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The Future of Trading: Migrating the Capital Markets Ecosystem to the Cloud

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In the dynamic world of financial markets, the migration of exchanges’ trading systems to the cloud is a transformative shift that promises to redefine operational efficiencies and market dynamics. This transition is not just a technological upgrade but a strategic move offering numerous benefits for exchanges, market participants, and cloud providers.
In this blog, Matt Barrett, CEO & Co-founder of Adaptive, will (i) explore the key advantages of this migration, (ii) address the challenges involved, and (iii) discuss the broader implications, regulatory and otherwise, for all stakeholders.
What’s in it for me? Cloud migration benefits for the capital markets ecosystem and beyond

Unlocking new revenue streams for cloud providers

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Cloud providers stand to gain significantly from tapping into the financial services industry. This sector has traditionally relied on proprietary data centers and is widely underserved by public cloud (and open source) technology. The potential revenue from this untapped market is substantial, making it an attractive opportunity for cloud giants.

Cloud benefits for exchanges

Cost efficiency

Migrating to the cloud offers significant cost benefits for exchanges. By externalizing non-core operating costs, exchanges can shift from capital expenditure (capex) to operational expenditure (opex). It is particularly advantageous for firms that previously managed their own data centers. The cloud’s pay-as-you-go model means exchanges only pay for the resources they use, avoiding high upfront costs associated with purchasing and maintaining physical hardware. Additionally, moving to a standardized tech stack reduces the cost of supporting bespoke technology, simplifying maintenance and upgrades. The reduced fixed costs associated with innovation also make it easier for exchanges to experiment with new technologies and solutions, providing a flexible and scalable environment for rapid prototyping and testing without significant capital investment.
Operational efficiency, innovation and agility

Cloud adoption significantly enhances operational efficiency and agility for exchanges. The increased technology delivery velocity, allows exchanges to stay ahead in a rapidly evolving market. This agility facilitates faster development cycles, enabling more frequent and reliable rollouts of new features and updates. Furthermore, cloud platforms offer greater accessibility, allowing exchanges to deploy and scale their services more efficiently. This ease of access supports expansion into new geographic regions and improves service delivery to a global client base.

Reliability and security

Cloud platforms provide robust disaster recovery and business continuity solutions, ensuring high availability and data redundancy. Exchanges can leverage the cloud’s distributed infrastructure to quickly recover and resume operations in the event of a failure or disaster, minimizing downtime and data loss. This reliability is crucial for maintaining trust and stability in the financial markets.

Ecosystem and Network Benefits
Enhanced connectivity

The ease of connectivity in the cloud means new trading venues, which rely on connected participants, have a greater chance of success. This connectivity fosters a more vibrant and competitive market ecosystem.

Disintermediation of Market Service Providers (MSPs)

Exchanges can potentially disintermediate MSPs, capturing more value directly from their participants. It is particularly relevant in mature markets like fixed income, where MSPs currently capture significant value through a thin software layer over a complex web of hardware and telco contracts.

Lower costs for market participants

Not all market participants require the high costs associated with colocation infrastructure. Cloud-provisioned access to order entry and market data at lower costs can make trading more accessible and attractive. For example, the CME Smart Stream product allows real-time market data acquisition over Google’s network at a fraction of the cost of other distribution mechanisms.

Is cloud migration essential for competitiveness?
Cloud migration is increasingly seen as a must-have for exchanges to remain competitive. New trading venues have a higher success rate when deployed in the cloud compared to on-premises solutions. As other parts of the trade lifecycle, such as analytics and market data, move to the cloud, leaving execution behind adds unnecessary friction and expense.
Moreover, the cloud offers unique advantages over proprietary data centers, including the ability to fully define and operate technology stacks via APIs, global traffic routing, and software deployment with a high level of standardization. The ease of interconnecting with other firms at low latencies through simple textual identifiers does set the cloud apart.
The complexities when migrating trading infrastructure to the cloud
Migrating trading infrastructure to the cloud is a complex process, particularly as the cloud is not inherently designed for capital markets. This transition involves several technical and operational challenges that must be addressed to ensure a seamless and effective migration.
Here are some of the critical complexities:

Network Reliability and Performance
Network contention:

The cloud’s network architecture can introduce contention issues, where multiple users compete for the same network resources, potentially leading to latency and performance degradation.

