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April 1, 2003

A Teen Talk Machine

By Jon Sakoda

The fastest-growing communications medium in history was made popular by teenagers only a few years ago. Now Instant Messaging, or IM, is maturing into a product which is also used by professional adults. Trading rooms are using IM for business. Today, pop-ups, such as AOL Instant Messenger, Microsoft MSN Messenger, and Yahoo! Messenger, are on many desktop terminals.

Some of the largest brokerages are making a mental adjustment for the millions of dollars of business transacted over IM systems. These are tools which were once regarded as a communications toy for teenagers. In truth, this is a frightening reality for many CIOs and IT managers, a group that prides itself on adopting the most rigorous requirements for security and compliance.

Direct Dial

Why has IM lifted-off? The answer is that IM allows users to ensure that critical orders or news can be sent in real-time and then responded to without delay.

Real-time and immediate IM notifications have often replaced the need for traditional hoot and holler communications and direct-dial phone systems on trading floors. This change has meant that traders can multi-task and prioritize both their internal and external communications.

Traders who have reaped the benefits are becoming fanatical about IM. They swear by their community of buddy-lists and conference style chat-rooms. Buyside and sellside pros have embraced IM to become more agile and responsive.

Is there a risk? Unfortunately, though IM has matured in the securities world as a mission-critical form of communication, it must still grow-up in the eyes of regulators, lawyers and CIOs.

IM wasn't originally designed for business purposes. As such, it lacks critical features, such as archiving and logging, features traditionally found in billion-dollar buyside communications.

The Securities and Exchange Commission and the National Association of Securities Dealers are currently investigating a formal ruling for the electronic archiving requirements of IM. They will likely resemble the same retention rules for all electronic communications such as e-mail.

The stakes are high. There were stiff fines imposed over the past year for non-compliance in the area of message retentions, a fact which has pushed member firms to strictly abide by the legal archiving requirements. (Several of the largest broker dealers were recently fined more than $1 million each for not properly archiving e-mail). In extreme cases, individuals or banks can be shut down or expelled from broker dealer activity for not following the rules.

The adoption of a powerful communication medium, such as instant messaging, should not put firms in violation of the rules. Technologies do exist that enable broker dealers to use IM while meeting SEC and NASD requirements on archiving and auditing. These technologies allow employees to continue using their current IM systems and buddy-lists. But they enable IT and compliance officers to enforce legal procedures.

These solutions should allow member firms to provide corporate endorsed screen names instead of anonymous (and sometimes off-color) screen names. Finally, these technologies should allow a firm to keep a reliable record of IM conversations. They should also permit them to generate Web-based reports and audit trails in case of an SEC or NASD examination.

Compliance involves a procedural task. But IM archiving solutions today can ensure that the process is undertaken cost effectively with little administration.

IM is ready for prime-time in the trading world. It is on pace to surpass e-mail as the real-time communication medium of choice. How firms use IM could give them a competitive advantage in a world where timing, execution, and, yes, communication are critical.

Jon Sakoda is director of products for Waltham, Mass.-based IMlogic, Inc., which is a provider of enterprise infrastructure software solutions for the Instant Messaging market.

(Updated June 20, 2003)