Technology Under SEC rule 17a-4, instant messages must be archived and retrievable and can’t be edited or changed.
Hedge funds are shying away from using instant messaging to send orders to their brokers because there has been a lack of technology to create an audit trail. “If I did not have the ability to archive these messages, I probably would not use it,” says Angie Kim, chief financial officer of Core Fund Solutions, a San Francisco-based company that oversees four hedge funds. Even though the onus is on the brokers to archive instant messages, “There are still certain legal exposures” for the buy side, says Kim.
In fact, to limit their own exposure, prime brokers – which clear the hedge funds’ trades – don’t want hedge fund managers to use instant messaging, adds Kim. If there is a dispute over a trade, the buy-side firm has to be able to retrieve the instant message to resolve the matter. And, because IM platforms are not as secure or as reliable as most trading systems, prime brokers are concerned that a hedge fund could send them trades that an IM platform may fail to deliver. Since hedge funds tend to outsource many functions, such as operations and trading, to third-parties, they don’t want to spend money developing IT infrastructure in-house to capture and archive IM communications.
Core Fund Solutions uses one such solution, IMTrader, a combination light-weight blotter and instant-messaging platform developed by Boston-based Pivot Solutions that interfaces with compliance systems like IM Logic and Facetime. Additionally, order-management systems are expected to integrate instant messaging into their trading applications, too. “The two greatest advantages [to using a system such as IMTrader] are the ability to see trades [filled] on a real-time basis and the ability to streamline operations by downloading the blotter and uploading trades to the prime brokers,” says Kim, who uses IMTrader to monitor trading in real time between the hedge funds’ portfolio managers and their brokers. JNK Securities, an institutional brokerage firm that uses IMTrader, utilizes an order-management system from Tradeware Systems to translate messages into FIX. Since then, Pivot has tweaked the system, so “You can just add our name to your buddy list,” says Jack Weiselberg, president of JNK Securities.
But before Weiselberg implemented IMTrader, he had to make sure the data network was secure and that it met the compliance regulations that govern brokers’ activities.
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