George Popescu, CEO of Boston Technologies, is quoted in the October 2011 issue of e-Forex Magazine sharing his opinion of cloud computing in the FX market. Read the full magazine here: Offering Wider Market Access - Cloud Computing Proves Well Suited to FX. Below is an excerpt from the article.
Offering wider market access –
Cloud Computing proves well suited to FX
Cloud computing services are widening access to the FX market and helping firms to better integrate front, middle and back-office functions. Joe Morgan examines in what ways use of cloud computing can improve the operational capabilities of trading desks and allow FX firms to fine tune their offering.
Proponents of cloud computing liken it to the evolved model of electricity distribution we have today. It is pointed out that when industry first started using electricity, each business built its own power generating plant. The replacement of this model with a centralised national grid – where electricity is delivered to customers who pay for their usage without having to make an upfront investment or shoulder maintenance costs – is said to be analogous with the cloud. Adherents of the cloud say it is a natural development for consumers and businesses alike to outsource computational services, rather than rely on servers and IT architecture stored in-house.
Kevin Houstoun, chairman of Rapid Addition, a specialist software solutions provider to financial institutions, says a “morphing process” is underway, from banks and trading firms managing IT infrastructure in-house to “sharing everything as a utility”. His view is underlined by research published by Gartner, a technology research firm, which predicts that by 2012, a fifth of businesses will own no IT assets. Research by Gartner has predicted that worldwide cloud services revenue will increase from just $46.4 billion in 2008 to $150.1 billion by 2013. Houstoun even includes proximity hosting services – whereby a server is installed next to the matching engine of an exchange or trading platform – as part of an IT outsourcing trend sweeping across the financial markets. “There is a continuum in levels of shared IT infrastructure which raises the question of how you define the cloud. Thomson Reuters Elektron, for example, offers shared server space with software installed. But it also offers direct market access (DMA) gateways and high performance networking,” says Houstoun. “The Elektron offering is much closer to a private cloud.
But a private cloud with special characteristics of low latency. Customers may just need server rack space or a low latency trading solution.”
Dr Michael Newberry, UK product manager for the Windows Azure platform at Microsoft, says the cloud can be “narrowly defined” as “just-intime provisioning and scaling of services on shared hardware.” Newberry favours this definition because it “captures the scalability of the cloud” without “making assumptions” about where the cloud is actually based. “There is the private cloud, based inside a financial institution, a hosted system or a public cloud which all fall inside the boundaries of this definition,” he says.
In summarizing the paradigm shift which, he feels, cloud computing brings to the industries like FX, Newberry uses a question he asks to his customers. “I often say to organisations, what would you do if there were no limitations or boundaries on the computing power that you have at your finger-tips. If you had unlimited power, what would you do differently? What could you do that you can’t do today?” he says.
Key benefits of the cloud
Howard Tolman, Managing Director of Cloud Trading Technologies in London, which specialises in complex pricing of financial instruments and online Forex trading software, summarizes the three key benefits of the cloud as being the removal of costly capital expenditure investment, low deployment costs and rapid scalability. Investment in technology migrates from capital expenditure – in which IT systems and architecture are purchased in a costly upfront purchase – to operational expenditure, where computational power is used in a way akin to a pay-as-you-go model.
Tolman points out that when a bank enlists the services of a cloud computing specialist, it immediately obtains the economies of scale benefits that the provider has already invested in its data center and IT architecture. He says this makes sense as it allows banks and Forex trading firms to focus upon the core competencies of their business.
“Banks have made themselves IT companies. But their core business is banking. The whole idea that the top twenty banks are all going to come up with something completely different in their processing in the trading space is a fallacy,” says Tolman. “We are reaching some stage of maturity and commoditization of trading systems. It is the delivery capability which is important.”
Furthermore, Tolman points out the increasing operational risks banks and trading firms face when having to continually upgrade IT systems in response to market conditions or regulatory requirements. The cloud enables banks to ‘future proof ’ new technology and systems. “Users of the cloud can take advantage of the investment that firms like Microsoft have made. This means they can have computing power straight away, rather than investing in infrastructure to make it work. You can try innovative stuff and if it doesn’t work you can just switch it off and pay for what you use,” says Newberry of Microsoft.
Upgrades can be done in a seamless manner, removing the potential high costs of having to install new systems or technology architecture. Tolman contrasts
this with the traditional banking technology model, where time delays are common place if additional server space has to be deployed for a new project.
