Trading Technology: Want 2 Trade? Instant messaging lets traders execute trades, convert orders into FIX messages and even add algorithms to their buddy lists.

By Emily Fraser

June 1, 2007

Instant messaging (IM) has evolved beyond a simple one-to-one communication tool to become a dominant feature on the trader's desktop. For many firms, especially hedge funds, IM applications are considered mission-critical trading tools. Traders can now even add algorithms to their list of IM contacts, or buddy lists.

IM an Algorithm
New York-based agency broker-dealer UNX launched a new functionality earlier this year, offering a unique way for clients to search for liquidity. In a partnership with Boston-based Pivot Solutions, UNX is extending its liquidity pools to a network of users by giving screen names to two of its algorithms via Pivot Solutions' flagship enterprise messaging product, IMTrader.

"We've basically hooked up IMTrader to our back end at UNX and we've allowed the IMTrader system to access certain tactical sweeps within our execution fabric," says Pat Gaynor, director of trading for UNX. When users send an order they are actually launching a direct market access order, he says.

IMTrader has been integrated with two UNX algorithmic strategies: immediate or cancel (IOC) sweep and penny probe. UNX created a screen name, for example UNX IOC Sweep, specifically for each of those sweeps. The firm provides this to its buy-side customers, who can click on the name of the algorithm as if it were a regular IM buddy name, and type in, for example, "B 10K IBM." The sweep will search liquidity pools for an order of 10,000 shares of IBM and if the liquidity exists, it will fill the order. If it does not exist, the order will be canceled.

This functionality is new, although users of UNX's front-end trading system have these order types available to them, says Gaynor. "This is just one solution that we're offering to people to make their life easier. It really depends on the trader, and their individual workflow and needs," he says. The firm does not have any figures as yet on the level of uptake among clients so far.

Adam Sussman, a consultant with research firm The Tabb Group, says that a trader's individual habits and preferences will play a deciding role in whether he or she chooses to input into algorithms via IM. "It's interesting because if you already have the ability to send an order from your OMS to UNX to use this algorithm, what is the incentive to change your behavior and start using IM instead? Maybe it's faster, maybe the OMS is bogged down, and the user interface is more intuitive on IM. It will depend on the trader's style," he says. If the trader feels comfortable using IM then it makes sense to have another box up where they're able to IM an algorithm, he says.

Hedge Funds Get a FIX
IM use is increasing, especially among hedge funds. "It's really the preferred communication tool of some of our clients, especially in the hedge fund world," says Gaynor. Hedge funds seem to adapt to new technologies quicker and force the adoption of these new technologies by others in the marketplace, he adds.

UNX conducts much of its everyday trading business over IM. The small team of seven traders uses IM daily, according to Gaynor, who first used it to communicate with clients in 1997. The firm utilizes a combination of consumer messaging services, such as AOL IM (AIM), and Pivot Solutions' IMTrader. The IMTrader software is also integrated with UNX's order management system (OMS). Any permissioned UNX client who has an AIM screen name can send an order to IMTrader.

"The client can type in an order—for example, 'sell 100 shares of xyz at the market'—and the system interprets that into a FIX message," Gaynor says. The client is then required to confirm the order. Typing "yes" sends the order to UNX's OMS and it is captured electronically. "It gives clients, especially the smaller hedge funds, a cheap and easy FIX solution," Gaynor says. "If they're not big enough or they can't afford an OMS at this time, the system allows them to work within our more compliant environment," he adds.

There are currently over 2,000 users of IMTrader across the industry, according to Ed McDonnell, senior vice president of sales at Pivot Solutions.

Energy Markets Join In
Hedge funds aren't alone in their love of cutting-edge IM technologies. The energy and commodity markets are also very big users of IM, and prefer the Yahoo Messenger, according to Paul Pickup, strategic IT consultant for analyst firm Trading Technology. Pickup used to work for a well-known petrochemicals company and says that all commodities derivatives traders use Yahoo Messenger to trade.

One of the major advantages of IM, Pickup says, is that one person can send a message to multiple counterparties—otherwise known as one-to-many messaging. This allows traders to advertise prices or to display indications that they want to trade, he says. "Traders advertise on Yahoo Messenger what the prices are for various petrochemical swaps," he says. "Then people phone each other up to complete the trade," he adds.

Preferences for commercial IM solutions such as AIM, MSN Messenger and Yahoo Messenger vary depending on geography and what is used in an industry sector. Yahoo and MSN are relatively dominant in Europe and Asia, whereas AIM is more dominant in the US, says David Gurlé, executive vice president and global head of Reuters' collaboration services.