Connectivity:

Ground-to-cloud and inter-cloud connectivity can still introduce latency and bandwidth limitations that can impact the speed and efficiency of trade execution and data transfer between different cloud regions or providers.

Storage and data management
Storage solutions:
While cloud storage solutions offer scalability and flexibility, they may not always meet the high-performance requirements of trading systems.

Data integrity:

Ensuring data consistency and integrity across distributed cloud environments is a significant challenge.

Protocols and communication
TCP/HTTP vs. UDP:
Traditional cloud communication protocols like TCP/HTTP may not be suitable for the high-speed, low-latency requirements of trading systems. UDP, which is often preferred for its lower latency, may not be fully supported or optimized in cloud environments, necessitating custom solutions or adaptations.

Bridging the migration gap through technology
Bridging the gap between the cloud’s current capabilities and capital markets’ needs requires innovative solutions. Technologies like Aeron are specifically designed to address these challenges, providing a bridge that enhances network performance, reduces latency, and ensures reliable data transfer.
Here is how Aeron OSS and similar technologies are making this possible:

Enhanced network performance: Aeron optimizes network performance, which is crucial for trading systems that need ultra-low latency. It minimizes network contention and improves data throughput, ensuring swift and efficient trading operations.
Reduced latency: Aeron employs advanced techniques to reduce latency, such as efficient data serialization and optimized network protocols. It ensures real-time trade execution, maintaining a competitive edge in high-frequency trading.
Reliable data transfer: Aeron provides robust data consistency and error-handling mechanisms, ensuring accurate and reliable data transmission. This reliability is essential for maintaining trust and operational integrity in trading activities.
Scalability and flexibility: Aeron is built to scale seamlessly and adapts to changing requirements without compromising performance. This scalability is crucial for trading firms looking to grow and innovate in a cloud environment.
Interoperability with cloud providers: Aeron is recognized by market participants and cloud providers, and seamlessly integrates with existing cloud infrastructures, ensuring trading systems can leverage cloud services while maintaining the performance needed.

In summary, bridging the gap between the cloud’s capabilities and the needs of capital markets involves leveraging specialized technologies.
The impact of cloud migration on co-location revenues and private cloud regions
At first glance, cloud migration might seem detrimental to exchange co-location revenues. However, cloud providers know this model and will likely replicate proximity rental models in the public cloud.
Regulatory concerns and what the future holds
Regulators are understandably cautious about the migration of trading infrastructure to the cloud due to several key concerns. One major issue is the centralization of critical market infrastructure on a single cloud provider, which could pose systemic risks if that provider experiences outages or security breaches. Additionally, moving to the cloud can result in a perceived or actual loss of control over the infrastructure, making it harder for firms to manage and mitigate risks effectively. The opacity of cloud operations further complicates matters, as it can hinder firms’ and regulators’ ability to understand and monitor the underlying infrastructure fully.
Firms can mitigate these risks by adopting multi-cloud or hybrid strategies, spreading infrastructure across multiple providers, or combining cloud with on-premises solutions. It enhances resilience and reduces dependency on a single provider. Cloud providers can improve transparency through detailed reporting and real-time monitoring, ensuring firms maintain control. Developing regulatory compliance frameworks tailored to financial services and offering on-premises deployment options for critical components can also help.
Looking ahead, an inflection point in cloud investment might come as early as 18-24 months, with a peak likely to follow after that. This will be driven by the benefits of cloud adoption, such as cost efficiencies and enhanced innovation. As cloud use increases, regulators will develop more comprehensive guidelines to address associated risks. Advancements in cloud technology, like improved network performance and security, will further facilitate this migration, making the cloud an increasingly attractive and inevitable option for capital markets.
The post The Future of Trading: Migrating the Capital Markets Ecosystem to the Cloud appeared first on Adaptive Financial Consulting.
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