Robin Manicom, director financial services, Europe Middle East and Africa (EMEA) at Equinix, a global data center specialist with networking and service partners that build cloud offerings, contrasts the heterogeneous enterprise environment – where equipment from different technology vendors is bolted together – to the homogenous environment of the cloud, where a single server architecture is used resulting in a far lower ratio of administrators to servers in cloud operations.
He also says the cloud turns the traditional conservative banking technology model – where new projects often have to wait approval by committees – “on its head”, creating a new more fluid and innovative environment. “In the traditional Capex heavy model, organisations have to obtain funding for a project and then buy a large amount of equipment from a technology provider. When this equipment arrives, one is forced to basically write it off over a number of years but still pay a maintenance charge to support that initial purchase over the term,” says Manicom. “The cloud turns this traditional model on its head – switching a Capex spend into Opex spend over most likely a two, three or five-year contract. But from day one your initial payment is substantially lower, which is a very cost effective and manageable way to quickly embark on new projects with the minimum of capital spend.”
Needs of FX
Tolman argues that the capacity of the cloud to provide high-speed calculations using large volumes of data is becoming more important to FX firms, particularly in the current regulatory environment. “Central banks and regulators will want answers very quickly. If you are a sterling-based bank, for example, issuing a credit default swap in dollars and an event triggers the stress testing of a portfolio against not just the credit risk but the foreign exchange risk, cloud lends itself to this type of calculation,” says Tolman.
Harpal Sandhu, CEO at Integral in Silicon Valley, a technology provider that offers the entire life cycle of FX as a service through FX Cloud, an open FX platform, says the fragmented nature of FX markets – characterised by competing hubs vying for liquidity – also particularly lends itself to Cloud-based solutions. Integral tailors its trading and aggregation solutions to match the profile of its customers which include buy side banks, brokers, prime brokers, hedge funds and sell side banks. Integral has a data center in London, server space within Equinix’s Secaucus NY4 in New Jersey along with back-up data centers in different locations across the globe. Clients can connect to more than 200 financial institutions, along with major Forex trading hubs such as Bloomberg, Currenex, Electronic Broking Services (EBS) and Reuters.
“Forex markets are opaque and heterogeneous. We allow customers to customise how they trade, who they see and who they are visible to. We take what you have and you trade on one screen,” says Sandhu. George Popescu, CEO of Boston Technologies, a provider of software solutions and trading platforms to institutional and retail brokerage firms in the FX market, points to the unsteady nature of the Forex markets, which he says makes the scalability which the cloud offers very important. “There are times when people have to trade a lot and others when things are quiet. So because of this, one has to scale the resources on a whim but also because the market is very competitive. It also means scaling for new customers,” says Popescu.
Lowered entry barriers
Sandhu points out that cloud computing technology has lowered barriers to entry in the Forex market. While Integral’s clients now include many major banks, initially its customer base consisted of many secondtier or regional banks in the US, without the resources to build their own Forex trading infrastructure. “We remove potential conflicts of interest that can arise if a second-tier bank enlists the FX services of a prime broker who will of course be able to see all their trading positions,” explains Sandhu. “Our customers have much more flexibility. They can switch prime brokers and liquidity providers at will.”
Sam Johnston, director of cloud and IT services at Equinix, believes that cloud-based services will initially be used for the offline components of Forex trading. This will include the development and back-testing of algorithms with historic market data, along with risk calculations which can require large amounts of server space. These include Monte Carlo simulations – which are deployed to reduce uncertainty in anticipating future events – a tool widely used in risk management, portfolio management and the pricing of derivatives. “The big computing farms designed specifically for these purposes are typically under-utilised ” says Johnston.
Newberry of Microsoft says cloud technology is helping to facilitate linkages between different silos within banks, which is particularly valuable, given the current regulatory push for banks to aggregate data between different asset classes and instigate a more holistic market view, rather than the traditional silos-based approach. For example, disparate execution channels and organizational silos represent a hurdle to US banks’ compliance with the Securities and Exchange Commission’s Market-Access Rule (MAR) 15c3-5, which has requirements for banks to look at total trading positions across different divisions in realtime with pre-trade checks.
Manicom of Equinix also emphasizes the scalability of the cloud and its capacity to facilitate real-time risk calculations which he anticipates to be required much more stringently, given pressure from regulators on both sides of the Atlantic. “During the day the market can move so much that a bank’s credit risk position could be compromised and it may not find out until the overnight batch of data has been processed. So bank’s will be looking at cloud solutions which provide cost-effective ways to perform this work in realtime, in an effort to control mitigate some risk and speed processing time, when in the past this approach was cost [prohibitive” says Manicom.
