Cloud adoption increasing in derivatives markets, industry experts say

As skepticism fades, focus shifts to practical issues and cultural change

4 November 2019


Technology experts from four industry leaders—Amazon Web Services, CloudMargin, CME Group, and Trading Technologies—discussed the evolution of cloud technology in the derivatives markets at the FIA's annual Futures and Options Expo on Oct. 31.

While adoption of cloud technology has become more widespread over recent years, financial institutions are still cautious about migration to the technology because of concerns around security and regulatory compliance, the panelists said. More importantly, financial institutions are discovering that the adoption of cloud technology requires a shift in company culture towards a more agile mindset and greater integration of technology, security and business expertise, they said.

Rick Lane, chairman and CEO of 25-year-old Trading Technologies, one of the industry's top vendors of trading systems, gave the audience an insider's perspective on the resistance that the company faced as it transitioned away from on-premises computing to using remotely hosted computing provided by a third party. Many of its clients are large banks and broker-dealers, and they were highly skeptical of its decision to move certain components of its service to the cloud.

"Six years ago just about every major client of ours was telling us not only do we think you are crazy for moving this core part of your trading execution platform to the cloud, but we would never be able to use it because our businesses are too security dependent and the cloud poses too many risks," Lane said.

"We are all aware that that has since changed, but I don't know that it’s changed completely," he continued. "We have found today that despite a massive shift in acceptance of the cloud, we still run into headwinds with respect to new adoption …There tends to be a six-to-eight-month process just to get [clients'] level of comfort to the point where they are willing to accept the use of a new cloud product."

He added that although the company has embraced cloud technology, not everything it does is in the cloud. "The cloud enables certain things … but the things that need to be fast, that need to be deterministic from a latency perspective, are still built in the old-fashioned way," he continued.

Lane contrasted TT's experience with migrating its customers from on-premises computing to the cloud with the experience of younger companies that use the cloud as the foundation for their business models.

"Six years ago, when we made the bet [to use cloud components], we didn’t know that it was going to take quite this long to get people mentally over that hump. That is one of the biggest differences between a company coming out the gate and saying, 'We're cloud and we're proud and we’re going to build a business around that', and [a company] trying to effect change within an incumbent user base," Lane said.

Cloud security

One 'cloud and proud' company is CloudMargin, which was founded five years ago as a cloud-based platform for collateral management. The company works with clearinghouses, clearing firms and buyside firms to migrate their collateral management systems from paper documents and spreadsheets to the cloud. While the efficiency benefits are obvious, the key challenge is security, and the company's experience has been that the industry today is much more attuned to the specific challenges of the cloud environment.

"What I have seen from a client acquisition perspective is that the nature of the security questionnaires that we receive has changed over the past few years," said Karl Wyborn, global head of business development at CloudMargin, who joined the company in 2015 after working for many years at J.P. Morgan.

"Four years ago, they were really just enterprise installed technology questionnaires where somebody replaced 'enterprise' with 'cloud'. There was a lack of developed procedures around cloud adoption. Fast forward to today and I see much more tailored questionnaires with specific questions around cloud security. I've seen an evolution in the understanding within the market around what cloud means from a security standpoint," Wyborn said.

Speaking from the perspective of a cloud technology provider, Shea Lutton, enterprise architect at Amazon Web Services, said the conversation about security has shifted.

"Two or three years ago the question was skeptical: can we really go to the cloud?" said Lutton, who joined AWS in 2017 after running technology operations for several Chicago-based proprietary trading firms. "Now every company in every industry has seen themselves or one of their peers move to the cloud and we have moved past that first level of questions to the second: yes, we know that things can be built, but, tangibly, how is my company going to build secure platforms, how are we going to get fast and efficient at doing this? There’s less of the skepticism now, and lots of conversations. Everyone agrees that security is job one."

Cultural change

For companies that embrace cloud technologies, the focus should be on fostering a culture that is not only security driven but open to changing the way they think about deploying technology, the panelists said.

Ari Studnitzer, managing director, architecture and product management at CME Group, said one of the first things the exchange did when it embarked on its cloud journey was to create a single team of engineers, infrastructure engineers and security engineers to ensure that all of its security requirements were integrated into its cloud services as they were being developed, rather than being applied as a separate layer.

"The cloud is about culture as much as it is about technology," he added. "Often times people underestimate how important culture is. The cloud is heavily disruptive, and it is critical to build a separate team, find the skillsets and create the right culture. The ability to hire from within and the ability to … spin up a dedicated team, at least for us, has been really critical in tackling the disruption."

Cultural change was a topic that came up repeatedly in the panel discussion. AWS' Lutton said that as challenging as it is to build a technology platform from the ground up, this is dwarfed by the challenge of creating cultural change in an organization. "This is both with people that have a completely different skillset that work for these teams and know that they need to fundamentally change how they work, how they think about building and deploying technology, to the hiring for roles that the business is just not used to hiring," he said.

"The driving force for when customers are looking to come on to the cloud is to gain agility and to bring agility to their businesses, and almost every single technology team needs to change in response to that. It's the companies that have that broad mindset about embracing change that are able to reward their business."

Regulatory engagement

While the regulatory environment has not been a driver in how technology vendors build and deploy their solutions, it has influenced how their clients use cloud technology, according to TT's Lane. He noted that financial institutions are heavily regulated and he commented that this leads to a more conservative approach to technology innovation. "The conservative view and measured approaches of clients in how they approve and let us build solutions that manage their data and risk are driven by regulation," he said.

However, Lutton believes regulators are getting more comfortable with the cloud, engaging with cloud providers and acknowledging the positive role the technology plays in financial services. "The conversations that exchanges and banks are having are causing a change in the thinking of regulators," he said. "They have the same goal as market participants of wanting to be agile, so it’s interesting to see them approaching cloud platforms now."

Looking ahead two- or three years, CloudMargin's Wyborn said there is likely to be a wave of consolidation in the industry as larger technology companies come to grips with the adoption of cloud-based services and the rapid growth of fintech companies. "You're seeing a raft of fintechs of a similar age emerging from the pack and becoming more established. I think we’ll see consolidation in the space with larger technology companies looking to these smaller ones to drive further growth. I see convergence between older and newer technologies because that is what the market wants—trusted vendors with really great solutions."

  • MarketVoice