High-Speed Trading Driving Outsourcing Shift

The growing importance of financial trading is driving a long-term trend in which financial services firms will outsource critical data center operations from in-house facilities to third-party colocation facilities and wholesale data center space. That's the prediction from Larry Tabb, founder and CEO of Tabb Group, which tracks technology trends on Wall Street.

In a column at Wall Street & Technology, Tabb writes that the need for low-latency connectivity for high frequency trading has already shifted many firms' most critical applications into third-party data centers in northern New Jersey. "This has put in motion a process that will spell the demise of the corporate data center," Tabb writes.

Tabb believes the relocation of trading applications will disrupt the economics of the IT operations that remain in the in-house data centers.  

"Think of a firm where 10 percent of its technology moves from internal to external facilities," Tabb writes. "While the group that housed that 10 percent needs to pay for external space, the cost of that internal 10 percent that was abandoned in the corporate data center still needs to be borne by the firm, and typically is reallocated to the other 90 percent of the users that didn't leave."

Over time, that trend will widen the gap between the expense of operating the in-house data center and the cost of shifting assets to a third-party facility. Since the most valuable apps have already left the building, Tabb argues, all that remains is diminishing returns on the company-operated data center. That's a trend that isn't likely to survive the ongoing focus on cost management.

"While this process will not happen overnight and likely will take place over the next decade, the die is cast," Tabb writes. "And unless speed somehow becomes less important, or the economics of running a corporate data center change, owning this castle may not be the most economically sound business decision for the future."

For more on this trend, see Wholesale Data Centers Thrive in Central NJ,which looks at the role of capital efficiency in financial firms' shift to leasing "plug-n-play" wholesale data center space as well as colo space in high-speed trading hubs in north Jersey.