Since Yahoo Messenger has become the de facto communications tool for commodity and energy markets between traders and between front- and back-office users, Reuters has recently tried to tap into this market. The vendor announced connectivity to the Yahoo network in April of this year, expanding on the connectivity to AIM and the MSN Messenger it has had since early 2006. "When we approached the energy market customers in different regions in the world, they said they liked Reuters Messaging as a solution but could not use it without connectivity to Yahoo. This is really where the market is, so that has been a driver for us," says Gurlé.

Traders with Reuters Messaging can communicate via IM with anyone in any of these partner networks. Gurlé says it is the only enterprise IM vendor to have connectivity partnerships with all three providers and expects to announce partnerships with others in the near future. There are currently 90,000 users of Reuters Messaging in 3,000 institutions and the number of users is growing at a rate of 1,000 a month, says Gurlé.

IM's Enterprise-Wide Reach
It took 16 years for the PC to reach 15 million users, according to Osterman, a research company focused on the messaging industry. E-mail took six years to reach the same number of users. Instant messaging took two years.

About 60 percent of employees within a typical securities firm now use IM, according to research conducted late last year by Peter Delano, senior analyst for TowerGroup. Overall, it is primarily an internal tool, says Delano, used by traders to collaborate during the trading process, to bounce trends they are seeing in the marketplace to a portfolio manager, for example. Reuters' Gurlé says that adoption often starts in the front office, later spreading to the middle and back offices.

The use of consumer IM is much more prevalent among smaller firms, according to The Tabb Group's Sussman. "The larger firms tend to have more compliance protocols in place that disallow them from using IM. They would use FIX and the phone but not too much IM," he says. Under new e-mail discovery rules, which came into force in the US last December, firms are required to store all forms of electronic communications, including IM.

While initially many firms began by using consumer IM services, such as AIM, MSN Messenger or Yahoo Messenger, there has been a recent move toward enterprise solutions, as they make it easier for firms to meet compliance requirements. IT departments in large organizations tolerated these products initially because they realized IM was a mission-critical tool, but increasingly, securities firms are looking to alternative solutions to reduce exposure, ensure proper identity management and meet compliance requirements, says Reuters' Gurlé.

Another major disadvantage of a consumer service, such as AIM, is that there is no service level agreement (SLA). "If AOL goes down, there is nobody you can call and ask what is going on," says Pivot Solutions' McDonnell.

Consumer IM services are exposed to risks similar to those associated with consumer e-mail services, says TowerGroup's Delano, who conducted a survey of IM vendors for the trade lifecycle, released last November. These risks include exposure to viruses, malware, even spam for IM, known as SPIM. These risks can be managed in much the same way as e-mail risks are handled, says Delano.

A number of vendors provide enterprise IM platforms that integrate with commercial IM providers. According to the TowerGroup report, Reuters has the lion's share of the market, with 84 percent of financial institutions using Reuters Messaging. Other vendors include Markit, which has 8 percent of the market; Pivot Solutions which has a 7 percent market share; and Block Orders Execution, used by 1 percent of financial institutions. Bloomberg also provides an IM function, but users must have access to a Bloomberg terminal.

Common features of enterprise IM platforms include real-time detection of users of the network, also known as presence; a list of approved contacts; and the ability to attach files and embed hyperlinks. Trading-related IM applications offer identity management functions, group discussions and chat rooms.

Next, Social Networking Sites: Watch This Space
Instant messaging is not the only modern technology to pass from the consumer realm into the modern enterprise. Reuters plans to launch a Web-based collaboration platform using Web 2.0 technologies later this year, which will look like an enterprise version of online social networking Web site MySpace. The interface will be called Reuters Space and will target the capital markets initially, and then the wider financial markets. Users will be able to view other members' profiles, link to counterparties, post blogs, and the interface will be seamlessly integrated with Reuters Messaging. The page is designed to be accessible to people both inside and outside of firms, but companies can limit access depending on their privacy policies.

According to a recent report by Matt Nelson, senior analyst at TowerGroup, over the next year, firms will increasingly explore and adopt Web 2.0 technologies, such as social networking, blogs, and wikis, within organizations and with outside business partners. As the next generation enters the workforce, the adoption of these types of technologies and tools looks set to continue. "Talk to any teenager at any high school or college and see what they are using," says David Gurlé, executive vice president and global head of Reuters' collaboration services. "They are the workforce of tomorrow."