it is still necessary to adopt and embrace it in order for operational protocols and core business functions to adapt accordingly. In the years to come, 24/7 trading will be everywhere. It is already starting to become the norm as we see digital currencies trading around the clock and traditional exchanges extending their trading hours.
As we look forward to the future, we see customers taking a hybrid approach to accompany their trading infrastructure and enterprise needs. What remains to be seen is how cloud technologies continue to evolve to manage the volume of market data that is generated and consumed by capital market participants.
By Mike Smith
Mike is a seasoned executive with 18+ years of customer success and relationship management experience in diverse sectors. Currently, he is the Director of Global Exchange Relations Management with IPC Systems. Mike has spearheaded all daily efforts related to continuous business development for Exchange and Liquidity providers while producing globally focused product offerings. Mike has also accelerated boarding processes as well as launch innovative initiatives aimed at heightening content awareness.