Vivek Shankar

Exploring the transformational effects of e-FX in the Cloud

September 2022 in Fintech & Connectivity

The cloud is here to stay in FX. However, the effects of cloud technology extend well beyond cost efficiency, writes Vivek Shankar.

The FX world has steadily embraced managed cloud solutions over the past few years. This move mirrors broad digital transformation initiatives that have witnessed banks revamp their businesses by leveraging technology. Cloud adoption is a digital transformation pillar, given the cost and efficiency advantages it offers.

While FX stakeholders recognize the need to move to the cloud, this process brings unique challenges. Ganesh Iyer, Chief Marketing and Strategy Officer at IPC Systems, explains further.

“Concerning FX, 66% of respondents to an IPC survey said that trading-related technology is important to meeting 2022 performance/returns targets,” he says. 

“Crucially, while the majority of respondents acknowledge the importance of a fully-connected and integrated infrastructure linking all participants, only 41% felt that their organization had either the technology or wherewithal to ‘connect the dots’ themselves.”

FX has traditionally welcomed technological innovation, whether a fully electronic trading environment or algo usage. Managed cloud service providers are spearheading the latest technological change, and FX is set to reap the benefits.

“Every performance enhancement, security safeguard, or other solution improvements a managed service provider introduces as technology evolves, benefits every one of its clients.”

Ganesh Iyer

Connectivity and flexibility

Vikas Srivastava, Chief Revenue Officer at Integral, firmly believes the cloud offers FX market participants several benefits. Fast deployment, reduced infrastructure costs, and fully customizable technology built for scale are a few of the ones he lists. 

“The FX market has gone through a journey of digitization over the last two decades,” he says. “This makes it a perfect fit for cloud technology that supports the evolution of the industry with whatever is to come – with speed and agility.”

Srivastava also points out that the cloud offers a marked improvement over legacy technology. “FX providers who’ve migrated to the cloud are able to access state-of-the-art technology at a fraction of the price it would cost to build their own,” he says. The cloud offers a flexible infrastructure solution essential to executing FX business needs.

Connectivity is the most critical element of a firm’s FX infrastructure. IPC’s Iyer points out that connectivity is a combination of ease of access, onboarding, and scale. “It’s a fast-moving target. It’s not just about ease and efficiency of markets’ access, clients also want fast, efficient onboarding of new providers, asset classes, and customers.”

“Further, they want to leverage cloud technology and connectivity to take advantage of emerging technologies and data sources to support AI and algorithmic trading strategies and other intelligent automation projects.”

He further explains that a venue’s liquidity or Tier One relationships are not the only elements participants consider. “The key is to knit the technologies together efficiently, in the right combinations, and with the right connections to meet each FX provider’s unique requirements,” he says.

When evaluating cloud infrastructure, talk of hybrid, on-premise, and off-premise systems rears its head. Stakeholders typically evaluate these options, comparing the benefits of one versus the others. While distinguishing between these options is necessary, recognizing that there is no standard “one size fits all” solution is far more critical.

“FX providers who’ve migrated to the cloud are able to access state-of-the-art technology at a fraction of the price it would cost to build their own.”

Vikas Srivastava

“Our experience is that solutions are typically a combination of cloud technologies, accommodating the diverse needs of each of the constituents in the providers’ transaction supply chain,” Iyer says. “This is where we come in; being able to deliver any combination of market connections and trading solutions, underpinned by cloud technologies, on an ‘as-a-service’ basis simply makes more business sense.”  

Srivastava notes some of the benefits of this business model for FX stakeholders. “(Firms) can deploy pricing engines, algos, connectivity, and distribution tools, as well as make prices, obtain liquidity, and host algorithms in a low latency configuration in a matter of weeks,” he says.

Best of all, managed cloud service providers offer firms the ability to scale their systems and integrate tech such as AI and distributed ledger systems.

