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Trading and Risk Management on The Cloud

The spectacular growth of cloud technology is going to be a game-changer for all kinds of companies worldwide, but Howard Tolman, of Cloud Trading Technologies, believes the banking sector could be one of the biggest beneficiaries. This of course assumes that the banks themselves recognize what they need to do to espouse the new way of doing things.


Cloud technology is undoubtedly set to have a significant influence on the banking sector over the next decade and beyond, partly because banks traditionally feel part of their role is to be heavily involved in information technology (IT). While this is not surprising given the nature of their mainstream business the conflation of processing requirement and controlling risk has, I believe, had the unexpected effect of dramatically increasing the cost of IT within the banking sector. A recent report by Gartner put banking IT costs running at 2 and a half times for a similar outcome than those in other industries. OK in the good times, maybe, but not where we are now. I would argue that the strategy of producing internally developed and hosted applications has now run its course and has left behind a legacy of huge IT departments and infrastructures which are in many cases uncontrolled vested interests only fully understood by the people working within them.


E-commerce and electronic trading

One area where banks have been particularly keen in building and maintaining their own applications has been in the e-commerce and electronic trading markets. Over the past 15 years or so these markets have moved considerably and now offer complex derivative calculation, decision support and delivery capability as well as vanilla products. Risk systems have tried to keep up but it has been a very hard slog. Initiatives such as the Credit Support Annexe (CSA) under which Counterparty risk is backed up by physical movement of cash collateral on a daily basis mean that time is of the essence when making these complex calculations. In addition innovation tends to be coming from independent software vendors who tend to take a more holistic approach to risk problems rather than the more silo’d product based approach favoured by banking institutions. Changes in organisational thinking are key to increasing efficiency.


Additionally for the first time in the last five decades the time gap between innovation of financial products and the regulation required to monitor the markets has started to close. This is leading to regulators actually being able to spell out how risk systems will have to operate and banks will need to comply rather than simply waiting for the regulator to arrive at a fait accompli already entrenched through market practice. This is apparent in the Basel three accords which are taking a much more homogenous view of interconnected risk.


Regulation

So banks need to get a grip of these issues sooner rather than later. But at a time when institutions are seriously under performing and there are restrictions on both headcount and budgets this might be a really difficult nut to crack. On top of this it is not going to get any easier as regulators start to home in on how risk is managed and start insisting that institutions manage their positions in real-time. So the trick will be to reduce costs and at the same time dramatically increase efficiency.


If these problems are going to be taken seriously then banks could do worse than look at embracing Cloud Technology which could easily have been made specifically for the trading and risk markets. External cloud technology provides significant cost reductions coupled with ease of implementation and massive scalability. On top of this it solves two of the biggest problems inherent in trading systems: those of fault tolerance and high availability. Closely behind comes the problem of maintaining huge amounts of mainly redundant hardware purely to avoid systems falling over when there is a spike in market activity. They could also start to abandon the costly and glacially slow practice of internal application building which surely provides them with the worst of all worlds.


Time for change

I know banks are proud and somewhat monolithic organisations which are conservative by nature, however Cloud technology is here to stay and in the trading, risk and derivative space can seriously reduce cost, enhance risk management and increase efficiency all the way around. There is of course fierce resistance from internal IT to any form of external engagement. There are in particular concerns about security which I believe are more based on vested interests rather than real anxiety. Cloud security is extremely robust. Similarly compliance issues are frequently brought up however regulators do not generally stand in the way of progress when it is explained to them properly. After all they want the market to function properly and will not object to banks using tools which help them to achieve this objective by being obstructive. It is refreshing to see that banks in some parts of Asia are taking a far more enlightened view on this new technology.


My company have been building complex applications in the electronic trading and risk management area for the past 11 years and delivery of these systems using Microsoft’ Windows Azure cloud technology is a huge step forward and can help any bank improve its performance and lower it’s unit costs at the same time. It remains to be seen how quick the take up will be but I am confident that within the coming year we will see a large number of banks start to recognise the benefit of new technology in this particular market segment.





Howard Tolman is Managing Director of Cloud Trading Technologies. He is an entrepreneur and ex banker having held senior positions in major banks including Bankers Trust, Dresdner Bank and Bank of America both in London and overseas including Netherlands, Denmark, Greece and USA. He is trained in Treasury and Risk as well as corporate banking.


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