After Scandals, Banks Release Chat Back into the Wild

Chat tools are being embraced again as the industry seeks more efficiency in the workflow.

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Financial institutions are embracing chat tools as both a form of communication and a workflow manager.

Collaboration tools have become a big draw for chat platforms as firms seek to make trade processing more efficient.

In order for platforms made for other industries to attract the financial market, compliance measures must be beefed up.

Chat rooms with multiple firms participating have largely been limited.

Chat needs to foster a community to flourish in the financial services industry.

After the global financial crisis in 2008 came the European sovereign debt crisis, which rocked markets across the world and saw central banks resort to extraordinary measures to stabilize the system. Soon after, commercial banks faced another barrage of crises related to fixing crucial benchmarks, including the London Interbank Offered Rate (Libor) and the 4 p.m. fix in foreign-exchange (FX) markets. The fines were eye-watering, cumulatively reaching tens of billions of dollars across most major financial institutions. What fueled salacious headlines in the media, deepened reputational wounds, and largely provided the basis for the prosecution’s case, however, were lurid chat transcripts published in all of their vulgar glory, where traders, brokers and rate-setters openly discussed moving submissions to favor the bank’s own positions.

As might have been expected, the reaction was swift and severe. Most trading houses sharply curtailed the use of chat, banning multi-firm chat rooms and strictly limiting what platforms traders could and could not use to discuss business. 

But chat has come back with a bang in recent years, as new entrants have built offerings that incorporate compliance and surveillance capabilities, along with powerful collaborative tools that make them too useful to ignore. In addition, a wave of new entrants into the industry, all of whom use chat or instant messaging in some variety in their day-to-day lives, has prompted a shift back toward the technology. “We used to do the business by phone or fax then email, and chat is an evolution of how people communicate effectively,” says Chris DeWinter, managing director, market structure and strategic investments at Nomura. “It’s driven largely by convenience as the technology people use in their everyday life changes. It’s another form of communication and all of our communications now are being recorded and reported.”

Endangered Animal

Today, it’s hard to imagine that there was a period where chat was very much an endangered animal on the trading floor. While used less in the middle and back offices, the front office is absolutely powered by messaging platforms, which in many cases have taken the place of phone calls to quickly resolve minor issues. “Chat functions have been around for a long time in the business and it’s been generally used by firms like ours so groups can quickly resolve problems or apprise someone of a situation internally,” DeWinter says. “While it has not been used as a formal business tool, the exception is front-office trading, which uses chat much more now in place of the phone.”

Part of this is due to the technology’s evolution, and how firms have put new processes in place to govern its usage, allowing all sides to feel more comfortable with its slow re-introduction to the wild. “Firms are coming up with very strict rules around how chat programs get used in the business,” says Robert Powell, director of compliance at communications vendor IPC. “Like, you’re not allowed to include people from outside your firm in a chat room, or you’re not allowed to join a chat room that talks about anything other than social subjects where there are more than three firms present. There are quite a lot of intense rules there.”

Regulated industries such as financial services, particularly those where chat was something of a dirty word for a long time, are hard nuts to crack. Despite this, firms ranging from Microsoft to Silicon Valley startups are seeing the potential, even if they have a major obstacle in terms of the dominant platform: Bloomberg.

Captive Market

Symphony has perhaps provided the stiffest challenge to date. The platform was born in 2014, just as banks were starting to search for alternative trading and communication environments, following not only the rate-fixing scandals but also issues with Bloomberg, where reporters for the company’s news service were caught snooping on users’ Terminal activities. The platform gained attention in the financial industry after a consortium of banks and trading houses, led by Goldman Sachs, invested in it with the idea of creating a compliant chat environment specifically for heavily regulated industries. The service currently has 230,000 users.  

Symphony CEO David Gurle tells Waters that the industry just wants a standard, compliant and effective way of communication, which has led to the platform’s popularity. “There’s a need to address concerns like communicating with people not on your current system, but still having the same productivity as internal communications, ensuring information protection rules, and putting in the content needed for the conversation,” Gurle says. “Over the last few years, we’ve seen the resurgence of those needs to be addressed globally as opposed to discreetly within the firm.” 

It isn’t just Symphony challenging Bloomberg. In the past few years, Slack and Microsoft—companies known more widely outside of the financial services world—have upgraded their offerings and security features to tap into more regulated markets like finance and healthcare.

Slack—which functions as an internet version of a water cooler and boasts a strong user-base that includes coders and startups—counts large firms including Capital One and IBM among its followers, and has been preparing an assault on the financial services industry for some time. Microsoft is a more familiar face for the industry, thanks to widespread use of its Office365 platform, which integrates features like email, screen sharing and chat. In 2016, the company announced that it would be releasing a chat and collaboration tool called Teams that would be folded into the Office365 system, and, since its release in early October this year, has proven popular among users. 

But Slack, Microsoft and other consumer-facing chat services are not likely to make much headway in the highly regulated world of finance, according to IPC’s Powell. They often underestimate the challenges involved, he says. Indeed, none of them would comment to this article despite repeated requests from Waters, variously citing time pressures and specialist availability. “If you went back to 2010 and you wanted the collaboration tool in the financial markets, you had a choice of two—Bloomberg, which is the preeminent and dominant player in the market, and Thomson Reuters Eikon,” Powell says. “Nowadays, you’ve got a whole bunch of different things. I’d like to say that Slack and other startups have come up with compelling solutions that the financial markets are now looking at, but market participants still want a financial-markets-focused chat tool and there are very few of those.”