Cloud storage also helps firms deal with the changing nature of the trading floor

Data democratization and analysis

A move to the cloud also addresses a critical need within FX operations: Data democratization. Eugene Markman, CEO of MarketFactory, an ION company, and COO of ION Markets (FX), explains the issue. “FX is a competitive space, which means that traders prefer to hold on to their data to make the most of the insights they gather. As a result, the market is siloed with participants holding on to their respective data sets.”

Markman points out that data silos occur within organizations too. Traders find it difficult to deliver the best execution with such partial views. Cloud data storage removes these hurdles and offers additional benefits.

“Given that FX trades OTC, 24 hours a day, five days a week – having data in the cloud means that it promises real-time analysis.”

Eugene Markman

“Given that FX trades OTC, 24 hours a day, five days a week – having data in the cloud means that it promises real-time analysis,” Markman explains. “On the cloud, data is updated in real-time, mitigating delays caused by internal IT teams capturing and processing information about price movements from different points. Not only does this ensure better-informed trades at a lower cost margin, but also enhances compliance and risk management capabilities – both of which are key to optimizing an organization’s return on investment and market position.”

Cloud storage also helps firms deal with the changing nature of the trading floor. “A few years ago, it would have been unthinkable to many that virtual trading floors could be created (and traders could work from home) with the necessary (mandated) and rigorous levels of security, performance, surveillance, conduct, and reporting built around them,” Iyer says. “However, new communications technologies have facilitated a major shift in mindset in long-held attitudes to ‘institutional’ operational and business models.”

The result is that firms must invest in flexibility and the robustness of their cloud environments. Integral’s Srivastava quickly points out that managed cloud service providers simplify decision-making workflows too. “In general, having one source of data, easy data aggregation and access enables easy analysis and allows for better insights to be drawn from the data,” he says. “Our cloud-based SaaS technology allows clients to gain a holistic view of critical business functions, FX activity, and data science tools empower them with actionable intelligence.”

Data science and analysis are playing major roles in FX trading strategies thanks to algo adoption. TCA has shone a spotlight on the need for cost-effective trading workflows, and service providers that help firms reach this goal tend to prosper.

The seamless communication and connectivity that the cloud offers enhances TCA and offers firms granular insight into their data. Combined with the advantages that democratization offers, the benefits are clear. For starters, cloud infrastructure scales and adjusts to meet the large data volumes FX workflows generate.

As Markman explains, “All processes are connected and accessible in a singular environment – eliminating concerns relating to outdated infrastructure while also providing a clear and uninterrupted view of both historic and current data.”  

Srivastava believes the cloud offers yet another example of building agility into workflows. “With cloud-based SaaS technology, it’s easy to layer other applications on top of the “baseline” technology solution, which is one of the reasons why cloud-based solutions are so agile and scalable,” he says. 

“With trading becoming more and more a technology play, there is demand for data analytics tools like Integral Watch, keeping clients on top of critical business functions, trade rejection patterns and transactional data with multiple filtering options to help run their eFX business more efficiently.”

The result is a future-proofed solution that reacts to the markets quickly, giving stakeholders all the information they need to execute their strategies.

Security and resilience

While the business benefits of cloud technology are clear, how are service providers ensuring security and infrastructure resilience? Markman concedes that firms can never eliminate some hardware downtime. However, he points out that response agility is critical.

“In terms of reliability, as with most processes, hardware will never be 100 percent reliable,” he says. “However, if the infrastructure is being created in-house, when problems arise, these will likely take time to fix given their wide remit. e-FX providers are therefore taking steps to implement cloud-based solutions that run on specialized servers which can tackle specific issues – even during power outages, hardware failures, and system errors. The outcome is operating in a dependable and therefore far more productive trading environment.”

Iyer mentions that partnering with a service provider that has a long and successful track record is critical. “It’s the ‘rising tide lifts all boats’ principle,” he says. “Every performance enhancement, security safeguard, or other solution improvements a managed service provider introduces as technology evolves, benefits every one of its clients.”

“Beyond a robust technology infrastructure, in IPC’s case they are also leveraging a flexible, multi-modal platform and an unparalleled, ever-expanding community of participants, for seamless, light-touch, end-to-end connectivity and a secure information flow with global counterparties and customers.”

