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April 30, 2003

Instant Messages Are a Hit

By Peter Chapman

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  • Instant Messages Are a Hit

Vendors Tackle the Problem of Compliance and Technology

IM. Traders love it. But compliance officers and IT pros hate it. Can vendors broker the peace?

Instant messaging, the Internet-based communication medium made popular by the world's teenagers in the mid-90s, is now entrenched in most equity trading rooms. Traders use the software to conduct snippets of conversations with customers or colleagues, finding it less intrusive than the telephone and more immediate than e-mail.

Stock traders started downloading IM clients from the Internet about two years ago, typically from AOL, Yahoo! or Microsoft. Compliance and IT officials objected. They said it put their firms on the wrong side of industry regs and opened up systems to viruses and miscreants. Some tried to ban IM.

That didn't faze the traders at many trading firms. They wanted their IM. In fact, they screamed bloody murder for it. They said if they couldn't IM the buyside they would lose business to those who could.

In the end, that argument carried the day at most shops. But compliance and systems still had a big headache.

Things got worse last December. That month the Securities and Exchange Commission, the National Association of Securities Dealers and the New York Stock Exchange jointly fined five big broker dealers $8.5 million for failure to archive their e-mail messages. Securities Exchange Act Rule 17a-4 requires brokerages to keep records of all correspondence, both paper and electronic, for at least two years. The NASD and NYSE have similar rules.

These five firms, Deutsche Bank Securities, Goldman Sachs, Morgan Stanley, Citigroup, and U.S. Bancorp Piper Jaffray were caught because regulators were already examining their records as a part of the IPO investigation.

E-mails have proved especially damning evidence in recent high profile Wall Street cases. The SEC was livid the banks were deleting their e-mails. So livid, in fact, the regulator decided not to stop at e-mail. The SEC launched an inquiry into the brokerages' retention practices covering instant messages as well.

By some estimates, three-quarters of the industry is non-compliant with the record retention regs. The SEC's findings were expected in early May.

In March, the New York Stock Exchange moved to clarify its IM rules. It issued a memorandum "reminding" its members that the record retention requirements of NYSE Rule 440 and SEA Rule 17a-4 pertained to all communications, including instant messages.

The memo was a bombshell, industry sources told Traders Magazine. SEA Rule 17a-4 had been updated in 1997 to include e-mail. But IM, of course, was not prevalent at the time. Sources say it has never been clear whether or not 17a-4 applies to instant messaging. Now the New York Stock Exchange said it did.

However, compliance isn't the only problem. The technology itself is also at issue. Messages sent via AOL and its competitors in the public space can't be easily scrutinized by company firewall software. That opens systems up to viruses and spoofing, or unauthorized access.

The Vendors

Enter the vendors. Two different groups of vendors are tackling the compliance and technology problems. One group is marketing archiving and security software. The other is pushing private IM communities designed for corporations. The latter hopes to eliminate the firewall problem by nudging aside the public networks.