Why It's Important: Cloud computing -- loosely defined as software, hardware, storage and/or networking as a service -- is building serious momentum, on Wall Street and everywhere else. Claus Mortensen, IDC's principal for emerging technologies advisory services, predicted earlier this year that IT cloud services will form 25 percent of all incremental global IT spending growth by 2012. Merrill Lynch analysts estimate that by 2011 the cloud computing market will reach $160 billion, including $95 billion in business and productivity applications. In a survey of Wall Street IT executives conducted by SIFMA and IBM in June, the number of respondents predicting that cloud computing would force significant business change more than doubled from 21 percent in 2008 to 46 percent in 2009, making it the top disruptive technology (ahead of even operational risk modeling and mobile technologies).

Where the Industry Is Now: Large financial services firms are using public clouds (such as Amazon's or Google's) for application testing and for basic applications, such as customer relationship management. But they have been reluctant to store sensitive data in a cloud. "If you use Amazon, you share its cloud with many different companies," points out Madge Meyer, EVP of State Street. "Security is still a challenge every day for all companies." Smaller firms, with fewer internal IT resources, use cloud computing for CRM and beyond.

As with hosted applications, the primary business driver for cloud computing is cost cutting. "IT departments are always looking for ways to save money and costs, and cloud computing services are a way to potentially save money," says Mike Barba, manager, information risk management, at SMART Business Advisory and Consulting. "If you use the cloud, you don't have to purchase all the hardware and licenses required to do a project, [and] you don't have to maintain a lab. You can simply purchase a number of months' worth of hardware time from Amazon. So the cost savings can be dramatic."

Barba warns, however, that there may be a hidden cost to cloud computing, especially if using public clouds. "A lot of times information security concerns are overblown, in that often cloud service providers do things better than an IT department in a small to medium-size company; they have economies of scale to help them," he notes. But, "From a litigation perspective, what happens if sensitive data in a cloud is compromised?" Barba asks.

Many cloud services contracts stipulate that data protection is the customer's responsibility -- even though the cloud provider manages the data and the client often has no control over it. Wall Street firms need to carefully examine such contracts and be certain they'll be able to comply with data privacy and security rules even as the cloud provider makes changes, such as moving data from one facility to another. Further, IT staff need to manage this relationship, which can be a job in and of itself, Barba says. "The provider is ... not going to think clearly for you or think from the business perspective," he says. "It's a changing role for IT -- you need business and IT knowledge, and you need to be very flexible."

Focus in 2010: Public cloud providers such as Google and Amazon are beefing up cloud security. The Cloud Security Alliance, a group of information security professionals, is working on a set of best practices and an information security standard for cloud providers. Cisco recently bought cloud security company ScanSafe, which it will use to help the networking giant figure out how to make its cloud offerings more secure.

Large firms, such as Merrill Lynch, Morgan Stanley and State Street, are building internal clouds within their own data centers and firewalls. State Street's Meyer calls this "capacity on demand." "When you need it, it's there," she says.

Industry Leaders: Morgan Stanley, Merrill Lynch, State Street.

Technology Providers: Amazon, Google, IBM.

Price Tag: Varies by type of service and size of institution (e.g., how much storage, how many application users). Amazon's fee schedule ranges from 10 cents to $2.88 per hour.