New Tool of the Trade

Financial houses may be scrambling to comply with NASD Rules 3010 and 3110 to monitor, archive and retrieve instant messages, but the regulatory mandate is not stopping the evolution of instant messaging on trading floors.

"In a large floor, it's critical to pass timely information across," says Miranda Mizen, senior analyst with Needham, Mass.-based TowerGroup. "They have to find a way to work with the rules to make it fit because it's supporting the environment," she says.

Sell-side firms may have no choice but to support IM. "Clients are leading the charge," says Jeffrey Scott, senior vice president, foreign exchange at Brown Brothers Harriman, which uses IM to communicate with global investors. "They want market information and market updates flashed to them over these instant-messaging services."

When there's a market-moving event, rather than pick up the phone or deal with the delays of sending e-mail, traders shoot instant messages to their clients.

"For a sales guy, it's key. It's getting me into their minds and their brains," says Keith Henthorn, senior vice president, corporate sales, Royal Bank of Scotland. For internal communications, the global bank uses MindAlign, an enterprise system. "If (a client) in the U.S. wanted to do something in Japan, we use it for global information flow," he says.

For the past few months, Henthorn has been using Reuters Messaging, which the bank was offered as an additional add-on to the Reuters Dealing system (for FX) and the Reuters news information system. "The nice bit about Reuters is that clients can have multiple banks speaking to them," he says.

Speed is the number one feature of IM cited by traders. "It's more real time than a phone call (during which) you can only talk to one person at a time," says Scott.

Up until six months ago, BBH mainly used the older Bloomberg messaging system to convey market information and pass trade ideas back and forth. But recently the bank began using Reuters Messaging, a new product based on Microsoft Office Live Communications Server technologies.

While a trader has to be a Bloomberg subscriber to use the Bloomberg message system, with Reuters Messaging, "You don't have to be a Reuters user to have it, and it's free," says Scott. However, banks are taking precautions by not letting traders use the screen names they use on AOL or Yahoo. "On Reuters, it's Jeff Scott at Brown Brothers Harriman. You know whom you are speaking to. It has your full user name. It's more professional," says Scott.

On the other hand, due to compliance concerns, many financial institutions have their own enterprise systems which function as gated communities.

"Enterprise means it's your community that you establish, as opposed to the public system such as AOL or Yahoo," says Marie Patton, vice president of ICAP, a fixed-income inter-dealer broker. ICAP uses IM Hub from Communicator as its internal system.

On a global level, firms use the enterprise IM systems for secure communications between the firm's offices to facilitate passing of trade details, says Patton. "It's quicker and more secure, (and because) of the presence detection, you know it's been received."

While some firms have outlawed the usage of consumer IM services like AOL, others permit it as long as it can be tracked.

"Two years ago everyone was thinking the only solution was enterprise systems. There's now technology to bundle all the different systems and put it all in an archivable, retrievable format, which allows customers like ourselves to have a hybrid of instant-messaging (systems)," Patton says.

Reuters is helping to fuel that trend. During the first quarter of 2001, Reuters plans to launch a more secure messaging service that will offer connectivity to the three largest consumer IM applications - AOL, Microsoft Messenger and Lotus (Sametime). "We are the first company to open it up to so many networks so quickly," says a Reuters spokesman.

Reuters says it developed the system because the number-one request from the sell side is to talk to the buy side. "Hedge funds that can't afford a $1,600 Bloomberg machine are using MSN and Yahoo to talk to all their counter-parties," the Reuters spokesman says.

In the meantime, the sell side is in a quandary because it wants connectivity, yet is worried about compliance.

To give the sell side more security, IM Logic is creating a gateway for Reuters that will encrypt all the messages coming from AOL, MSN and Lotus' systems, and then audit and log them. (Bloomberg says it's working with the same third-parties.)

But how far will instant messaging go? Will it morph from being a valuable communications tool into "a silver bullet that can be a trading tool?" asks TowerGroup's Mizen. "I think it's got a very useful function in the trading arena," she says.

Before IM can be linked to trading, there are some compliance hurdles to overcome. Right now, financial houses are not letting their sales and trading personnel enter deals through IM. "Definitely no orders are taken over IM systems," says Pamela Housley, director of compliance at Thomas Weisel Partners. "Most firms will not accept orders electronically via IM because if the system goes down, how do you know if the order went through?" she says. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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