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The Virtual Markets

The cloud has changed the way the majority of us live our lives. Not just in terms of personal storage but also when it comes to applications and services we use on a daily basis and the way that we work. With the FCA releasing guidance for firms outsourcing functions to the cloud or to third parties, it seems that even capital markets firms cannot resist the force of change forever.

Capital markets firms are gradually overcoming fears around security and speed, attracted by the flexibility and cost-saving potential of cloud services and many have already moved to a private cloud model. The question is, how long before we see firms moving some operations to a more public cloud? And when this happens how will they access such solutions?

Many currently use cloud-based services for a multitude of functions – trading systems, trade monitoring and data storage for example. Certain regulatory solutions are also ripe for delivery through the cloud, namely those that offer solutions that don’t need to be “always on”. For example, algorithm testing or market surveillance under MiFID II. Neither of these need solutions that are constantly active and so firms can simply use them on an “as-needed” basis. The same applies for the access needs to such solutions. For example, does bandwidth need to be constant?

What’s even more interesting, and potentially game-changing, is the idea of the capital markets as a whole moving into the cloud, but how might this happen?

Lead and they will follow

The answer, in part, lies with the exchanges and how they are accessed. Exchanges have always been physical places, from the earliest forms in coffee shops and under a buttonwood tree to the modern monoliths suffused by the quiet hum of microprocessors. Increasingly, however, the physical location is becoming less important.

Exchanges, having effectively morphed into server farms, are no longer located in the buildings with their names on the door. In the drive to reduce latency, trading firms co-locate with exchanges at out of town centres or in locations close to them, and have been doing so for a long time. The actual location of a single exchange is becoming less relevant with liquidity sources being fragmented across venues. In addition “access” technology can make physically separate liquidity pools look like a single logical location. Indeed, as trading activity grows and the number of trades executed in each second increases at an exponential rate, ever more space will be needed.

It’s not a huge leap to see that moving to a secure cloud infrastructure makes sense. Clearly it’s not going to happen overnight but there’s no real reason why – if security and regulatory concerns were met – such a move couldn’t work. The technology is in place for it to work and the desire from capital markets firms, although nascent, is increasing.

Connectivity but not as we know it

Once exchanges move to a cloud environment, market participants and trading activity will follow. Advantages gained from being in the best rack of a data centre will be less attractive. Participants will start looking for better experience all around, an experience that reflects the flexibility they get in a cloud environment for their compute and storage needs. Such flexibility, or elasticity, will be expected from the way they reach the cloud as well. As such users will expect an elastic bandwidth, topology, and commercial model. Service providers need to be ready for such new user expectations as well.

So in this hypothetical world, what will connectivity look like?

Connections to the cloud will be key and will need to reflect user experience in the cloud. If the model is a hybrid, semi-public cloud then it’s likely that there will be more than one cloud-based ecosystem and so connections to each of them will be necessary. However it won’t be about latency, or capacity or reliability alone. Flexibility will be the watchword.

Networks will need the ability to flex according to demand in real time. Not just in terms of capacity, but also in terms of topology, functionalities, and the commercial wrap that goes with that. In addition, users will expect real time transparency into their network performance just like they get with their cloud experience. In this new world, point-to-point connections between participant and venue will be replaced by the one-to-many connections to multiple cloud ecosystems across multiple locations. In effect, connections will become a self-service gateway to all the services needed to operate in the capital markets. This new model will require new, smart networks able to scale, grow and develop with the business. Judging by the aforementioned guidance from the FCA, it’s not too far off.


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