The Surging Appetite for Cloud-Based Services

I recently wrote an article for Capital Markets CIO Outlook that incorporates my thinking on the transition from one architecture to another in capital markets. I have the benefit of some of the great thinking of our analyst team on cloud, emerging technologies, and DLT.

While the end-state is unclear, directionally more and more capital markets firms are moving to cloud-based infrastructure, BPO, and IT outsourcing.

CIOs take note: I encourage you to, as much as possible, look outside your own four walls for inspiration.

See here.

Cloud is Down

Yes, even the cloud can go down!

For the many firms, including the SEC and CIA, who run their infrastructure in the AWS cloud, Tuesday’s outage was a pain. The economic impact of the outage will easily be in the many tens of millions.

It is particularly poignant as it comes at a time when so many core processes are moving into the public cloud and more and more capital market participants are building in the cloud, or toward a cloud future, as we discussed in The Cloud Comes of Age in the Capital Markets: All Clear for More Cloud.

This outage is a reminder that not only can all technology fail at some point, but it will. The scale of this week’s outage, along with its rarity makes it newsworthy. However, the scale masks the simple truth that the net downtime of this failure is far less than the aggregate downtime, had all impacted firms been running their own infrastructure.

Furthermore, it is a lesson for firms moving into the cloud to consider how to best manage risk profiles across various clouds and models, or ensuring that they are running across regions (a single AWS region went down).

But the news flow now suggests the most common point of failure: the human. And, of course, the proverbial fat finger. As in many cases, in market technology failures, it is at the human/machine interface that is the weakest link.

This is a time to learn, access the risk and move forward.

Future architecture: All roads lead to Cloud

Present vs. Future-State Architecture

Our frenetic activity of client meetings, briefings, conferences, and events heated up in the last few months. We recently spoke to audiences in New York, London, and Tokyo.

The present environment of cost-cutting, evaluation of profitability, capital efficiency, and compliance implementation is consuming much management attention and IT budgets. Operational efficiency and operational risk mitigation are top of mind.

However, across our client base and network of financial institutions and vendors, there is also a continued desire to understand emerging technologies like blockchain/DL and artificial intelligence. Many of you are expressing a strong interest in our opinions on the future state of the technology architecture in parallel with these day-to-day operational considerations.

From this vantage point, we believe the potential of blockchain technology (including smart contracts), IoT, and artificial intelligence will drive incremental IT spending going forward as solutions are implemented, further uses cases are developed and tested, and ecosystems and IT partnerships are expanded.

All Roads Lead to Rome Cloud

With respect to the future IT architecture, one striking conclusion we've reached is that all roads lead to cloud. For instance, major blockchain use cases are being built atop cloud providers. Technology firms such as AWS, IBM, Microsoft, and others appear to be prime beneficiaries of this frenetic activity, some of which is strategic, and some of which may be simply tactical and later disappear. In addition, artificial intelligence may be best leveraged in the future with data that resides in the cloud as opposed to in siloed business operations. Moreover, wealth managers increasingly are considering cloud-deployed solutions. Even compliance (e.g. RegTech) is increasingly being sold "as a service".

Clearly not all capital markets, wealth management, and asset management operations are cloud-friendly, both now and in the future, but many types of operations will move to the cloud.

We see this happening gradually and powered by availability, greater standardization, and creative vendor offerings across a spectrum (from ITO and BPO to managed services, utilities, and yes … cloud possibilities throughout).

Symphony messaging: WhatsApp to business’ ears?

It’s official, what many financial institutions have been saying for quite a while is becoming reality: they don’t want Bloomberg (or any third party?) to have access to all of their messaging, trading or not related, anymore and hence have decided to team up as equal partners, in a top-notch technology utility that serves the needs of its members, a key to its potential success, to fund a competitor messaging system called Symphony. The network, the link between the bankers and their clients and between their clients and their competitors is what enables them to be and stay in business: A third party cannot be invited around that table. Not only, Symphony could be offered to other business sectors as a professional WhatsApp. Follow me here: financial institutions don’t trust anymore a third party to manage their messaging data, but think other business sectors will trust financial institutions to manage their messaging data. Although I personally got annoyed when my bank asked me why I was spending some of my savings‎ on our family farm when I asked for a mortgage, I know they probably know my financial situation better than I do, and that I am not a potentially “good” client for them: I trade myself, have little savings, do everything online, so I guess it’s only fair for them to ask. Of course Big Brother is watching me – and so should he. But I am not sure if I would send all my WhatsApp messages on a bank-owned competitor system, would you run the risk that your bank could potentially see all your messages? In the case of corporations and businesses though, things are slightly different: their relationship with their banks are usually extremely deep, their bank helped them get their first line of credit, maybe introduced them to private investors or helped them IPO. And when they wanted to take part in a big project with a new foreign client they bridged the financing of the project, they helped them offset their FX risk, invest their liquidity and manage their treasury… so if they started potentially seeing their employee’s messages to their clients or suppliers, would it really make a difference to them? Probably not. Of course I am extremely simplifying the potentially extreme risk such a system could have; It has been created on the back of a highly secure encrypted internal system Goldman Sachs had developed and has been enhanced with the best of the best (it is said) technology, in an open source environment. We’ll be make sure to test it as soon as it is offered to the public later this year and am waiting for the next Instagram for finance.

