While cloud computing comes with its drawbacks, buy-side firms would do well to look past these challenges and enjoy its many benefits, technical expert Kevin McPartland wrote in a recent Wall Street & Technology article.
Buy-side cost pressures
Many institutions are facing significant cost pressures in the current economy. More stringent regulation, growing competition and rising data expenses are all combining to create these headwinds.
Buy-side firms are facing demands to use a greater number of benchmarks, as well as benchmarks that have been customized, to evaluate their performance. Since these resources are becoming more expensive, the rising need for them is helping place upward pressure on the expenses institutions must cope with.
Rising computational needs
Another development that is affecting buy-side costs is the increasing demand for computational ability, which has been partly fueled by the growing use of structured products, noted McPartland, who works for a company that provides market intelligence and advisory services to financial institutions.
Lowering costs with cloud computing
One way institutions can potentially defray these expenses is harnessing cloud computing, he emphasized. The author cited figures from a 2013 study conducted by this firm, in which institutional investors reported an average annual budget of $5.5 million. The average spend was even higher for hedge funds, coming in at $7.9 million per year.
To illustrate the potential cost savings, McPartland used the example of a hedge fund that needs slightly more than 3,600 cores to perform the computations needed for its products. If the buy-side firm decided to use an on-premise grid, this choice would cost $4.1 million every year. However, opting to work with an enterprise cloud solution would carry a total annual expense of $1.9 million, close to 50 percent less.
Another factor that could easily impact whether buy-side firms harness cloud computing technology are the difficulties that surround regulations and compliance management. Currently, these institutions are operating in a complex regulatory environment created by the enactment of various regimes.
Since the financial crisis, lawmakers and regulators have passed landmark reforms including the Dodd-Frank Act and European Market Infrastructure Regulation, which have provided financial institutions such as buy-side firms with far more stringent compliance.
These changes have affected every facet of these institutions’ operations, including the back, middle and front office functions.
Authorities embrace cloud computing
Amid this situation, it is perfectly understandable why buy-side firms would want to avoid anything that could create regulatory challenges, the author noted. However, it would seem that the authorities providing regulations are embracing cloud computing with greater frequency.
The European Union has helped facilitate the proliferation of this technology, proposing regulatory changes that would make it far more simple to transmit information from one nation to another, he noted. In addition, both the Financial Industry Regulatory Authority and The Securities and Exchange Commission are using cloud computing.
Finally, the regulatory environment is becoming increasingly certain, McPartland asserted. Amid these numerous tailwinds, buy-side firms might do well to harness cloud computing to facilitate their current operations.