SaaS and PaaS
Johnston expects the initial interest in the cloud among Forex market participants to focus upon Infrastructure as a Service (IaaS) with Platform-asa-Service (PaaS) becoming more prevalent in the future.
However, Ralf Behnstedt, a managing partner at FX Architects, a team of Forex specialists advising on how to strengthen business and operations in the industry, who argues that IaaS is already used in many financial institutions, which means a migration to the cloud will not add significant benefits. “The real advantage will come from Software-as-a-Service (SaaS). If the bank does not need to host their Forex business applications anymore but can get them almost for free using the cloud – that will the big winner for the industry,” he says.
Richard Man, head of business development at BT Radianz, which has established a Financial Community Cloud of institutions and vendors, says the cloud’s delivery of the SaaS model marks a significant development for the financial services industry. “Taking a pay-as-you-go model and being able to bill monthly for software that required annual licencing in the past means that software and applications can be bundled into monthly network charges. This opens up the doors for a whole new world for discussions with application vendors,” he says.
Meanwhile, Johnston of Equinix expects financial community clouds to flourish – where a variety of financial institutions and trading firms share server storage space in a data center. Equinix’s financial customers can already obtain access to a variety of cloud services via a direct connection between their dedicated infrastructure and a variety of specialist cloud providers based either in the same facility or another data center which forms part of Equinix’s global network. Johnston also expects a flourishing of the hybrid cloud model, in which institutions choose to have some services in-house and others on the cloud. “You could have a very high performance system pushing orders into the market, while a public cloud is used to do daily batch risk analysis,” says Johnston.
In financial markets becoming increasingly dominated by ultra-low latency trading, in which leading banks and trading firms battle each other in a race to achieve ever faster trading speeds, Manicom believes the cloud may not be the best solution for front office trading systems. “If you want to fire an algorithmic generated FX order at a time when you are ahead of the market by 100 microseconds, you do not want to run the risk of your cloud server being busy at that point,” he says.
Popescu of Boston Technologies takes a similar view on the potential latency pitfalls in implementing cloud-based solutions for ultra-low latency trading. “For the masses, for the majority of traders I think the cloud is the best. But for some of the institutional market and for the highly competitive, sophisticated market, I do not think it is,” he says.
Manicom offers that the multi-tenant environment of shared server racks within the data center of a cloud computing provider can create potential latency problems for ultra-fast FX trading. He says a so-called “noisy neighbour” problem can emerge, should a resident in the data center perform an extraordinary task which involves a large amount of compute capacity. “If number crunching for risk checking a batch of data takes one hour and ten minutes instead of an hour, that’s not the end of the world. But if a trade takes 500 microseconds instead of 50 microseconds, that translates to real costs,” says Manicom.
However, Sandhu of Integral does not agree that the cloud creates problems for latency, arguing that in fact the cloud can be even more robust than internal systems used by major sell side firms in withstanding spikes of market stress. He points out that Integral’s systems are continuously monitored for potential latency issues. “On the week after the Japanese earthquake, we experienced a six-fold spike in volume in Japanese Yen trading in one hour. Yet there was no perceptible latency issues whereas two of the top five banks in the world shut systems down because they could not handle the load,” he says.
Sandhu says Integral’s customers benefit from its “distributive network” of participants which can be robust in rare incidents of market stress, in contrast to systems reliant upon a single order book to provide liquidity. “In times of volume or liquidity stress – both of which took place in the flash crash of May 2010 – you will have participants that fail,” explains Sandhu. “The beauty of having a broader interconnected network is that elements of that network can fail but it is immediately supplemented by liquidity in other parts of the network.”
Critics of the cloud also raise concerns over data security, an area of particular concern to the financial services industry where protecting proprietary data is of critical importance. The concept of shifting data outside to a third party is somewhat inimical to the ethos of the banking community, in which a financial institution’s data is closely guarded with stringent checks. Indeed, in the current climate where hackers – often employed by organized criminal groups – are targeting the systems of banks and exchanges, there is undoubtedly a reluctance in finance to put data security into the hands of a third party.
Behnstedt of FX Architects concedes that outsourcing data to the cloud does not come without security risks. “There is the risk that someone steals from the cloud in a hacking attack which would result in an unrepairable cost of reputation to the bank,” he says. Behnstedt posits possible solutions to this problem such as the encryption of all data, rendering the information unintelligible, in the event of a hacking attack. “Another solution could be that the data gets spread across many databases so that stealing one piece of data does not provide any insight,” he says.
