Wall Street Firms Prepare to License NYSE Trading Systems in the Cloud to Outsiders
This article first appeared on InformationWeek.com.
Financial services are about to be permanently changed by cloud computing. Instead of everyone going to Wall Street for financial services, the cloud will extend Wall Street services to them, whether they're in Manhattan or Missoula.
What we call cloud computing--in this instance, specialized software as a service available through a New York Stock Exchange-licensee--has within its power the means to broaden a once privileged playing field, extending trading privileges to a much wider segment of the population.
How can a corporate treasurer in Peoria, arranging a currency transaction to consolidate a major deal in China, function as an equal of a currency trader on Wall Street? He can't, can he? Can a purchasing agent, looking for an assured supply of a commodity, trade in futures on par with a Wall Street broker? She can't, can she? It's still difficult, but the day is not far off where the remote trader and the Wall Street broker will be functioning as near equals.
Granted, a licensed NYSE member still has to be the party to offer the trading service to outsiders, but the cloud makes it possible to do so on a location-independent basis, then charge fees based on hours (or minutes or seconds) of use, or by the number of transactions, or some other use-based metric. Such a fee charged many times, to many users, could lower the expense of being a $40,000 a year licensed NYSE trader.
And just as NYSE members can make the NYSE matching engine and other services available as online services, NYSE itself can link to other stock exchanges around the world and offer additional markets and exchanges through reciprocal agreements. There will be fees, just as surely as there will be blood on a butcher shop's floor, but those fees can shrink to new lows if a NYSE licenseholder signs up lots of users.
We are at the first step of what is going to be a long, leveling process in financial services that brings many more participants into exchanges. Your personal wealth manager may be your next-door neighbor rather than a trust manager in a downtown office building.
"We are now more apt to describe ourselves as a technology services company that operates exchanges than as an exchange that happens to use technology," said NYSE Euronext CIO Steve Rubinow in his Aug. 29 appearance at VMworld in Las Vegas. A regulated trader, such as a Merrill Lynch or J.P. Morgan, could lease its license through the NYSE cloud infrastructure to another participant to use for a short period.
Is such an evolution going to occur? I raised that question with Rubinow after his VMworld opening day appearance. He cautioned that NYSE is a heavily regulated entity and the regulators need to know where a trade was executed, not just the outcome. That means financial services may be extended in many directions, but the systems accomplishing the trades will still have to be in NYSE's Mahwah, N.J. data center.
NYSE itself doesn't wish to become an extender of new financial services. It's for its licensees to decide how they wish to add services to attract new customers. But NYSE, as a supplier of a neutral trading infrastructure, just made it a lot easier for Wall Street firms to compete by reaching further out into the hinterland for short-term, rapid-turnover trading clients seeking momentary advantage in their own businesses.
"This is a nice horizon we have in front of us," Rubinow said in the interview. Existing services can be duplicated in the NYSE cloud today and "there are things on the whiteboard for tomorrow."
NYSE has opened a modern data center in Mahwah, N.J., with a sister data center outside of London. While NYSE's key trading members put their own equipment in the data center to be close to the NYSE matching engine, there is additional compute infrastructure available to supply cloud services. The cloud portion of the data center is the same distance from the matching engine as J.P. Morgan's and other licensed traders. So if a corporate treasurer in Peoria puts an order into a trading system in Mahwah, his bid is capable of executing as fast as a Wall Street firm's.
There are many parties who would like to access markets and execute their own trades who have not previously had the chance to do so. They are competing with other firms in their own industry, not with Wall Street firms. But having the ability to decide, then execute their own trades would in some cases constitute a significant competitive advantage.
With currencies fluctuating in value worldwide and the competition for natural resources driving up prices for copper and aluminum to molybdenum and rare earths, having the opportunity to set up a decisionmaking process in advance, monitor world markets, and execute trades as certain conditions are met could become a standard practice in many industries.
NYSE has so far only named Pico Quantitative Trading and the self-service 401K rollover firm Millennium as financial services making use of the cloud portion of the Mahwah center. Indeed, those limited public examples caused some confusion at the data center's opening. Pico said it wouldn't be using the virtualized--which listeners interpreted as "cloud"--portion of the data center. Pico wanted to avoid being stigmatized as a user of virtualized servers, which would be inherently slower--virtualization adds a few milliseconds of overhead--than its competitors. But in fact both Pico and Millennium will use the cloud infrastructure to run their systems on bare metal, unvirtualized hardware. (Amazon and other public clouds are often running workloads in virtual machines, but there is no requirement that cloud infrastructure run only virtualized servers.)
Companies that want to supply low-cost or self-service financial services can get in the game because cloud infrastructure is less expensive than the typical Wall Street firm's colocated infrastructure; they can offer clients services without incurring big infrastructure costs. In the long run, it may not matter to a 401K holder if the transfer of his stock sale receipts are added to his 0.1% money market account a few thousandths of a second slower than might otherwise have happened in a Merrill Lynch trade. It may only matter that someone extended a user friendly method of allowing him to make that decision.
Earlier this year, I asked Ken Barnes, VP of global platform services for NYSE Technologies, how the cloud portion of the NYSE data center changed the nature of the stock exchange's traditional business. "People who would normally say, 'I can't afford a colocation operation' can quickly set up a server in the cloud ... We think this opens up the addressable market."
Indeed, it does. The doors have opened and many will pass through them in an endeavor to continue one of man's earliest activities, trading for value. It may not go so far as to allow dogs to trade in dog food futures, but on the Internet, no one knows if you're an unsophisticated trader.
This article first appeared on InformationWeek.com. Charles Babcock is an editor-at-large for InformationWeek and author of Management Strategies for the Cloud Revolution, a McGraw-Hill book. He is the former editor-in-chief of Digital News, former software editor of Computerworld and former technology editor of Interactive ... View Full Bio