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The Rise of Cloud Computing on Wall Street

Looking to cut their capital expenditures on servers and applications, financial services firms are warming up to private clouds run outside their firewalls.

As Wall Street continues to struggle with volatile markets, uncertain global economic conditions and vanishing profits, many firms are looking to reduce their capital expenditures. Targeting the costs of building data centers and maintaining server farms, more and more Wall Street organizations are looking to outsource pieces of their infrastructures to the cloud.

While all of the largest financial firms already are experimenting with cloud technology in non-production areas such as server provisioning and storage networks, most remain cautious about security and refuse to let client data leave the relative safety of their own facilities. "We want to manage our own destiny," says Darren Tedesco, managing principal, innovation and strategy, at Commonwealth Financial, an independent broker-dealer that built an enterprise private cloud to host the firm's wealth management platform.

After facing sluggish profits and lower trading volumes last year, however, Wall Street firms are looking to convert large, up-front "cap-ex," or capital expenditures, into more variable "op-ex," or operational expenditures. As financial firms react to tighter IT budgets and the pressure to allocate resources to developing new products and entering new markets, the adoption of third-party cloud-based applications and services is expected to gain momentum in 2012.

[For more on the rise of cloud computing as a dominant force in financial services IT, see Options IT CEO Nigel Kneafsey's related article.]

Increasingly, large financial firms are open to the software-as-a-service approach, says Joe Stensland, SVP and managing director of wealth management services at Scivantage, which runs its retail online-trading portal and professional trading and tax reporting applications in a private cloud. "We deliver the application with a private cloud and allocate the resources needed for each client deployment so they don't have to bring in resources and infrastructure," Stensland says. While the interest in cloud services is moving up the list of priorities at large firms that have become cost-conscious, according to Stensland, "Midrange firms have become even more interested in the cloud's pay-for-what-you-eat philosophy."

One of the major advantages of the cloud is its ability to help with capacity planning, Stensland notes. In the past, financial firms added capacity to be prepared for sudden bursts, but now they don't want to incur the additional costs unless they need it, he explains. With the cloud, firms can have "burst-ready" capacity, which is even more critical today than in the past due to the current volatility in the markets, Stensland says.

Amid the intense focus on the bottom line, some buy- and sell-side firms are migrating to applications managed in private clouds outside their own data centers, confirms Bob Guilbert, managing director of Eze Castle Integration, a private cloud provider of infrastructure, applications and services to hedge funds. Guilbert says cloud services now can offer high availability and robust security, without requiring firms to increase IT head count to manage software, storage and networks. "We still see the business trending heavily toward the cloud, based on the benefits that people get -- lower cost on the infrastructure and maintenance, and they don't have to do a technology refresh," he relates.

But clients that already have their own established infrastructures might take a first step toward cloud computing with an order management system or Eze Castle's disaster recovery services, Guilbert adds. "As they move toward a technology refresh, that is the point at which they would look at application outsourcing," he says.

As an example of the growing trend, Guilbert points to the hedge fund "hotel" that Eze Castle opened on a floor above its offices in New York City. "We provide office infrastructure, network connectivity, phones and access to the cloud," he says. Noting that hedge funds that are waiting for their permanent office space can move in and become operational very quickly, Guilbert explains that funds can access Eze Castle's cloud-based services via the Internet or though point-to-point circuits.

Going Public in 2012?

But while financial firms embrace private clouds, the big question for 2012 is whether Wall Street, facing economic pressures and sagging revenues, will consider the public cloud infrastructure and solutions offered by Amazon Web Services (AWS), Google and Microsoft. These huge operators of public clouds offer tremendous economies of scale by shifting workloads to virtual servers operating all over the world. Even as companies such as Netflix run their businesses via AWS, however, so far financial institutions are staying grounded in the private cloud.

