EMS providers are increasingly moving their systems to the cloud, but the move has created some concerns for clients, particularly on the buy-side, who resent the operational demands, the mandatory shift, and the perceived expense. What are the benefits, why the shift, and how can vendors circumvent the pitfalls of client reluctance?
There is no question that cloud adoption is accelerating, and the giants of the skies (Microsoft Azure, Google Cloud, Amazon Web Services (AWS)) are becoming increasingly influential in the financial markets arena. Partnerships such as LSEG’s 10-year tie-up with Microsoft and Nasdaq’s multi-year deal with AWS are competing to develop radical new infrastructure, with entire markets now migrating – while giants such as Aladdin and Refinitiv are transforming the way market data can be accessed through the cloud.
In the OEMS space, the shift to the cloud has also accelerated in recent years, with smaller players such as Cowen-backed Enfusion and LSEG-owned TORA creating new efficiencies and opening up opportunities for smaller asset managers at a scalable and affordable cost. The big EMS incumbents have not been slow to recognise the advantages, with some major cloud migrations taking place in recent years.
“The landscape is constantly changing: with new venues, new protocols, new partnerships, new algos, new sets of market data, new ways of analysing execution quality,” explained Vidya Guruju, director of product management at Charles River Development, which recently shifted many of its clients to the cloud. “As an OEMS platform we have to stay on top of this and quickly react so our clients have access to a broad and best set of market data, analytics and liquidity pools.”
From a vendor perspective, the cloud allows them to be agile, deliver updates faster, connect to third party providers more easily, and offer services at a more flexible and cost-effective rate. But for clients, on both the buy and sell-side, the move has been far less popular. Few are prepared to go on record to register their displeasure publicly for fear of offending their providers – but for some, under the surface and behind closed doors, resentment is bubbling away – with fears of cyber security, expense, operational logistics, and more.
“It’s very understandable, as it’s a huge change,” sympathises Guruju. “Like everything else, it is a risky move until proven otherwise – in terms of uptime, control, access and other factors. On the one hand you have the obvious advantages but on the other there is the fear of losing control.”
A positive spin
On the plus side, most vendors assure clients that cloud-based services are cheaper, with no upfront capital expenditure for infrastructure – while it’s also more cost-effective to let experts handle and manage the system for you, with no in-house hardware to maintain. On-demand scalability, quicker access to upgrades and quicker connectivity to newer datasets and providers are among the other advantages. Additionally, the cloud provider manages all the required patches and updates from a security perspective, which can allow the vendor to focus on functionality.
“The cloud has revolutionised how we work. Whereas in the past, teams of developers would have to work on premises to implement or upgrade systems, this can now be done remotely – improving efficiency but also greatly improving the power and capabilities of trading technology,” said Andrew Morgan, president and chief revenue officer at TS Imagine.
“There are also significant cost implications for those who are slow to adopt. Cloud-based EMSs do not have the overheads or complexity of expensive, cumbersome and inflexible on-premises systems that are quickly outdated – a major disadvantage when budgets are under pressure across the board.”
Adi Prnjavorac, who heads up FlexTrade’s cloud-native EMS solution, Spark, agrees. “The main driver for FlexTrade to bring Spark EMS to market was to offer small to medium-sized asset managers and hedge funds a solution which fitted their business and technology requirements. One of the primary drivers is cost and making technology accessible for firms who want cutting-edge EMS technology but don’t have the resources or business requirements to deploy a traditional on-premise solution.
“It can also simplify integration. For example, we offer an ecosystem of out-of-the-box integration options, such as our recent market data partnership with SIX Financial, which can be rolled out quickly via the cloud, and we can integrate with other solutions, such as Finbourne’s LUSID PMS, relatively rapidly and easily.”
A nervous response
However, a cloud migration can be a big deal for both the vendor and the buy-side, and it can be easy to get bogged down in a myriad of minute details because of the importance of the move. “Lines of support, access to data, how change can be initiated, expected response times… it’s a lot,” agreed Guruju. “To avoid pitfalls, all stakeholders should be involved in defining and approving those processes.”
Security is one of the biggest concerns. “It’s not just the security of the application running in the cloud. It’s also the security of the company running the application in the cloud,” explained Alex Wolcough, CEO of advisory firm Greenbirch Group.
“Smaller firms that provide trading software used to just go and install it on bank premises, which was fine. Now they’re saying that they’ll put it in the cloud and run it for you, and suddenly the bank needs a whole lot more information about their security processes as a company, and that can make them very nervous, so they push back against the cloud switch.”
