Though instant messaging (IM) is a fast and convenient communications format, buy-side firms are still cautious about the regulatory implications of using the technology because they lack the compliance tools to archive and retrieve the content. Under SEC rule 17a-4, instant messages must be archived and retrievable and can't be edited or changed. Even hedge funds are shying away from using instant messaging to send orders to their brokers because there has been a lack of technology to create an audit trail.
"If I did not have the ability to archive these messages, I probably would not use it," says Angie Kim, chief financial officer of Core Fund Solutions, a San Francisco-based company that oversees four hedge funds.
Even though the onus is on the brokers to archive instant messages, "There are still certain legal exposures" for the buy side, says Kim. In fact, to limit their own exposure, prime brokers - which clear the hedge funds' trades - don't want hedge fund managers to use instant messaging, adds Kim. If there is a dispute over a trade, the buy-side firm has to be able to retrieve the instant message to resolve the matter. And, because IM platforms are not as secure or as reliable as most trading systems, prime brokers are concerned that a hedge fund could send them trades that an IM platform may fail to deliver. Since hedge funds tend to outsource many functions, such as operations and trading, to third-parties, they don't want to spend money developing IT infrastructure in-house to capture and archive IM communications.
But now there are products coming to market that address the instant-messaging compliance requirements. Core Fund Solutions uses one such solution, IMTrader, a combination light-weight blotter and instant-messaging platform developed by Boston-based Pivot Solutions that interfaces with compliance systems like IM Logic and Facetime. And similar products are available from Bloomberg and Reuters that also interface with the compliance systems. Additionally, order-management systems are expected to integrate instant messaging into their trading applications, too.
"The two greatest advantages [to using a system such as IMTrader] are the ability to see trades [filled] on a real-time basis and the ability to streamline operations by downloading the blotter and uploading trades to the prime brokers," says Kim, who uses IMTrader to monitor trading in real time between the hedge funds' portfolio managers and their brokers. And when she's traveling, Kim can download the software from the Internet to her laptop and, at the end of the day, upload an Excel file of all the transactions to the firm's prime broker, which consolidates and clears the trades. "And you're done. That's your operations," says Core Fund Solutions' busy CFO.
"This is a great way for [firms] to get the benefits of electronic trading without the cost and expense of one of the high-end trading systems," says Furqan Nazeeri, CEO of Pivot Solutions.
Buy-side customers who send trade requests through public instant-messaging networks can have them translated into the Financial Information Exchange (FIX) protocol, so the broker's workflow remains the same, and the fills are translated into the instant message or blotter format, says Nazeeri.
JNK Securities, an institutional brokerage firm that uses IMTrader, utilizes an order-management system from Tradeware Systems to translate messages into FIX. One of the initial problems that JNK faced with its implementation of IMTrader was the reluctance of traders to change the big buddy lists that they maintained on AOL. Since then, Pivot has tweaked the system, so "You can just add our name to your buddy list," says Jack Weiselberg, president of JNK Securities.
But before Weiselberg implemented IMTrader, he had to make sure the data network was secure and that it met the compliance regulations that govern brokers' activities. "In the event that a regulatory organization wants to look at the messages, all that data is stored here in our office," Weiselberg says. "We wanted to control our client's data."
Inside the Blotter
Purpose: Instant messaging (IM) of trades between buy and sell sides via public IM networks or blotter.
Features: Price and volume alerts; time stamps; import daily positions; export trade files to prime broker; archive messages via interface with compliance systems.
Next in Q2: Support equity options; brokers to publish research to buy side; launch chat rooms. 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