As banks continue to spin off proprietary trading desks, demand is increasing for cloud-based services for startup hedge funds.

“The Volcker Rule and other regulatory changes are having a profound impact on demand for connectivity and computing platforms,” said Ken Barnes, senior vice president of corporate development at Options, a provider of private cloud services platform for the exchange, banking, trading and investment communities.

Although small- to midsize hedge funds have traditionally outsourced core IT services, demand for cloud-based platforms has escalated due to several factors, including the emergence of Software-as-a-Service (SaaS), a computing model in which middle- and back-office services are hosted at a data center and delivered via the cloud.

“When Options was founded 20 years ago, its value proposition was similar to that of other IT service providers, which were based on a consulting-based model,” Barnes said. “In 2002, however, Options moved toward a managed hosting environment built around scale and efficiency.”

Spending for cloud computing in capital markets will grow worldwide to $2.8 billion in 2013, according to research firm Celent.

Shifting projects and applications to the cloud helps reduce costs by reducing excess capacity, speeds up deployment times by leveraging existing infrastructure, and provide scalable capacity for new projects, according to Celent.
Options offers three type of cloud services: Core, a set of basic IT services such as e-mail and telephony; Momentum, a managed hosting service for front-, middle-, and back-office applications; and Velocity, a direct market access service for low-latency trading application.

“We are seeing a spike in demand for Core from startup hedge funds and prop trading firms that have been spun off from banks as a result of the Volcker Rule,” Barnes said. “A cloud-based infrastructure is well-suited for that.”

Through its Momentum service, Options provides hosting for a variety of service providers such as Advent Software (portfolio management), Misys Sophis (risk management), and Eze Castle Software (order management system).

“Data outsourcing in the financial sector has increasingly become an important asset with rising costs over the last couple years,” said George McLaughlin, senior director of data services at Advent Software, in a statement.

The business relationship with Options “continues to demonstrate a growing and innovative presence in the area of infrastructure-as-a-service and the private financial cloud,” McLaughlin said.

“For Advent, the cloud allows them to deliver an overall solution that’s more cost effective to operate and manage, and which opens up the addressable market for them,” Barnes said.

In addition to SaaS, the other two major service models of cloud computing are Infrastructure-as-a-Service (IaaS) and Platform-as-a-Service (PaaS).

PaaS, by providing a computing platform as a service, enables users to develop software using tools and/or libraries from the provider. The user also controls software deployment and configuration settings. The provider provides the networks, servers, storage and other services.

Examples of PaaS are Google App Engine, Windows Azure, and Salesforce.