The pace of change to cloud services has been gathering for some time and is now accelerating. In research commissioned by Integral, a Palo Alto, California headquartered cloud-based eFX technology provider, nearly all respondents believed that the cloud would be used in their workflows in the next five years.
The research was conducted by FX Markets on behalf of Integral between September last year and January. It surveyed 94 heads of FX trading and senior FX managers in banks and buyside institutions around the globe. It found that 69 per cent of respondents expect their FX trading flows to be either entirely in the cloud or to use a hybrid of cloud and on-premise solutions within five years.” The report found that 45 per cent of respondents were not using the cloud at all at present and this figure would dramatically reduce to only 2% within five years. Speaking to e-Forex, Integral’s chief revenue officer Vikas Srivastava commented, “Respondents signalled the expected shift to cloud is driven by lower cost of technology, ease of integration, ability to customize, and accessibility for distributed workforces. Looking ahead, we expect that the increased use of cloud will help market participants of all shapes and sizes perform their FX functions on a daily basis cheaper and more efficiently with necessary access to sophisticated workflow.”
Better, cheaper, easier
How individual market players can benefit from the cloud depends on what their approach to the market is. For example, a high frequency trader seeking to transact large numbers of rapid-fire trades may find latency a challenge in the public cloud.
“In FX trading, latency requirements make the transactional side of the business a challenge for both liquidity providers and consumers of those prices,” explains Alan Samuel, Chief of Sales at Beeks, a leading infrastructure and connectivity provider. “Our customers still expect the servers we provide to either be co-located in the exchange or in a connectivity rich data centre such as LD4/NY4/TY3, which has private and secure connections to multiple electronic communications networks (ECN), liquidity providers and market data suppliers.”
However there is universal agreement that the public cloud provides the ideal environment for data and analytics. “What firms do need,” Alan Samuel adds, “is the ability to exchange data between that trading environment and the public cloud, to archive data, to communicate with other applications that are not latency-sensitive. That is why the secure, private connectivity between clouds is becoming more and more important.”
And this is where the distinction between public and private clouds comes into play. At present market participants will tend to use the public cloud for public data, perhaps storing large amounts of their data and having access to compute power on demand. But depending on the type of user and their security needs, private clouds may be more appropriate for other aspects of their business.
Meanwhile, the cloud offers obvious cost and scale advantages. The move to an existing cloud set up and the ease of connecting to it and its ecosystem reduces the capex costs of building systems in-house. Using software-as-a-service (SaaS) on a take and pay basis is easy to do by comparison. And it’s scalable. The more compute power needed, the more you take down from the cloud.
This is valuable for established market participants as well as for new players but as Terence Chabe, Business Development Manager at Colt Technology Services, a communications and connectivity provider notes, many new participants leap straight for the cloud.
“If we look at cryptocurrencies, a lot of platforms tend to reside in the cloud. They tend to have started in the cloud anyway, and there may be a requirement for low latency connectivity between the different exchanges that suits the cloud. Then you’ve got the retail model of connecting to the cloud where traders may be using apps on their phones to be able to buy and sell. At the same time a lot of those exchanges are also looking at being hosted in well know liquidity centres like NY4, LD4, TY3 and SG1 to attract institutional flow and traditional FX technology and latency thresholds”
It’s easy to see that for an increasing number of users, the cloud offers better, cheaper and easier connectivity.
Clouds for courses
However, there can be a distinct difference between the needs of sellside and buyside firms for example. Integral’s Vikas Srivastava characterises it in this way. On the sellside, “Being competitive means keeping up with changes of all kinds – regulatory requirements, client demands, product changes, and unpredictable market volatility. These changes affect sellside firms in a highly significant way because the only way to compete and win in electronic workflows is having flexible and scalable technology that enhances what makes you unique in your market. From customer-facing platforms to workflow automation to risk management tools, banks need technology that can be configured to suit their specific business flows while enhancing their differentiation.”
