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Cloud Economics Spawn New Business Models

As Wall Street firms offload more and more work into the cloud, new technology delivery models, including shared utilities, are likely to emerge.

Cloud computing is a game changer, says Aron Dutta, senior director of financial services and global market strategy at Cisco. According to Dutta, the cloud will transform capital markets firms, driving innovation and leading to new business operating models.

Whether a firm is a market participant or a technology/services provider, "As the economics get commoditized around scale and margins get compressed, firms are looking for ways to differentiate and rethink their business models," says Dutta. "Staring through the lens of the cloud, there are quick ways that firms can get out of certain cost structures and move toward a flexible infrastructure without having the high capital investment."

While firms currently manage racks of hardware, with the cloud, these burdens go away, Dutta continues. Firms could even use a mobile device such as a BlackBerry to process transactions or track trades end-to-end, he says.

Rather than own their own hardware, firms can rent the servers, similar to leasing a car, says Kevin McPartland, senior analyst with Tabb Group. While it may cost $10,000 to own a high-end server for a year, he relates, it might cost just $6,000 to lease it if the firm only needs it for six months.

The Economics of Access

In response to cloud economics, the roles of exchanges and trading venues that provide platforms and services will be elevated, Cisco's Dutta adds. "Whoever serves the capital markets and provides access to liquidity venues and quickly aggregates context around information, pricing, analytics and news around transactions, can control the economics of access," he says.

Today, applications are built for the compute model, Dutta explains; but tomorrow there will be a class of applications built into the network -- functions such as pre-trade analytics, risk management and post-trade reconciliation will be offered as part of a cloud-based infrastructure. Cisco refers to this as the high-performance trading fabric.

Step Two of the transformation will occur when banks figure out that they can share services, turning the cloud into a utility, Dutta contends. Eventually, he says, capital markets firms will form consortiums to create these utilities. "That's the federation side of this equation, and so all of sudden, all those costs go away," Dutta comments.

Another powerful repercussion of the migration to the cloud is the growing expectation of end users that they will have to pay only for what they use. "That ripples through the entire supply chain," says Dutta. "If we're talking about short-term microseconds of a trade, they'll only pay me for how much they use." Eventually, this may lead to a new model in the securities markets that would allow firms to switch capacity on or off in any market.

Today, Dutta notes, a firm has to go through a three-month provisioning process to be able to trade in different markets. "Tomorrow," he predicts, "all of this stuff will be switched on electronically," through the cloud.

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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