But this could be changing, according to industry sources at cloud providers. "In financial services, many of these organizations are being pressured to adopt some form of cloud services," says Bryan Thompson, VP of services at Tier 3, a provider of private, public and hybrid cloud solutions. "As they look at where their IT dollars are going, they're looking at what kind of functions they can migrate [to the cloud]."

High-frequency and other trading solutions are not conducive to being moved or virtualized into public cloud infrastructures, acknowledges Thompson. But he says post-trade analytics or any kind of information analytics that require a lot of market data, storage and scalable computing resources -- without real-time updates -- are strong candidates to move to a cloud-based infrastructure.

While public clouds still may be a leap for capital markets firms, asset managers, hedge funds and broker-dealers are tapping into private cloud applications deployed in third-party data centers as well. One of the drivers of the trend is the wider variety of sophisticated applications specific to trading, asset management, market data and corporate actions that has moved to the cloud. "We're seeing everything from accounting packages to risk to EMSs to OMSs," says Eze Castle's Guilbert. "You can get FIX connectivity and market data feeds into a cloud site. It's basically shifted from an on-premise solution to a cloud provider that can deliver high-volume services to a wide variety of hedge funds."

Typically, the public cloud is a multitenanted infrastructure in which everything is shared, Guilbert notes. But he says many of the private cloud deployments have dedicated infrastructures, including dedicated storage, alleviating the concerns about shared infrastructure. Eze Castle's cloud services can either be based on the multitenanted model or can include dedicated infrastructure. "It's either a security trade-off or a price trade-off," Guilbert says.

Private Clouds: Overcoming Trust Issues

Still, many financial firms choose to run their private clouds internally to avoid moving their clients' data outside of their own firewalls. San Diego-based Commonwealth Financial Network, which serves 1,500 financial advisers throughout the United States, built its enterprise private cloud to host its wealth management platform, Client360. Of the firm's 135-person technology staff, 15 percent are really focusing on keeping the cloud running in an efficient manner, while the rest are developing and supporting the software in the cloud, according to the firm's Tedesco.

"We just trust ourselves when we deal with our clients' data and being the full cloud for our financial advisers," Tedesco says. Though Commonwealth may change its tune in the future, "The cost benefit and risk analysis doesn't pan out for going to a third party at this point," he adds.

That doesn't mean, however, that the firm isn't working with third-party providers. Hosted in Commonwealth's two primary data centers in Massachusetts, Client360 encompasses portfolio management, document imaging and management, CRM, trading, and wealth management functionality in one comprehensive and integrated solution, according to Tedesco. But the firm also is taking advantage of application programming interfaces (APIs) and web services to access applications that reside outside of its firewalls.

For instance, Commonwealth taps the public Internet to receive real-time market data on U.S. equities from Xignite, a cloud-based provider of market data. "The market data [from Xignite] is coming over the Internet," notes Tedesco, stressing, "It's not personal data or private data."

Tedesco says Commonwealth is using the cloud as way to improve the user experience so the adviser doesn't have to think about technology. "We're going to leverage clouds -- whether it's Xignite or our own proprietary software -- to allow an adviser to do five or six different things in one cohesive piece of software," he asserts, adding that Commonwealth is building a new trading engine that leverages companies such as Xignite to pull in the real-time data.

"[Advisers] don't need one tool to do their jobs -- they need five or six," Tedesco continues. He explaining that Commonwealth leverages third-party tools -- such as Microsoft for CRM -- and puts wrappers on top of the different applications to create a cohesive look and feel for financial advisers. "There are other places on our wealth management engine where we have a proprietary back end," Tedesco adds. "That's kind of our cloud strategy: a cohesive front end where we make all the tools a financial adviser would want in a secured environment."

In terms of computing power, Commonwealth has reaped cost savings from using virtualization to throttle the data and CPU utilization, Tedesco reports. "I can see what's happening and assign more memory and CPU units to whatever is going on," he says. An early adopter of VMware, Commonwealth has used virtualization for almost five years. According to Tedesco, the technology has enabled the firm to add fewer physical machines, saving on space and cooling costs.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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