Algorithms Join Buddy Lists: E-Trading Innovations Incorporated in IM Technologies

Wall Street traders have been using instant messaging (IM) for several years, at first often without the approval of information technology and compliance managers who were wary of a public-network technology with apparent security holes. But by the end of 2006, 60 percent of traders were using it, according to TowerGroup.

A senior analyst at the Needham, Mass. research firm, Peter Delano, believes that the statistic, if anything, understates IM's value to the securities industry. "It's become part of the business process" for traders, he says. "It's a complementary communication tool with the other applications on the desktop."

"It comes down to workflow," adds Ed McDonnell, SVP of sales at Boston-based Pivot Solutions, whose IMTrader system has become a prominent, market-tested application of the technology for institutional securities transactions. With a February IMTrader software release, Pivot added links to algorithmic trading models, a sure sign of IM's legitimacy and acceptance as a trading tool. Five-year-old Pivot, which in 2004 was spun off by Boston's Eze Castle Integration, also may have raised its industry profile several notches with its appointment in April of Lou Eccleston, a former high-level executive at Bloomberg and Thomson Financial, as its new CEO (Securities Industry News, April 23).

"If I'm using instant messaging to communicate with my high-touch world, and now I can combine that with a tool to source liquidity, that's a pretty big benefit," says McDonnell. "If you think about buy-side traders and what they are trying to accomplish using an instant messaging system, they're able to link to an algorithmic trading solution, they're able to retain their anonymity, and they're able to create a straight FIX trade into their broker's system. Those are three pretty key things that the buy-side trader is going to be interested in."

Indicating the extent to which IM and algorithmic trading are converging, JP Morgan Chase & Co.'s electronic client solutions (ECS) group last October unveiled AlgoAlert, an IM service that monitors the performance of algorithmic strategies in real time. Carl Carrie, head of product development for ECS, says this product was introduced to help address the huge increase in traders' workload. He notes that IM trading products have matured quickly in their few years on Wall Street.

"Markets are becoming more complex, more integrated and more global," Carrie observes. "The amount of information that needs to be filtered is overwhelming. The need to tie your algorithmic tools into your workflow is part of the new regime of challenges that buy- and sell-side traders face."

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TowerGroup's Delano says IM has become so popular because, in addition to such basic functions as order placement and execution, it can assist in pre-trade tasks such as idea generation and liquidity discovery, and post-trade functions such as information on fill rates, settlement instructions and trade allocation. Delano sees a continued maturation of IM platforms, including more access to algorithmic strategies and dark pools of liquidity.

Sidney Belzberg, chairman, president and CEO of Belzberg Technologies, a trading technology and agency brokerage firm based in Toronto, says its Chat Trader is used by sell-side traders to "blast indications of interest to many clients simultaneously. Then the clients can send orders back via Chat Trader. The client sees that he's done the order entry through the instant message, and he has the order fills through the Web browser."

The process isn't all that different when an algorithmic strategy is made available on an IM platform. Often, the process is as straightforward as creating an identity for that algorithm on an IM forum's buddy list.

Referring to the volume-weighted average price (VWAP) algorithm, Rick Goldenberg, managing partner of New York-based technology provider Block Orders Execution, which sells IM as a key component of its flagship LiquidityBook order management system, says, "Users can just type an IM that says vwap b 100,000 xyz.' A broker or an order management system or execution management system will read the b' in the message as a buy order for 100,000 shares of that ticker symbol using VWAP."

Goldenberg says that "it's just a matter of creating and typing the parsing within the IM of what you want from the algorithm. We code that into the FIX message, and the IM knows what to do with it." Responding to the market demand, trading technology suppliers have focused on fully integrating IM into their offerings. "There is no longer any point in saying to a trader that this is instant messaging; this is a ticketing application and this is your order routing network," says Kirsti Suutari, global business manager for algorithmic trading at Reuters Group.