The buyside may have different requirements. “It’s about taking into account their key objectives,” Vikas Srivastava explains. “They have a duty to achieve and prove best execution. They want access to a high-quality execution management system (EMS), and they also want connectivity to different types of liquidity, ranging from their bank relationships to indirect access with non-bank market makers. They would like a trading system that can fit seamlessly with their existing order lifecycle and order management systems. Traders especially appreciate a system that makes their lives easier. Whether this takes the form of an auto-execution system, low-cost access to trading algos, or simply the ability to upload hundreds of orders to net and trade all at once.”
If these are sellside and buyside requirements then the next question is which cloud to use. Which on-ramp might they use the access the great information highway in the sky?
The point is of course that that highway is not in the sky. The cloud resides on different servers and it becomes a matter of control, trust, ease and cost as to whose servers a business chooses to use. Will they use a private or public cloud for example, or maybe a hybrid of the two?
Speaking from experience, Joseph Pickel, Head of Product Strategy at IPC Systems Inc., a New Jersey based communication systems provider, says pure play public or private cloud usage may be something of a rarity. “I think every sell side firm has embraced public clouds to some degree. How they define that though is interesting, because public cloud integrated into their own private cloud has a tendency to be called their private cloud, as opposed to calling it out. Except for some major banks that have talked about fully embracing AWS, a lot of the firms don’t overly talk about it with those they’re providing services to. I think there’s a blend of what we would consider at IPC to be the public environment to large sellside firms’ private clouds. I don’t think they overly differentiate to their customers in the marketplace that are consuming services from them. It’s become part of their whole solution.”
Further to this, Pickel’s colleague at IPC and Director of Global Exchange Relations Management Mike Smith points out that some firms are simply cloud-agnostic, choosing the best routing for their data. “What I see in terms of the cloud enabling the FX marketplace is firms shifting data amongst their offices. I think that’s where the cloud enablement has taken off.” He says that firms are looking at their data handling needs and at the same time considering their latency needs. “There can be a trade off between the two where it can be so much cheaper to move and handle data in the cloud that it is worth losing a little speed on the trade.” It seems likely however that in due course speed will catch up.
Meanwhile there is a distinct demand for services that the cloud may not yet be fully appropriate for. “At Beeks,” says Alan Samuel, “we definitely find that our customers want to focus on services that aren’t available in public cloud, such as precision time stamping, and trade and market data performance analytics. These services are expensive to deliver for a customer on their own, but are now an essential component of any finance-focused managed cloud service for FX.”
The COVID factor
Before taking up Samuel’s point about managed cloud services, it’s worth pausing to consider the effect of COVID-19 on the progression to cloud services in FX. It has had a dramatic impact.
One of the key findings of the Integral survey was that “53% of respondents thought Covid-19 accelerated existing trends and one-quarter noticed temporary changes.”
At Cloud9 Technologies, a specialist cloud-based voice trading communications firm based in New York, Chief Operating Officer Jim Miller says that Covid has made a big difference. “Prior to the pandemic, there was already a broader transition to cloud-based solutions for FX trading and beyond. For voice trading in particular, the cloud has empowered institutional traders to access a virtual trading floor, their counterparties, and important data regardless of the location where they are working. By having seamless access to cloud-based metadata, traders have been able to make more informed decisions and the regulatory reporting process has been more streamlined. Last year, when firms were forced to work remotely and move off of the trading floor, the cloud was the only way firms could ensure their workflows remained efficient. While the traditional trading floor will exist for years to come, expect to see a greater migration towards cloud-based, distributed trading both in the FX markets as well as others.”
If the cloud won its spurs as the pandemic spread around the world, it also caused markets to reappraise from a practical point of view how they might do business in the future. Terence Chabe at Colt explains, “I think what we’ve seen with COVID-19 is actually just an acceleration of the adoption of some of these [cloud-based] software as a service platforms. Take EBS for example, that’s a platform that had to be delivered on site via dedicated infrastructure, now it’s more cloud-enabled. The release of their next generation platform will come with improved latencies and be IP enabled, so it can be delivered over an extranet and you don’t need to have dedicated equipment. It’s a little bit more flexible and, what’s more, the use of mobile apps on EBS increased in 2020.”
Mike Smith at IPC says, “I think COVID-19 made people take ten steps back to re-evaluate what they were doing, where they were spending. So, they would ask, “ do I need five corporate offices in a very dense area and have this real estate expense, or do I go to a WeWork solution and put that capital expenditure elsewhere, cloud-enable it, take away my footprint in a datacentre?” So, I think the equity space has driven that, as well. We are now seeing banks starting to use this.”
