We’ll forgive you if capital markets isn’t the first industry that comes to mind when you think of cloud computing. Compared with other industries, capital markets’ adoption of cloud has been, well, rather slow. While barriers to cloud computing, such as privacy and security concerns and legacy IT systems, still exist, they are gradually being overcome. As the industry braces for new challenges, the role of cloud may now be more important than ever.

Six industry dynamics expand the cloud opportunity

Since the global financial crisis, accelerating industry trends have combined with rising cost pressures, creating a number of new concerns for capital markets firms. Cloud computing, it seems, may play a role in finding the solution to at least six of these issues, including:

  • Fragmentation of liquidity. As liquidity fragments between different trading venues, firms face the challenge of deciding where they should be located to achieve the best latency across a range of venues. In response, the industry is turning to “proximity centers” to host software-as-a-service (SaaS) provided by trading application and market data suppliers. These centers are strategically located to take advantage of a shorter distance to key markets and liquidity hubs, and they use high-speed, low-latency connections between vendors and the trading firms they collectively service.
  • Changing regulatory landscape. Assuming appropriate security is in place, cloud computing solutions can facilitate faster, better integrated and more accurate regulatory reporting, while offering firm-wide or even industry-wide automated options to help organizations comply with requirements.
  • More demanding customers. As buy-side influence increases, customer retention becomes more challenging and fee-based value propositions harder to sell. Cloud-based customer relationship management solutions can boost efficiency and effectiveness, enable institutions to own the client relationships and help create a single central repository of client relationships and contacts.
  • A more dynamic trading environment. In an effort to maintain trading profits and margins, firms are streamlining processing capabilities, resulting in rationalization and virtualization of multiple physical platforms in private clouds. Building on these models, enterprise-strength trading is now available via SaaS, opening the way to future rationalization at a lower cost. At the same time, post-trade and back-office activities are also moving into the cloud.
  • The need for sustainable cost reduction. Cloud-based shared services and industry utilities accessed on a pay-per-use basis can help reduce costs by breaking down existing vertical silos and enabling more effective enterprise data transformation.
  • The need for smarter and more sophisticated risk management. Traditional software applications, such as enterprise risk engines, are now available in the cloud on a pay-per-use basis and the scalability and flexibility of on-demand cloud-based offerings can make them particularly well suited for large, complex and resource-intensive risk calculations.
Read the report.
Read the report.

Due in large part to these industry challenges, cloud computing is making inroads into the capital markets industry. This is good news, especially considering the potential savings some firms stand to gain. Recent research suggests capital markets firms can save 10–15 percent on their costs by moving to the cloud. Perhaps an even bigger tipping point for cloud solutions, however, could come as a result of migrating the select handful of industry-specific software packages to cloud platforms. With cloud-based solutions, smaller market participants, for example, may be able to gain access to services based on these leading platforms at a more affordable and flexible cost.

This is just one example of how cloud computing could play a pivotal role in driving change in capital markets. Join me next week when I look at three scenarios in detail.

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