INTRODUCTION TO THE CLOUD.

Lynn Strongin Dodds, Editor

The financial services industry is often at the forefront of technological change but they are only cautiously embracing cloud computing. While drawn to the flexibility and low costs on offer, concern over security and reliability persist. Providers are trying to allay their fears but investment banks and fund managers continue to tread cautiously towards the virtual world.

Marc De Groote, chief executive of Callataÿ
& Wouters, a technology firm that serves the financial services industry believes that cloud will gain momentum as “part of the overall outsourcing trend that is taking place across the industry. About half of the banks are outsourcing in some way
and I think people do understand the benefits and potential cost savings of using the cloud.”

In fact, a recent study by Centre for Economics and Business Research, a UK think tank, commissioned by data storage and solutions company EMC, predicts that 60% to 80% of all EMEA-based businesses in the banking, financial and business services sector will have adopted some form of cloud computing by 2015. Views are mixed though as to whether adoption rates will be that rapid.

Jon Milward, director of managed and support services at IT consultancy, Northdoor plc, believes financial services firm have to put cloud technology into perspective. “In many ways cloud computing does not offer any new functions in that access to storage, applications and servers are provided and managed by a third party versus in-house.” he says. “It is though a new way of delivering those services and companies have to understand that the cloud will not make all their IT headaches go away.”

The main benefits as with any IT outsourcing are well documented. Financial firms would not have to develop implement, maintain or upgrade technology. In addition, due to the on-demand nature of cloud computing, there is both scalability and elasticity. For example, if a bank requires surplus computing power or storage space due to an occasional spike in demand, it can look up to the cloud.

There are though several concerns, the first being the confusion over the definitions and the different terms that are bandied about such as – cloud computing, software-as-a-service (SaaS) and application service provider (ASP) which can be viewed as variations on a theme. A recent report by Celent defines cloud computing as the outsourcing of IT hardware – such as storage, servers and other infrastructure services – to a vendor that provides these services via the internet on an on-demand basis. Users therefore pay only for what they use and can call on these services as and when they need them.

SaaS, on the other hand, refers to the outsourcing of various applications, but not hardware. It may seem similar to ASP but Celent believes there are differences. The use of private networks and the constant customisation made the ASP model economically unrewarding, whereas the SaaS model is based on all users having access to the same application and via the same internet-based route.

The other issues, according to Milward revolve around availability, the legal contracts as well as the security of data stored and accessed remotely. “As with any technology such as Amazon or Google mail, there are outages and as a result, firms have
to look at whether they will be compensated if the service goes down. As for security, companies have to check whether they are allowed to have their data stored in a different location than their home market because some regulators do not allow this. Also, in terms of overall security, the best advice is to use a large provider with a track record.”

In fact, there are many vendors in the marketplace who have jumped on the cloud bandwagon and relabelled their offerings as cloud compatible. Stuart Berwick, chief executive officer of Singletrack Systems says, “We have seen several established IT vendors entering the cloud space positioning themselves as cloud providers to align themselves with this new trend. What
we are seeing is that banks and asset managers are gradually making the move with smaller firms making the move first. It is typically starting with applications like CRM [customer relationship management] and research management.”

Private versus public

These views are underscored by a report by Gartner which notes that cloud computing will evolve in stages emigrating first to what are known as private clouds and then on to public clouds over a period of years. A private cloud typically means that the data centres are still owned by
the corporate users and managed in-house. They take advantage of cloud-enabling technologies such as the virtualisation provided by VMware and the internet. By contrast, a “public cloud,” usually means that nearly all of a company’s information
is outsourced and managed by a third party that owns clusters of data centres.

Simon Watts, chief architect at DST Global Solutions, says, “Concerns over security are making asset managers, for example, extremely wary of public clouds but we are seeing an increase in the use of private clouds because they are ring fenced within an organisation. I think the usage will ramp up as organisations become more comfortable with the technology but to date most of the public clouds are being used by the consumer and retail sectors.”

In the financial community, the first movers have tended to be the smaller asset management houses that do not have the deep pockets to develop their in-house capabilities. Alternative fund managers are also jumping on the bandwagon. “We are seeing an increasing number of hedge funds and private equity firms who are using our services for fund raising,” says Philip Whitchelo, a vice president at technology group IntraLinks. “For example, instead of private equity firms sending out individual prospectuses to investors, they will take all the information about a fund and put it in a cloud-based service for investors to read. This makes the process much more efficient and cost effective.”

Public clouds, particularly those focused on information based delivery services are though gaining traction among the larger players. For example, Fidessa has enjoyed success with its Fragulator and Tradalyzer products. The former offers comprehensive global content with specific regional analysis on the US, Canada, Japan and Asia as well as Europe where it is pulling data from more than 40 platforms. The tool aggregates, normalises and analyses all of the data reported by dark pools, systematic internalisers and lit venues to the various trade reporting facilities.

The Tradalyzer which is based on this data offers customisable consolidated trading analysis across Europe’s fragmented markets. The Tradalyzer allows users to compare an individual trade against data consolidated by Fidessa who in turn assesses the execution quality of that particular trade and rates it against a set of widely used industry benchmarks. These include arrival price, last trade, interval volume-weighted average price (VWAP), 20% VWAP market open, market close, and previous close.

According to Steve Grob, director of group strategy, Fidessa, the services run on Amazon. com’s S3 (Simple Storage Service) and are data encrypted and protected. “Although the financial services industry has concerns over the security of the cloud, there are well-established practices for data integrity and security. If you follow those, then there is no reason why there should be a risk.”

Looking ahead, Jose-Antonio Martinez, managing director of Radianz & Payments, BT Global Services believes that the new world regulatory order will be one the key drivers generating demand for cloud services.

Traditionally, the applications accessible via the BT Radianz cloud have been focused on pre-trade, trading and post-trade usage but the firm has expanded its horizons into the compliance and governance arena. Users can tap into LockPath’s Keylight platform for governance, risk and compliance (GRC).

The platform provides US and internationally regulated businesses with a fully automated governance, risk and compliance data reconciliation and reporting process. It consolidates business critical risk and compliance data and provides a single point of control that aims to ensures compliance across the organisation

This was the first of several SaaS applications being made available through the BT Radianz. Customers can leverage the BT Radianz cloud to access the Keylight application, while having the option to simultaneously host data in any of the global BT Radianz Hosting data centres

“Meeting regulatory requirements is one of the biggest challenges facing the financial services industry”, says Martinez. “As a result, there is
an increased demand for automated solutions to manage governance, risk and compliance. Overall, I think we will see an increase in the use of cloud services but many companies may choose a ‘hybrid’ solution whereby some of their more standard applications will make use of the cloud, whilst others will be hosted in-house. Clouds that are able to interconnect easily with these in-house applications and the corporate networks and clouds they’re hosted on will succeed.”