UCX: Trading the cloud's capacity

April 17, 2016 02:00 PM

The Universal Compute Xchange (UCX) is an on-demand spot exchange to trade access to cloud capacity. It offers businesses and organizations the ability to trade and hedge their storage needs by commoditizing the cloud.  

UCX co-founder and Director of Financial Products Hagop (Jack) Bouroudjian has spent 30 years in various roles in the futures industry, including president of Commerz Bank, and several years as a member of the Chicago Mercantile Exchange Board of Directors. This was between 1996-2002, a period of tremendous change and innovation at CME and the futures world. 

Bouroudjian and another former CME trader, UCX co-founder and CEO Adam Zeck, stumbled on the concept of an exchange to trade cloud capacity. 

Zeck learned of a firm that created an algorithm that measures cloud capacity as a potential venture capital project. Zeck shared this idea with a common friend, Attorney Chris Dwyer, who advised him to bring the idea to Bouroudjian.

“We fell into something that is pretty unique. A way to measure and trade infrastructure, namely the cloud as a commodity,” Bouroudjian says. “In their pitch they said, ‘We have an algorithm that measures and essentially turns the cloud into a commodity.’ Adam’s ears perked up and immediately contacted Chris Dwyer and me. We did a little digging, a lot of due diligence and found that this algorithm was the algorithm of choice for the IT community to measure out their compute resource power).”

What the algorithm provided was a way to create a benchmark unit to measure cloud capacity. It all sounded great, but they needed to learn more. Bouroudjian and Zeck began assembling a team, performed due diligence and even visited Silicon Valley; everyone they spoke to said the same thing: “You have to have this algorithm to start with.”

Bouroudjian and Zeck bought it.

They also noticed that there was a lot of discrepancy in pricing in the space. The industry priced cloud capacity in what they call instances, essentially the way they used to buy minutes in the old days. A provider would allocate you a certain amount of the certain components that run the cloud (see “Cloud components,” right). 

As someone who helped develop innovative risk management projects, Bouroudjian recognized an inefficiency that could be exploited. 

He brought it to close friend, CME Group Executive Chairman Terry Duffy, who knew if Bouroudjian kicked the tires and liked it, there must be something there. Duffy sent it to his tech people to check out. 

Their timing couldn’t have been better because it appeared that the entire financial technology and exchange community were looking for an answer —
and they had just found it. 

The Intercontinental Exchange (ICE) was looking into the concept. “ICE sent for us, they wanted to talk to us immediately because they had been doing their own due diligence and wanted to find an algorithm that did all this,” Bouroudjian says. 

At roughly the same time Deutsche Bourse was launching its DB Cloud Exchange. They also reached out. “As the former president of Commerz Bank, they contacted me and said ‘Jack, we see you are affiliated with this thing and would like to talk to you.’”

This was all happening at the same time.

Zeck and Bouroudjian figured on leasing out their suddenly very hot commodity to one of the exchanges, but CME Group offered to back them in the creation of a new exchange for future rights to all derivatives contracts. “CME came to us and said ‘Why don’t you guys take this and really run with it. We will help create an entire concept around you,’” Bouroudjian says. 

They would have access to CME matching engine technology and marketing resources and the freedom to take this where the market led it. UCX was on its way. 

They took the original algorithm, expanded on it and started to establish an on-demand spot market for infrastructure as a commodity. UCX launched beta testing with live trades to a small group of partners in January 2015 and opened it up to the public in September 2015. UCX estimates the underlying cloud infrastructure industry to be worth $1 trillion. 

UCX goes live

The six components described in “Cloud components” make up what is called a workload allocation cube, or WAC. People are trading it. UCX has already traded well above 11 million WAC hours.

“It is much like the watt in electricity,” says Bouroudjian. “People did not have that standard to measure electricity until somebody said, ‘Here’s the watt, this is the standard that we are going to measure all electricity.’ Sixty years ago they still had electricity officers. It has become a commoditized portion of our lives as we’ve seen it evolve.” 

Bouroudjian expects the cloud, as a commodity, to evolve similarly. “As we see this wild west of pricing get more efficient, the need for a central price discovery mechanism is clear,” he says. “Not only that but the need to manage risk becomes clear because as we discovered, you have these corporations that are in the process of building data centers for two months of the year because they see a spike. We are trying to give them solutions that make sense.” 

In our most recent Top Brokers feature, “Top 30 Brokers: Mean, lean and ready for what comes next” (January 2016), several futures commission merchant (FCM)  leaders expressed frustration that new regulations were requiring them to maintain more customer information, while at the same time additional rules on cyber security were coming online. They faced the double whammy of increasing both their capacity to collect data and making sure it is secure. 