Of games played for thrones

As Season 5 of Game of Thrones nears its end, I have come across a number of articles that have been talking about the leadership lessons that we can draw from the TV series (and presumably the books too). The first thing that comes to mind is that our world has enough problems already without having to take pointers from a bunch of people who probably kill each other more often than we have cups of coffee in a day. But then one starts realizing that maybe there is something after all to this fuss about the knowledge to be gained from the GOT. The next thing that comes to mind from there is that if there are leadership lessons to be learned for the world of business in general, surely there must be some for the capital markets too. The leading capital market sellside firms in JP Morgan, Goldman Sachs, Morgan Stanley, Deutsche Bank and so on probably are the parallel of the seven families, along with a couple of the leading buyside firms (the upstarts to the throne?). Daenerys’ dragons can be an example of game-changing technology such as Big Data processing, Cloud services or Machine learning. Similarly, the recent resignations of leading figures at some of these firms can be an example of the blood-letting we are so used to in GOT. If anything, GOT teaches us that merely changing the leadership does not change the direction the kingdom, or the firm in our case, will take. Nor does it change the impact of the environment around us. In the case of the for capital markets, for example, the tough regulatory and economic environment is here to stay. The ‘winter has come’ and we would do well to get used to it. We could presumably go on in this vein, but I am not sure we should draw too many parallels with, or take too many lessons from, a series that makes Greek tragedies look mild by comparison. If the pain on the screen is not enough, we are going to have to live with the very real tragedy of the season ending just when we were getting all warmed up and beginning to benefit from its infinite wisdom.

Market Surveillance issues

As I begin work on the last in the current series of Market Surveillance reports, there are some important points that we can reiterate from the recent research. The first is the all encompassing requirement for surveillance. The recent Deutsche Bank co-CEO resignations have shown the negative impact the benchmark manipulation related sanctions and fines had on not just this bank but the industry as a whole. Similarly, the investigation of a couple of British banks regarding the payments made in the FIFA bribery scandal also shows the need for constant vigilance on part of banking and capital market participants. Firms are embracing the need for holistic surveillance and compliance, which covers not just trading but also related areas such as best execution, cyber-security and AML. Firms that have legacy systems in place might want to continue with several systems, but for the better part, most firms would prefer to have one system that meets most of their requirements. As more advanced technology becomes available, this is becoming more of a reality. Another important aspect is the rising use of machine learning capabilities. Surveillance systems are becoming more advanced, processing both structured and unstructured data, especially through the use of cloud based processing and Big Data technologies. Machine learning takes this to the next level, as it reduces the need for human intervention, and allows for reduction in false positives and negatives. Furthermore, such advanced systems also allow firms to keep tabs with new compliance requirements more efficiently as they can anticipate problem areas based on learning from past experience. Finally, exchanges and sellside have been the main users of market surveillance technology. But increasingly regulators and buyside firms have also started acquiring these systems. For regulators, it makes sense because it allows them to monitor the market independently and reduces their dependence on the exchanges and the sellside for data and analysis. For buyside firms that are playing a more active role in the market, it is important that their trade surveillance is upto scratch, otherwise they are making themselves vulnerable to the same issues that are plaguing sellside firms at the moment.

Thoughts from IBM’s “World of Watson”

Last week was at the IBM’s World of Watson in NYC – IBM has opened up Watson through the Cloud forming an eco-system where application developers and partners utilizing open APIs can tap into Watson’s cognitive thinking algorithms.  IBM has decided to open the Watson platform to partners and developers for more rapid discoveries of real-applications and perhaps marketable applications. Of course many of the impressive applications targeted health care, mapping genomes, cancer research, synthetic drug pre-trials – some amazing stuff. In the area of finance I’m always a touch skeptical, investors have been trying to find the golden algorithms investment portfolios for centuries and not really convinced that Watson will do much better. However I was very impressed with some Private Equity software firm, Vantage Software in Boston, that was using Watson coupled with an accelerator big data analytics module application, AlchemyAPI out of Denver, to comb through social media for smoke signals about firms that were being tracked. For example a small firm is looking for 3 new analytical PhDs in polymer catalysts – a small signal that something might be popping with the young company. If an analyst is tracking say 250-500 start-ups, no way to track this manually. Of course stay tuned for Watson to show-up more in Wealth Management. Here’s some links to the main tent sessions: