Until SEC acts, firms follow NASD guidelines instant messaging has become an instant hit in the capital markets arena, with more than 80 percent of traders using it to some extent, and firms are battling internally over how best to comply with anticipated regulations. "IM is becoming as common as e-mail, but firms cannot permit their staff to just sign up for AOL or Yahoo! Messenger and be done with it," notes Damon Kovelsky, an analyst in Financial Insights Capital Markets Trading Group.
"A firm must be aware of two things: the regulations affecting its use of IM, and the technology needed to ensure that these regulations are being followed," Kovelsky says. TowerGroup estimates that 15 percent of the North American securities industry use IM actively for sharing market-related data with clients.
Other analysts predict that number will double by 2007. To date, IM uptake has been haphazard at best, with many traders using commercial IM platforms that don't allow the capture and archiving of communications.
A few traders and clients are starting to use IM in the transaction process for passing market-critical information, indications of interest, and in some cases, even orders and trades. So, given the intense pressure for effective corporate governance today, comprehensive archiving and compliance processes top the list of priorities for capital markets firms.
Miranda Mizen, senior analyst in the Securities & Capital Markets practice at TowerGroup, says IM fills a need but has a "minimal" return on investment in the transaction arena and requires significant investment to "develop tight interoperability across the board." Moreover, she says IM will probably accelerate the creation of more competitive low-end tools for passing orders and trades.
"This is a useful tool that is somewhere between data and voice," says Mizen, who says some firms are so frustrated with the no-man-land rules that they've simply outlawed IM use with clients. "We want to work with vendors to get a standard, to make IM interoperable.... But IM in itself isn't an execution tool-and certainly not a silver bullet. It's a communication tool that has a role as a supporting cast member." By late 2004, she says, it'll be "as common as the fax used to be."
Until the SEC rules on the regulations, which could happen in 2004 or 2005, many firms are applying the rules that apply to e-mails: Archive everything for five years, says Kovelsky. Others have chosen to adopt NASD's stipulations, issued in June, that IM records be retained for three years. "That's the safest bet, the most conservative idea," he says. "IMs are more difficult to deal with that e-mails. They're harder to organize. For e-mails, it's pretty straightforward, but instant messaging is so abbreviated and informal that it's harder to retrieve. So taking the current e-mail rules and applying them to instant messaging is pretty difficult-and a costly thing to do."
Eventually, Kovelsky predicts the SEC will rule that less stringent regulations should be applied to instant messaging, compared to e-mails, requiring firms to simply install filtration software, rather than archive each and every IM message. "A good chunk of instant messages, especially in the morning, for example, will be about the Knicks' game, as the trader talks to his clients," he says. "That's part of client relationships, but there's more of a chance that would happen with IMs than with e-mails. The SEC doesn't want to waste its time, so it would make sense to require only a filtration process, requiring firms to only retain a certain class of IMs, for example, only those that have to do directly with a client's trading activity. That means firms could get rid of those IMs about the Knicks' game."
Another IM glitch is the extensive use of slang. " IM has its own dialect and abbreviations," he says. "Traders do, too, but this complicates the issue of compliance. You have to have someone constantly looking over and seeing what traders' abbreviations are. It's hard to keep track of it."
Tapping into that uncertainty, a host of technology firms have emerged to help traders control, monitor, detect and analyze IM use, including Iron Mountain, Zantaz, EMC, Oracle, Assentor , IMlogic and Hewlett Packard. And financial data providers like Bloomberg and Reuters have also jumped in the boat.
FaceTime Communications was one of the first out of the starting gate. In late 2003, the firm announced its IM Auditor regulatory compliance solution would support Bloomberg's IM network. Oracle also has joined up with the firm to integrate FaceTime's IM Presence Manager into the Oracle Application Server Portal. Latitude, Antepo and BEA were part of similar late 2003 deals.
Syntegra, which manages more than one million messages each month, recently allied with iLumin, a provider of intelligent-content products, to launch enterprise messaging software as well as a carrier-grade messaging platform and service center. Syntegra and FaceTime already offer a similar service for e-mails.