Aside from resilience, cloud service providers also offer low latency solutions. Markman points to VPS services as an example. Srivastava adds that locating data centers in major financial hubs such as New York, London, Tokyo, and Singapore is another significant factor driving low latencies.

Security is another critical factor when considering a managed service provider. Markman is quick to point out that security extends beyond data protection. Firms must have secure access to data to comply with changing regulatory needs. 

“By leveraging the cloud, e-FX providers now provide a far more comprehensive service, which both meets and, in some cases, exceeds security requirements,” he explains. “While this is the case for both public and private offerings, vendors with specialized VPS platforms stand out. The flexible and automated nature of these bespoke services means infrastructure and application security checks can occur as soon as new requirements arise.”

“In a space characterized by uncertainty and evolving regulations (Dodd-Frank, MiFID, EMIR) each with varying requirements, this enhanced security risk mitigation is arguably more important than ever to create a comfortable and efficient trading environment.”

Srivastava notes that the right cloud infrastructure ultimately comes down to configurability. “From a customer’s perspective, it is about finding a trusted and proven provider who has reliable technology, improves efficiencies and the experience they offer their customers, and ultimately gives them technology that supports their business growth with flexibility and scalability,” he says.

He points out that managed cloud SaaS tailors itself to every client’s unique needs, offering unparalleled business advantages.

Iyer is also quick to caution that the cloud is best leveraged by firms that align their business to their infrastructure. After all, the cloud isn’t a silver bullet. “Financial market participants that have been most successful in cloud migrations, and in embracing new technologies, tend to exhibit common characteristics,” he notes. “Their approach to cloud adoption and its benefits is driven from the top down, by the Board and overall business strategy, not looked at as simply a “technology initiative”. These firms have a high degree of integration between business and technology and increased blurring of traditional lines of demarcation between the two.”

Given this blurring, can the cloud offer ways for firms to enhance their value proposition? Iyer responds that adopting the “disruptor” firm approach is paying dividends to some institutions. “By offering FX as a SaaS platform within a data center environment, early adopter customers are already thinking about how, as well being consumers themselves, they can package it up as a service to their own customers,” he says.

Srivastava adds that Integral’s white label offering, a standard part of its cloud-based SaaS technology, is being used by clients across geographies who take advantage of the branding opportunity and the customization that fit their requirements – down to local language options. “The fact that our white label solution can be deployed in a few weeks makes it a no-brainer for our customers,” he says.

Managed cloud service providers offer firms the ability to scale their systems and integrate tech such as AI and distributed ledger systems

Future transformation

“From a macro perspective, agility and flexibility make cloud technology a democratizing force for firms operating across the spectrum of FX,” Iyer explains. “Lower cost operations and product development, coupled with continuously evolving, high-quality technology provided by financial markets specialists will continue to level the competitive playing field, removing traditional barriers to entry and shortening time to market.”

He concedes that cloud fragmentation is a potential risk. However, a multi-cloud approach can mitigate it and offer institutions an exit. 

Srivastava points to existing trends in the market that indicate cloud migration shows no signs of slowing down. “Our research from last year shows that the vast majority of trading in the $6.6 trillion-a-day FX markets is expected to migrate to the cloud by 2026,” he says. “In fact, the continued acceleration and demand for tier-one technology that we’ve seen might mean it’s sooner than that – there have been quite a few big technology announcements in capital markets even in the last 6 months. Around 75% of the respondents were banks which indicates that cloud-based solutions are gaining wide adoption across even more traditional market participants in FX, a trend we’re welcoming.”

Markman opines that the cloud has been nothing short of revolutionary in FX, given the way it has improved market efficiency. “Clearly cloud is key to institutional FX investors, who are looking to provide a high-level service to their clients,” he says. “Not only does it overcome challenges, but it can also unlock new trading opportunities to further business development.”

Cloud services are rapidly changing and represent a new frontier in FX evolution. Only time will tell what form cloud services adopt as institutions continue to seek more efficiency and visibility into their data.