UCX appears to be a way they can meet such requirements more efficiently. “Our FCM community is a big example [of how this adds value],” Bouroudjian says. “They have to store things. This is one way for them to charge back in a fashion that they understand.” 

The key to UCX’s value proposition goes back to an allocation versus consumption model. “What we are doing is giving people the ability to pay as they go,” Bouroudjian says. “For example, Amazon right now will offer you a consumption-based model, but it is an allocated consumption-based model. They are allocating a certain amount for when you consume it, even if you are consuming it on an hourly basis. If you spike for eight seconds, they will charge you for the entire hour.”

UCX director Bill Hayes points out that many businesses only use 6% to 12% of the cloud capacity they are paying for and that pricing is extremely difficult to quantify. “No one had the ability to do an apples-to-apples comparison of cost because everyone measures an instance in a different way. An instance is nothing more than an allocation on a machine,” Hayes says. “What Amazon has and charges for is not the same as what Google or Rackspace has. You have these three looks from three different types of platforms and don’t understand what you are paying for.” 

“I know that I am getting a competitive price because people are competing for my business,” says Mike Schroll, co-founder of web hosting firm DNS Filter.

Schroll says UCX is helping make his business more efficient. “In the past it might have been the case that we had to go and spend millions of dollars setting up in different data centers around the world,” Schroll says. “Just a couple of months ago I needed to spend hundreds of hours calling different service providers to try and negotiate for the best price and make sure they can do what I need. Now I can just go to UCX and they have their marketplace with different providers, [which] saves me lots of time and makes sure I am getting the best deal.” 

Expansion 

UCX has started with the initial WAC productm but is rolling out additional contracts based on demand. 

“We expect eight to 10 products during the course of the next year,” Bouroudjian says.  The first few will be soft commodities; they will be data intensive; we will probably have a storage intensive WAC, a disaster recovery WAC. Disaster recovery is a great example of wasted resources for corporations.”

Instead of building separate data storage facilities, companies can go to UCX and buy what they need. The sellers on UCX are the providers. They are already selling their services, but UCX allows them a platform to place excess inventory. 

“They are selling it through their own systems,” Bouroudjian says. “We are giving them a very transparent way [to sell it]. Think of it this way: every minute at that data center that is not being used is wasted, so if they can go out there and sell it—great. Better yet, what if they want to lend it? Now they can go out there and lend out capacity because people would be using product.” 

One such provider is public cloud hub Packet, which also helped develop UCX’s bare metal contract. Bare metal refers to the pure power of a server without anything layered on it. “The new flexible container technology [firms], the Netflixes of the world [and] the gamers of the world all use this bare metal,” he says. 

“We are participating in UCX as a way to monetize our excess inventory and provide a normalized 
vetting process,” says Packet CEO Zachary Smith. “What UCX does is bring some efficiency to the process for us. What I want to do is maximize utilization on my cloud.”

Eventually sellers like Packet could become large commercial hedgers of UCX futures contracts. 
“We also can buy capacity eventually if we have high demand or something happens that we didn’t count on,” Smith says. 

UCX has an Indian exchange affiliate, the Indian Compute Interchange. “We are working closely with their government and with large corporations in order for them to measure out and trade internally the WAC,” Bouroudjian says. “They see this almost as a cyber 
currency because it is easy for them to charge back in compute power knowing what that value is regardless of where the rupee is trading.”  

One of the advantages of trading cloud infrastructure is its universality. “It’s compute resource power no matter where you go,” Bouroudjian says. “A WAC is a WAC is a WAC. That opened my eyes when we went to India.” 

And there are plans for Europe. “DB cloud did not have our algorithm, they could not deliver what they are trading; we, on the other hand, can.”

Bouroudjian says that in a different era an exchange would have created an entire new membership to trade a new asset class like the cloud. However, he sees some advantage with the flexibility of a start-up. 

“When I was in governance at the exchange, it was really hard to move quickly; when we are this flexible and small it is nice [because] we can navigate very fast,” he says. “We find ourselves in a unique situation. As more and more people are navigating to this world called the cloud, the need to be able to understand what the cloud really is and how to be able to hedge that exposure is what we have. It is really about what the market is telling us. Right now the market is telling us they want a storage-intensive WAC.”

Rght now, UCX has waived all exchange fees, but anticipates eventually listing futures contracts and having a traditional fee structure. 

“You’ve got something that makes sense across all lines, providers and end users; now we have a central marketplace where people can buy and sell that infrastructure,” Bouroudjian says. “It is not a really complicated story but we think it is a really neat story.”

About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.