In the aftermath of the initial COVID-19 shock, the new normal now features managed cloud based and SaaS offerings. Alan Samuel describes Beeks approach. “At Beeks we are seeing a growth in customers wanting a managed cloud connectivity service within our key LD4 & NY4 locations, alongside the demand for SaaSbased services to complement our existing infrastructure capabilities. We recently acquired a company called Velocimetrics, which is a trading analytics firm that provides full trade lifecycle monitoring. Historically the service was offered as an appliance that resided in a customer data centre or a customer environment. We have now launched Beeks Analytics as a Service. We have combined this software platform and our infrastructure platform to provide sellside institutions with a SaaS based model - including web console - all for a monthly fee, with no infrastructure deployment. A lot of banks themselves would like to offer that out to their customers, but the deployment model has not previously allowed that.”
Colt’s Terence Chabe is similarly enthusiastic. “Firms that have been able to offer SaaS models are the ones that have survived really well during the pandemic crisis and continued to provide seamless performance for their traders. I think you’re going to see firms that might have had to quickly come up with some kind of VPN or some kind of clunky solution during COVID-19 in order to enable their traders to stay in the market are going to have to develop cloud-enabled applications.”
On a practical level Integral’s Vikas Srivastava points out that institutions that have adopted SaaS find that it allows them to innovate far more quickly and at a much lower risk and cost. “In every industry, when the cost of trying out new ideas collapses, innovation blossoms. This is what we are already seeing in the FX markets across all stages of the trading workflow and in all regions.”
Ultimately to move from internal capex spend to opex expense can make a big difference to the bottom line but more importantly it has agility baked into it. A SaaS offering is there to take and to pay for with specialist providers innovating their service off of the customers’ payroll. But that does not mean that SaaS and cloud are the answers to every question.
The outlook is very much more sophisticated than cloud or non-cloud for FX. What activities and capabilities market participants will keep in house and which ones they will put to the cloud or to external service providers will really be determined by the nature of their business. Maintaining competitiveness is bound to be a key battleground.
I put the question of how this might pan out over the next three years to Vikas Srivastava at Integral. “Maybe two thirds will reside in cloud and one third will remain on-premise. But I think over time that portion retained in-house will become smaller and smaller.
There is a question of how you preserve your competitiveness while moving to the cloud, but my response is that the cloud doesn’t mean that it is one thing to everybody. It doesn’t mean that everybody has exactly the same functionality, and therefore they offer exactly the same service to their customers. This is something that we spend a lot of time talking to our clients about. It’s all about being able to configure aspects of the workflow so the client can offer a highly differentiated service. Of the hundreds of clients using Integral we find that every single deployment is different from the others.”
All of the experts we spoke to for this report pointed out that the application of cloud to FX is what you make it. You choose the relevant bits from the relevant type of cloud and tailor those to the business you want to do, they said. As service providers, they would say that but then the cloud is not just one thing and nor is it the panacea for every need. The capabilities that the cloud offers need refining for purpose.
Meanwhile what the cloud does provide is mass-market access at reasonable cost across the globe and that is very material for a globally traded FX asset class. This points to greater access for a wide variety for market participants to the broader market, whether that be to proprietary single bank offerings or to multibank platforms. Easier, more flexible access from emerging markets is one area where cloud connectivity could introduce enormous change. Price discovery and dealing capabilities in EM currencies could become more mainstream.
Likewise for retail traders. The democratisation of equity markets has led to extraordinary trading activity in the USA this year. The cloud could catalyse similar activity in FX even more than at present. The “Watanabe” phenomenon could become increasingly global.
All in all, the conclusion has to be that the cloud is here to stay in FX. But the cloud in all the forms we know it at present is not the finished article. New capabilities and faster connectivity are bound to follow as more connectivity specialists develop FX market solutions. More powerful, far-reaching cloud hosting centres will be established across the globe. I’ll offer a modest prediction. If, a year from now, we reappraise cloud managed solutions for FX, we may well find that they will have grown and spread to most corners of the market.