The talk about cloud computing in financial services doesn’t slow down despite a very slow pace of growth. Regardless, this article gives a good summary of my views on the subject:
“The cloud is certainly on everyone’s radar, but there are a lot of issues still to be resolved on the process and regulatory side,” said Kevin McPartland, senior analyst at Tabb Group, a Westborough, Mass.-based research and advisory firm focused on capital markets.
“Banks are not using commercial external clouds like Amazon and Google. If they use external clouds, it will be many years away. But quite a few are looking into internal clouds for IT systems, testing and less mission-critical apps. The cost savings that can be had are so big, it’s impossible for CIOs to ignore the opportunity,” McPartland said.
Everyone loves to talk about cloud computing adoption in financial services because it seems like such a ripe market for the technology – however regulations and privacy concerns will get in the way for a long time until the cost efficiency gains can no longer be ignored by CIOs. Even still, its all about private clouds:
“It’s too early to say there’s significant investment in cloud,” said Kevin McPartland, senior analyst at the Tabb Group. However, he said financial firms have crossed the hump on awareness, and most are experimenting, planning or otherwise exploring cloud computing within their walls.
“There are definitely pockets of testing and proof-of-concept [projects] going on,” he said.
There is a lot of buzz around cloud computing, but its use in financial services is still negligible. This piece examines how State Street is using internal cloud technology to create cost efficiencies.
Creating cost-savings to put into other areas of development is why boards have come around to cloud. Yet, as Kevin McPartland, a senior analyst at consultancy Tabb Group, notes, it is not the technology that institutions fear—it is how that technology fits into the business scheme.
“Cloud technology has been around for a long time, but for financial services, people still want to really vet not the technology, but the approach and process to see if it really works and for what types of applications and what types of business functions,” McPartland says.
Microsoft is making a run at financial services businesses, and cloud is a huge part of their strategy. The more I speak with them the more I realized they can’t be ignored and not all clouds are created equal:
Microsoft’s Windows HPC Server, as its cloud computing offering, may still function best on Microsoft or .Net tools, but the vendor has been figuring out how to transform this, according to Kevin McPartland, senior analyst at consultancy Tabb Group. “They have made it pretty clear that this is going to be a big focus for them,” he says. “Anytime Microsoft says that, people need to pay attention because they don’t do anything half-heartedly.”
Based on Microsoft’s consumer products, financial industry users can expect notable advances and improvement, observes McPartland. “Windows 7 is so much more stable and advanced than XP,” he says. “It’s a similar transformation. That’s where they are going. They have complex event processing (CEP); they had HPC server software and because they have such reach and such a deep set of products, it’s definitely an interesting area to keep an eye on.”
The enhanced functionality available when using all Microsoft products is a key to its cloud offering. “What they get the most flack for is that it works best when you are running with .Net or Microsoft tools,” says McPartland. “But if you are already a Microsoft-focused company then the efficiency … is apparent pretty quickly because it’s all so integrated.”
Following the panel I moderated at the Telx financial service event, they shuttled us all upstairs to talk to TMCnet. Here is the interview:
Cloud computing has a long way to go before it is widely adopted on Wall Street, but people on Wall Street certainly want to talk about it. In the last month, I have spoken at two conferences focused on adoption of cloud computing by financial services firms, one hosted by the Wall Street Technology Association (WSTA) and the other by the International Securities Association for Trade Communication (ISITC).
Cutting to the chase, cloud computing usage on Wall Street is minimal, and regulatory/security issues, not technical ones, will severely limit its growth over the next few years.
TABB Group’s 2010 US Equity Technology study showed that only 4% of sell side firms were using cloud computing in their equities businesses. And in those few cases, they were not using the widely known cloud offerings of Amazon or Google, but instead employed private clouds running within their own firewalls. Most firms cited security concerns and regulatory requirements surrounding customer and proprietary data that made it nearly impossible to use external cloud offerings despite clear cost efficiencies.