The incumbent has also not been standing still. Bloomberg is, by far, the weapon of choice in trading floors across the world. The information giant provides its messaging services to 325,000 users through its Bloomberg Terminal, the ubiquitous platform that essentially powers the world of modern finance. Indeed, a sign of how important the Terminal and its messaging service are came in 2015, when the UK government was forced to call off a gilt auction after Bloomberg terminals went down over the course of a morning in April 2015.

Weakness

This success has also been one of Bloomberg’s greatest weaknesses, in that for years, messaging was only available to Terminal subscribers. That has, historically, not been a cheap proposition for many firms—while Bloomberg does not publicly release the cost of its Terminal product, people familiar with the expense say that it can run into tens of thousands of dollars per month even for mid-tier operations.

However, that changed in October when Bloomberg revealed that it would extend its messaging services to non-terminal users, information that seemed to be timed to come out during Symphony’s annual flagship event, Symphony Innovate, held in New York on October 4. Dubbed Enterprise IB, the program offers data-sharing and communications tools for people within a firm that has at least one Terminal subscription. A Bloomberg spokesperson confirmed to Waters that Enterprise IB can only be used within a firm and will not have any capabilities to communicate with outside companies, but declined to make an executive available for interview on the broader topics associated with chat. For a data perspective on Enterprise IB, Inside Market Data looked into the platform

Even outside of Bloomberg’s dominance, while more firms embrace alternative chat platforms, they also still face internal adoption challenges. Adam Salem, senior vice president and head of equities technology at AllianceBernstein, says people are used to old systems embedded in email programs, even if Symphony is installed in all desktops at the firm. “We’ve rolled Symphony out to everybody, but while most group discussions are now done through Symphony, most one-on-one communication isn’t,” Salem says. “They’re not sure if the other person checks their Symphony, but they do know their Outlook is open so they send a message through there. I’d say only about 20 percent of one-on-one communication is [conducted] through Symphony.”

Collaboration and Compliance

Where these platforms may be adding value is not necessarily in disrupting incumbent providers, but in changing the internal workflow of office communications, which have heavily relied on email since workplaces became internet-enabled. 

Indeed, while chat may be seen as a mere communications tool by the front office, the real treasure trove in financial services is in increasing its adoption in the middle and back offices that employ thousands more employees, including risk, compliance, settlement, reconciliations and operational personnel. Collaborative features are providing this boost, says Nomura’s DeWinter, with visible results in terms of productivity. “When you see collaboration within a chat system, you see considerable drops in email chains. Once people who might not have been using an institutional chat service are given the opportunity to play with a robust system that helps them communicate more efficiently, you can see an incredible adoption,” he says. “I think this is because it is a collaborative and better way to communicate. Teams can work with each other in real time to handle issues, problems and opportunities. You see that particularly for the corporate functions and the back office and middle office. It’s definitely a productivity enhancer.”

Greater emphasis on trade processing has enabled the growth of collaboration features. This allows the back office to closely align itself with the front and middle offices, a move so many have said saves money especially now that the time between execution and settlement is tightening. This includes sharing data, reports, and working on the same document at the same time.

At its core, though, chat’s resurgence is still all about compliance. And building a platform geared toward compliance is a tall order. Regulators require banks to have access to archives and custodians to maintain a record of all communications for a certain period of time. But building a compliant communications engine involves more than just recording what passes through the pipes—those communications increasingly have to be available for a range of investigative purposes, including being collated around a specific trade or incident, in a linear and auditable fashion. Essentially, it’s not as simple as dumping chat logs onto a hard drive. “The main problem with all of these big players is that the step from being a thing that millions of people can easily and freely use, to becoming a financial markets chat tool, is so huge and complicated that they kind of shy away from it,” says IPC’s Powell. He adds that firms may see a lot of value in penetrating the financial industry, but they just don’t seem to be able to execute on it. 

Better Monitoring

Even though chat providers like Slack are interested in taking on the financial industry, many institutions feel platforms made specifically for the market can be better monitored so that a repeat of Libor fixing and similar scandals can be prevented. Nomura’s DeWinter says the bank wanted to rein in the use of unregulated chat applications and wanted to push the use of more financial industry-specific platforms. “One of the complications with chat initially was that many of the platforms people used were outside platforms. Those platforms, while they did a great job of getting people to talk to each other, weren’t part of a regulated framework. People want to use chat and the industry doesn’t want employees to be saddled with something that is inefficient but compliant, so you have to provide an outlet for people to use it without changing what they like about it,” DeWinter says. “Some new chat services are very fit-for-purpose for chatting, but they’re not fit-for-purpose for a regulated business that needs retention, monitoring tools and where you have defined information barriers.”

And it isn’t just for internal communications. Having many different chat platforms means some trading floors need to have at least two to reach counterparties. So for all the talk about the resurgence of chat and competition in the space, the market faces a more prosaic problem—people just don’t want too many platforms, according to Jody Kochansky, managing director and head of the Aladdin product group at BlackRock. “It’s a dynamic space, but ultimately the purpose of chat is to connect with the people we need to talk to,” he says. “That’s harder to do on multiple systems.” 

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