Cloud computing is changing the world for sophisticated institutional investors – even those who have never used Internet-based servers to execute a trade or stress-tested a high-frequency trading strategy. The result, according to experts, will be a lower cost structure for performing high-end trades and more widespread access to the computing power needed to develop and execute complex algorithmic trading strategies.

Cloud computing – on-demand self-service Internet infrastructure where you pay-as-you-go and use only what you need – is growing fast. Revenues in 2009 topped $56 billion for a 20 percent-plus increase from the previous year, according to technology research firm Gartner Inc., which projects the market hitting $150.1 billion in 2013.

What makes computing in “the cloud” so attractive to institutional investors is that it enables an end user to “rent” computing time from organizations with huge server capacity, such as Google, IBM,, Savvis, Microsoft’s Windows Azure, Amazon Elastic Compute Cloud (Amazon EC2), and Rackspace Cloud.

Firms now have a choice. They can build and maintain their own data centers, which can cost $1 million even if they cover only two or three markets, estimates Ken Yeadon, managing partner of Thematic Capital Partners LLP, a London-based venture capital firm that specializes in trading infrastructure. Or they can use cloud providers’ servers to test new trading strategies, back test and run time series analyses, and even execute trades.

“High-frequency trading strategies start with a lot of data analysis and often have a long R&D cycle,” notes Yeadon. “This can involve very expensive computational processes. You might need 1,000 CPUs working together in conjunction as a supercomputer for a short period of time. With cloud computing, instead of building the data center infrastructure yourself, you can test the strategy as long as you need to, on demand, and if it doesn't stack up, you just shut it down and stop paying for it. These types of strategy would simply not be commercially viable otherwise for anyone except the very largest market participants.”

Providers like Amazon EC2 tend to charge the user only for the time and capacity used, rather than passing on a percentage of their total costs – including maintenance, troubleshooting, security and other capabilities. For instance, the hourly charge to use one Rackspace server with a 620GB disk powering 8,192MB of RAM costs $0.96 per hour, or $700.80 per month – along with two basic charges of $100 a month and $0.12 charge per server hour.