Founding the Facebook for Finance

New instant messaging service aims to be the financial sector standard.

The Libor scandal widely reported in the media in 2012 resulted in billions of dollars worth of illegal rate fixing across a number of banks. Described as one of the biggest scams in the history of financial markets, the scandal led to resignations, criminal prosecutions, and calls for stricter regulation of the financial sector.

The scandal – largely caused by traders colluding over instant messaging channels to manipulate the Libor rates in their favour – saw billions of dollars being fraudulently gained and lost. However a new instant messaging (IM) system currently in development at technology services company Global Relay could ensure that scandals such as this never occur again.

Global Relay’s IM system – which promises to standardize communications throughout the financial sector – has been in development at the company’s head office in Vancouver for a number of years now. Its development was the subject of Beedie School of Business Management of Technology MBA graduate Matis Jasicek’s thesis. His research – which occurred several years before the subject became mainstream news – demonstrated the necessity for a universal system in the financial sector.

“When I started this research I knew it would be a radical concept, as it wasn’t typical mainstream news,” says Jasicek. “Global Relay had been developing their product for a few years at the time, and really had a head start on a messaging system that the recent scandals have shown is a necessity. This is a massive undertaking, so I decided it would be interesting to research it.”

One of the main reasons the Libor rate fixing – which is similar to insider trading in the stock market – was possible was the lack of a standardized instant messaging system with which to monitor and regulate financial firms.

At present financial institutions utilize a number of different IM systems for their traders to communicate, such as AOL, Yahoo Messenger, Google Talk, Bloomberg Chat or Microsoft Lync – with the adoption of systems not designed for compliance purposes ultimately creating the loopholes for traders to exploit. Traders were free to collude with each other over their unregulated IM channels, often offering incentives to each other to fix the rates favourably.

“With so many IM systems in use across financial institutions you can imagine that they don’t integrate and speak to each other, and compliance becomes an issue,” says Jasicek. “An enhancement in one area could circumvent an enhancement in another, so when traders upgrade their AOL client it may break the connection with the proxy server, meaning data won’t be archived. This shows why a dedicated platform adopted across the board built on top of our archiving services would be so desirable.”

The Global Relay IM system will directly address the problems that caused the Libor scandal, monitoring and detecting illegal activity occurring between financial firms. It will make use of the company’s established data archiving technology that is already entrenched in some of the largest financial institutions around the world.

Jasicek’s position as Regional Sales Director at Global Relay has provided him with a first hand view of the IM system’s development, upon which he based his thesis research. Supervised by Beedie School of Business Associate Professor Pek Hoi Sooh, Jasicek’s research explored where the opportunity lies in the current environment, and how Global Relay is positioned to capitalize, as well as the technological challenges in implementing a universal system.

“The principle of the research is collaboration – we are almost creating the Facebook of finance,” says Jasicek. “The big challenge was finding research and documentation to back up my research. There are not too many studies on this particular topic, and finding metrics for topics such as breaches that have occurred over IM was tough. Pek was instrumental in helping me track down supporting evidence.”

Jasicek’s research notes that the company faces significant challenges in successfully launching the system. A universal messaging system would essentially replace the entire IT infrastructure of IM messaging and archiving that has been in place in financial firms around the world for some time. Convincing these organizations to make the switch will require not only an attractive system, but also a seamless transition without any interruption to daily trading activities.

“Trading terminals offer extensive messaging directories that are appealing to the traders, but often lack proper ethical walls – there is no built-in supervision to ensure compliance in chats,” says Jasicek. “But traders don’t care about the compliance archiving capabilities of their IM system – they want access to an extensive “buddy list” within the financial services community. Herein lies the challenge: convincing compliance and traders to migrate over to a new messaging environment.”

Through strategic partnerships with key stakeholders, Jasicek says the company hopes to drive adoption and distribution of the system. He notes that if some of the major banks adopt the system it will be a boost in helping drive network effects through critical mass.

“There are other companies developing similar systems, but what gives Global Relay an advantage is the established archiving platform the messaging system is built on,” he says. “Whoever has the best archiving platform and the core competency of delivering compliance solutions is going to have the stepping stone to establish themselves as the provider of a universal messaging system for finance.”