... is there some movement toward "upload the strategy and let the exchange run it"? which would provide a more level playing field, reduce energy and hardware costs, etc?
Exchanges do provide very limited special conditional execution instructions such as peg orders or stop orders, but it seems like a hard problem for them to support anything more sophisticated and general.
> Also if two people want to make the same trade, who gets it?
Whoever pays more currently, right? So it can be uniform random and folks can pay for better than random chance, etc.
It's the same hypothetical "EC2 model" without the meta-game of trying to get closer to the cores the exchange runs at a given time.
Can you elaborate on the downsides besides security?
If a third party provider (there are several which offer this service) manages the rack, router, host infra, and provides you with the virtual guest OS, or going one step further with the application into which you load the strategies, then it's much easier to "right size" the infrastructure you actually need.
As others have pointed out, the pain point is multicast into the VM. Drop a packet = you lose money.
All that said, some trading is going the other way, RFQ based flows with 30 second quote lifetime, which is perfectly suited to the cloud and it could well be the nature of what is traded moves away from volatility based products (options) to value driven (bonds, funds).