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September 24, 2008
Banks and Outsourcing: Just Say 'Latency'
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A common critique of external cloud computing services is that big-time IT users, like major corporations and financial institutions, are nowhere near getting on board. That might be true for the new breed of "cloud" services, but for the financial services sector, at least, outsourcing is far from a dirty word.
Especially in the world of electronic or algorithmic trading, latency becomes a huge issue that, for some firms, can only be solved by hosting trading platforms in the same datacenters as major exchanges. For those with less-constant, less real-time demands, renting cycles on a global grid architecture, or even renting your own dedicated grid, can guarantee CPUs whenever and wherever they are needed. However they choose to do it -- and even if they opt otherwise -- the financial world understands the benefits, pitfalls and nuances of outsourced IT.
Ted Chamberlain, research director in the Networking & Communications Services practice at Gartner, believes we're actually experiencing a bit of an outsourcing renaissance. Traditionally, the financial sector does not like to let technology out of its grip because they view it as such a differentiator, but "I think we're at the point now where so many of these financial houses either are running out of space or aren't in the locations they want to be," says Chamberlain. "Conversely, people like BT Radianz and Savvis actually have started to, I think, build their portfolios to lure [financial institutions] away from their own datacenters." Especially in the past 12 months, he adds, the proliferation of exchanges going online has drawn a wide range of financial institutions -- from investment banks to brokerage houses -- to look into hosted datacenters for the sake of interconnecting with the various sources of market data. (Customers with space in one of Savvis' 31 international datacenters, for example, can cross-connect with anyone in any of the provider's other locations.)
"It's definitely becoming a larger trend," Chamberlain forecasts. "I don't think we're going to see a complete flip of all these financial service companies outsourcing to these exchanges in a cloud computing model, but we do see them diversifying and putting some level of their infrastructure in certain providers."
Although Gartner does not forecast this market, Chamberlain says his gut feeling is that these services will grow somewhere between 30-35 percent year over year, with the EMEA and APAC markets experiencing a doubling in size.
Alex Tabb, a partner in the Crisis & Continuity Services division of the Tabb Group, also sees an increase in outsourcing interest, although not across the board. The big sell-side investment banks experimented with outsourcing several years ago but many have since shied away from the practice, he says. The reason is that potential cost savings were not worth the sacrifices they had to make in terms of control, management and integration. And with such large operations, outsourcing just became too much to handle. For medium-sized banks and smaller buy-side firms, though, Tabb says hosted solutions make a lot of sense because it is easier to pay someone with that expertise than to staff an entire IT department.
Latency: Public Enemy No. 1
One area where there is no contention is the importance of low latency: It is the No. 1 reason financial firms are moving to hosted solutions. Chamberlain calls latency the primary motivator for making the move, particularly when it can be provided without "gargantuantly scaled costs." Granted, he notes, managed services often bear a premium over simply buying a point-to-point connection or buying traditional content delivery services, but the presence of guaranteed SLAs along with the low latency make it a premium with which they can live.
Tabb says latency is at its most critical in electronic trading scenarios, when trading applications require high-speed access to the exchanges. In particular, he says, "Latency becomes a killer if you're running VLDBs (very large databases)." An example would be a firm like Bank of New York trading billions of dollars in bonds -- for such an operation, Tabb stated, latency will bring down the system. Smaller houses doing algorithmic trading don't have quite the latency demands as their bigger counterparts because the requirements probably are not as high with 50 people accessing the trading application versus thousands, he added.
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