The story is not all bad for clouds, however. TABB Group sees a slow growth in internal cloud deployments among larger institutions, as these provide considerable cost efficiencies by increasing overall server utilization. Then there is SaaS (Software as a Service). This is the model upon which Salesforce.com, Gmail and a large number of web based products are now deployed. SaaS applications run within a cloud environment by definition, but the infrastructure is even further abstracted by the application layer. Banks will still be wary of letting proprietary data out of their sight with SaaS, but for established products such as Salesforce.com, continued adoption by buy and sell side firms of all sizes is expected.
So will bulge bracket investment banks ditch their private data centers and move entirely to a Microsoft cloud? I can say with some certainty that will never happen. But if regulations can catch up with technology, and cloud security is better understood by Wall Street, more “cloud days” are ahead.
Those interested in my presentation at WSTA can access it here.
This article refers to a presentation I gave in Boston on March 22, 2010 about cloud computing in financial services. Sure people are using Salesforce.com and other SaasS applications, but the use of cloud computing as an approach to resource allocation has a long way to go. A small excerpt from the article:
That’s the key finding of a cloud computing study done the by the Tabb Group in December. The report’s chief author is Tabb Group senior analyst Kevin McPartland, who spoke last week at the International Securities Association for Institutional Trade Communication (ISITC) in Boston.
As for trading systems, relying on computers somewhere in the cloud extends the latency of executing a transaction, which in today’s environment of millisecond competition would put traders at a distinct disadvantage.
But the reason is not technical in the back office. There, regulation means cloud computing is not a real option, yet.
“Technologically, it’s ready, but from both cultural and regulatory [perspectives], financial services are not ready for cloud computing,” he said.
There is constant talk of whether cloud computing will make its way onto Wall Street. I’m not talking about the use of web based CRM, but realshared storage and compute power cloud computing. The hybrid idea is an interesting one as it could allow firms to scale quickly without keeping the huge amounts of excess capacity they currently need in the event of unforeseen market events. Some excerpts of my commentary:
Hybrid cloud is still probably a couple of years away for even the more experimental financial services firms, while they focus on virtualizing and cloud-enabling their applications in-house. But eventually the hybrid-cloud model could be the solution to financial services firms’ cloud security worries and bridge the confidence gap. As time goes by, we will likely see applications being developed for deployment on hybrid clouds, although probably not this year, says McPartland.
Latency is another problem: Firms are reticent about deploying cloud in the equities space and other latency-sensitive areas. In a recent survey of equities technology executives in sell-side firms, the Tabb Group found that only 4 percent of firms questioned actually had cloud deployments and most of those were internal, according to McPartland, the report’s author. “Bulge-bracket firms are experimenting with cloud for things like back testing and other non mission-critical activities,” McPartland says. Seventy percent of firms questioned do not have a cloud strategy at this time, although a quarter of firms said they were looking into it. Seventy-two percent of those questioned said that security was a concern.
No one is using cloud for real-time equities trading applications, McPartland says, because it does not yet meet the low-latency demands of algorithmic trading.
This article talks about adoption of cloud computing by hedge funds. Most agree it has a place, but that place is limited. A clip:
Kevin McPartland, a senior analyst with the research and advisory firm TABB Group, says one function that may not be cloud-ready is trading. Placing trade-order management or execution onto servers in a cloud can add time to the process. Being late to a trade—even by a fraction of a second—can often be costly, and that concern is enough to deter most hedge fund users, McPartland says. “It is pretty likely that almost no one is using a cloud to run a trading application. It is just too slow,” he says.
But that could change dramatically if financial regulators took a more active role, he said. “If the SEC, CFTC or the proper regulatory body looked at certain cloud environments and was able to certify that they were secure enough for customer data, then we would see a whole new industry within the cloud computing world of financial services-targeted firms, that would be registered with regulators and clients could be assured that their data was secure,” says McPartland. “We think this could be a huge improvement for the industry.”