However, Houstoun of Rapid Addition points out that large volumes of data held within the walls of financial institutions and specialist Forex firms do not contain information which could put them at risk, should the data fall into the wrong hands. “FX prices are public record. If you want to analyse a big data set of tickby- tick FX prices for a particular pattern, storing that data in the cloud is fine,” he says. “The use of the data may be very secretive but quite often the data in itself isn’t.”
Newberry says Microsoft emphasises the important of data governance to its clients in the UK, which stipulate what type of information is and is not allowed to be moved to a cloud platform. “There are particular pieces of data, particular pieces of identifiable information that have to stay within an organisation. And there is other stuff - transient data, information that is transient that has value for the next few minutes but beyond that has no value - which does suit moving on to the cloud,” says Newberry.
Aside from the concerns over data security that the cloud may bring FX firms also have to consider the regulatory data restrictions which can apply when data is transferred between different jurisdictions. Equinix, for example, has 98 data centers across 38 markets, throughout the top 16 financial centres of the world. A cloud service transferring portions of data between these different locations would need to navigate myriad data protection laws and protocols.
Popescu of Boston Technologies says data protection regulations in different countries need to be scrutinised when providing a cloud service. “Some of our customers are regulated Swiss banks and Polish banks. By regulation, they have to host systems in their data center,” he says.
While banks and trading firms navigating such restrictions should consult with specialist cloud computing providers and data protection experts, Behnstedt is convinced that such data legal issues will be resolved within a few years. “On the other hand this [data laws] also opens the door for new services. A ‘security broker’ – someone in between the financial service provider and the cloud computing provider – could ensure data security integrity,” he says.
Alternatively, banks and trading firms can opt for a ‘private cloud’ model or hybrid cloud – where a portion of computational processing is done on site while other services are outsourced to an external cloud provider – as an effective way of circumventing any legal restrictions on the transfer of data while also ensuring that business critical and proprietary data stays in-house.
“Given the growing complexities and caution banks and trading firms must now operate within when considering operations that involve data security, they are probably not going to put finance systems into the public cloud – in a cloud where the physical hardware and memory of computers and servers are in a shared environment,” says Manicom of Equinix. “So it may be better to take the benefits of cloud architecture – such as low moving from a capex to an opex spend and attractive commercial terms – without sharing the infrastructure with anyone else. cloud services might
be best located in a data center for a bank’s sole use.”
Man of BT Radianz says there will be a rise in use of hybrid clouds in the financial services industry. “We know that our customers have moved to the public cloud for specific functions such as HR and CRM. The caveat here is that while the applications may run in the cloud, the proprietary data may still physically sit on the firm’s premises and that seems to be an acceptable compromise,” he says.
Once the “prickly issues” of data security and regulatory compliance can be overcome in the financial services industry, Man of BT Radianz believes there will be an “exponential growth” in cloud technologies. “Key to this is that the regulators which are currently lagging on technology innovation can catch-up with what is coming out of Silicon Valley which measures history on what was happening six months ago,” he says.
The cloud’s capacity to enable banks and trading firms to deploy new technology without large upfront investment costs, with spending on infrastructure spread into flexible payments should make it an increasingly popular IT solution. This is likely to bolster innovation in the FX industry, as it will facilitate more opportunities for banks and trading firms to experiment with new projects. Houstoun of Rapid Addition says participants in the Forex industry should decide exactly what computational problems they want to solve before taking the plunge and opting for a cloud-based solution. “Then it is a case of aligning the model the cloud provider offers with what you are trying to do,” says Houstoun.
While Tolman of Cloud Trading Technologies argues that vested interests within banks and trading firms are resisting take up of cloud solutions, he expects these to subside as the benefits of the cloud become more apparent and firms which do not enjoy the potential cost savings offered by the cloud come under “existential threat”.
Paradigm shift in Financial IT
Behnstedt of FX Architects says the advent of the cloud is such a paradigm shift in financial technology that it could make the existing structure of IT departments “obsolete” if there is a failure to adapt. But he argues that if bank IT departments view the cloud as an opportunity – rather than a threat – a brighter future will be possible. “The role of a bank IT department can shift towards ‘managing the network’, where as before it was about ‘running the application’. Bank IT guys need to see the cloud as a challenge and not as a threat. This is a fundamental pre-requisite to being part of the change. The change will happen anyway as business always looks for opportunities to decrease the cost base,” says Behnstedt.
In fact, Behnstedt expects cloud computing to be embraced to such an extent that in the next five years the term is likely to become implicit in the same way that “client server” became implicit after the first major paradigm shift that started with the introduction of the PC some 30 years ago. “It could just become the natural way of hosting applications in future. I’m not saying it will. But it clearly has the potential to do so,” he says.