Instead, when Reuters sales or support staff visit a trading desk, the conversation glides over the distinctions between the various features of the desktop. It becomes about how the Reuters platform supports and helps the trader. The recently released 6.0 version of the Reuters Messaging platform accommodates the IM systems of Yahoo, Time Warner's AOL division and Microsoft Corp.'s MSN (SIN, April 30).

"You'll see over time that there will not be a separate instant message application or a separate e-mail application," Delano says. "Instead, you will have these real-time, asynchronous communications on your desktop. They may be embedded in your trading application or part of an enterprise communications package on your desk."

IM can be seen as a logical extension of more traditional means of communications, and that may also have contributed to its rapid acceptance. "A lot of the business that Pivot sees is the electronic extension of the old broker desktop, which was predominantly just a phone call into the desk to trade a block of shares," says Scott Harrison, president and CEO of Burbank, Calif.-based agency brokerage UNX, which has a strategic partnership with Pivot.

Harrison notes that the compliance requirements of the NASD Order Audit Trail System (Oats) made it "difficult to take a call, because you had to make various records of taking the call and then enter them into your system. So you could see where IMTrader had a captive audience. They can do the same type of ad hoc communication into the trader's desktop, and it goes right into the system so they're able to do their Oats reporting. They hit a little niche."

Compliance has become so important a consideration that "when we start talking with the larger firms, one of the first people we meet with is the compliance officer," says Block Orders Execution's Goldenberg. "When we show them our capabilities, they are among the first people to give their approval." LiquidityBook's ability to retain electronic messages is a big selling point: Messages are timestamped in real time and "archived in our system," he adds.

The Connex IM platform, part of the portfolio of London- and New York-based market data, valuation and trade processing company Markit Group, also retains messages and uses a secure server, which has enhanced the platform's appeal, says managing director David May. Connex offers a secure sign-on and is easily integrated with other trading applications, which has enabled some Markit clients to use it as the single-sign-on system for traders' desktops.

Alerts and prompts can also be used to aid pre-trade compliance when integrated into IM systems, says JP Morgan's Carrie. What's more, since the messages are automated, they "are being sent out faster than any person could possibly do it," he notes.

"Because it's fast, it enables you to instantly get information back and forth to your clients, and it's a very useful tool," adds Leonard Amoruso, chief compliance officer and regulatory affairs officer for Knight Capital Group in Jersey City, N.J. and co-chair of the Security Traders Association's compliance committee. But, by the same token, "regulators view instant messaging much the same way they view email. You have to retain it, you have to have surveillance for it and you have to monitor its use."

Amoruso says that because the various IM platforms are often not compatible with one another, sell-side firms and their trading desks may have to accommodate several to be able to meet client demands. That complicates administration and customer service needs, which have to be balanced with compliancedriven archiving requirements.

"A lot of firms limit the amount of IM services their sales folks can use," Amoruso says. "They'll build all their data storage and surveillance systems around those providers. That makes surveillance a little easier. If you go back three or four years, a lot of firms had a lot of challenges trying to keep up, but today, most have a pretty good grasp of what they need to capture and how they need to do it."

The long-stated concerns about security are also being effectively addressed. "There is a vast community of buy- and sell-side traders using IM, but public IM platforms were never designed for securities trading and are exposed," says Eran Barak, Reuters' global head of marketing and strategy for collaboration services. "More and more companies are facing the fact that they need to put a secure solution in there." For all the growing reliance on IM, even its proponents don't see it displacing other trader-desktop applications. "If people are trying to place block orders around the Street, then we want to give them tools that let them sweep liquidity sources and maybe take out the natural liquidity before they drop it on a broker's desk," says UNX's Harrison. "IMTrader was basically a way of giving people another way of accessing our technology."

"I don't believe IM is being used to shop an entire order, not by any means," says Pivot's McDonnell. "IM is not displacing any execution or order management systems, but it has become a very quick and easy way to send out pieces of a block order."