Wall Street as the first business infrastructure as a service

The financial markets have been riding a roller coaster in the dark for several weeks. The uncertainty and fear clogging the flow of currency is causing governments of the industrialized world to examine how global markets conduct themselves, with an eye on shorter leashes for many large financial institutions, which these governments now have a stake in. It is likely that new, stricter regulations will come fro

The financial markets have been riding a roller coaster in the dark for several weeks. The uncertainty and fear clogging the flow of currency is causing governments of the industrialized world to examine how global markets conduct themselves, with an eye on shorter leashes for many large financial institutions, which these governments now have a stake in. It is likely that new, stricter regulations will come from this scrutiny and will severely limit how much risk these large organizations are allowed to take. It has also become clear that the degree of understanding and transparency surrounding the troubled investments that led to the current dilemma was limited, despite significant infrastructure devoted to the timely examination of the risks involved.

For those sell-side firms (banks and brokerages) that have significant investments in the risk and pricing platforms, the impending closing door on higher-risk trading instruments will likely swing both ways, opening a new platform as a service provider to those who will trade in those markets: hedge funds.

Hedge funds do not have the same restrictions as public banks and brokerage firms. They have little or no SEC oversight, and while the sell-side firms may be restricted soon, the appetite for this higher-risk, higher-reward market will not totally diminish. The clientele that hungers will be typically served by hedge funds.

While hedge funds may have the means and opportunity to redefine these markets, they will not have the infrastructure required to run the risk analytics for the increased volumes they will encounter. They will need easy and fast access to a large enough liquidity pool to operate their entire suite of strategies. Given the nature of the hedge fund business, large-scale infrastructure investments of this nature are not normally realized.

Sell-side firms, on the other hand, have the risk analytic platforms, the connectivity, and the infrastructure required to provide a service to these hedge funds, essentially capturing, disseminating, and reporting on flow, while aiding in risk and pricing valuations. As the flow of riskier transactions moves from sell-side firms to the hedge funds, banks and brokerages can leverage this robust infrastructure as a service, or IaaS.