Devil in the detail
Another pitfall exists around regulation. Both the European Banking Authority (EBA) and the UK’s Prudential Regulatory Authority (PRA) have rules and guidelines around outsourcing technology that typically require vendors have various controls in place, such as information security, which can worry buy-side and bank users if these are not clearly defined in the vendor contract. However, standards do exist that help define those controls, like ISO27001 for information security systems, that can help provide the relevant detail and can be referred to.
“Cloud software providers need to understand these regulatory requirements, get themselves certified, and then put those qualifications into the client contract so that the user knows that the guidelines will be satisfied,” urged Wolcough. “Then, funnily enough, they often find the client is a lot happier about moving to the cloud because they know they’re not going to get in trouble with the regulator. Getting the technology working in the cloud is the easy bit. If the vendor does the follow-up legwork, it all becomes a whole lot easier.”
“Today these certifications are no longer optional,” agreed Morgan. “At the minimum, most customers require their fintech cloud providers to have both ISO and SOC certifications.”
Sell-side reluctance
It is worth noting that, anecdotally, it would appear that there has so far been a wider adoption of clouds systems on the buy-side as compared to the sell-side – which is as much vendor-driven as it is client-driven, and is often as result of the specific business and technology requirements of the firms.
“Sell-side firms, who demand extremely high throughput from their trading technology, traditionally prefer their dedicated hardware to run solutions or may not want the added complexity or abstraction a cloud-native solution brings,” explained Prnjavorac. “On the business side, they must satisfy a raft of regulatory requirements. Therefore, they wish to have control in-house rather than effectively outsourcing to a cloud-based provider. The outcome is that adopting a ‘true’ cloud-based trading solution has been comparatively slow.”
Another important distinction is the difference between cloud-based and cloud-native.
“Over the past few years, the industry has seen various ‘lift and shift’ initiatives. These have involved moving the same architecture and software from an on-premise solution to a private cloud and offering access via a browser-based connection, versus a solution like Spark EMS, which lives in the cloud,” said Prnjavorac. “While not a trivial task to shift, fewer use cases of cloud-native solutions exist, making it harder for the sell-side to lean on other examples to be more confident in the shift. It will take some very large sell-side firms to move first for the adoption to become more widespread.”
Growing confidence
However, despite the initial fears, the move towards the cloud looks firmly set to continue, with concerns dying down as confidence grows.
“Of course, we have seen additional due diligence undertaken by clients, largely in the areas you’d expect – security, what happens with client data when it’s in the cloud, and any potential degradation in performance they could see versus having the solution on-premise,” said Prnjavorac. “However, as more firms have adopted [cloud-based systems] and the industry embraces cloud-based EMS technology, this hesitancy has reduced over time.”
“Confidence in the cloud has grown dramatically, as it has become an integral part of the operations of financial services businesses, and [this] has greatly reduced pushback,” agreed Morgan.
Where next?
As the shift continues, the opportunities for interoperability in terms of applications become ever bigger.
“Having a truly multi-asset cloud-based system allows teams to work as a single unit – allowing them to collaborate closely with a clear, real-time view of activity from across a trading desk,” explained Morgan. “With OMSs, risk management and portfolio management systems also on the cloud, they can be combined into a single all-encompassing multi-asset, multi-functional system. In volatile markets, unified systems supporting sophisticated investment teams are essential to navigating risk and capitalising on opportunity.”
Other possible applications include the ability to conduct analytics, market data processing, regulatory functions such as FRTB reporting, bank capital adequacy models and even AI functions on the cloud – something else that has the potential to decrease user costs.
“It’s much easier to switch a capability on and off, rather than having to deploy it on a server in-house, buy the software, maintain the system,” said Wolcough. “Then you’ve got to justify owning the software on an annual basis. Meanwhile in the cloud, you can just use the function for as long as you want, say a couple of hours a day to conduct your analysis or during busy trading times, and then switch it off for the rest of the week.”
Whichever side of the fence you sit on, there’s no denying that technology has become critical to the success of sophisticated investors – and that technology is on the move.
“Market complexity and the pace of change are accelerating,” concluded Morgan. “Those who continue to rely on legacy systems will find themselves at a competitive disadvantage – firms need fast access to liquidity and advanced trading tools to stay ahead of the game.”
©Markets Media Europe 2023
