FOW’s 2009 Awards for Innovation highlighted two parallel trends. Most obvious was the derivatives industry’s relentless drive for speed, for higher volume orders executed at ever lower latencies.
But the second, led by CME Group’s award for its pioneering use of social media, was perhaps more intriguing. A profession that relies on up to the minute information and microsecond advantages for its livelihood is developing an appetite for sharing news and information online.
The two strands are anything but contradictory. The drive for ever lower latency – trying to connect to an exchange at maximum speed – highlights how far the market has moved from the old trading pit. But some things about floor trading are missed – notably the community it created.
“The floor was a social environment, and we’ve lost that,” says Rob Staalstra, owner of Active Hedge, whose Ilinqu social media platform also won an FOW innovation award.
Does that explain the sudden drive towards new ways of information-sharing across the industry?
Staalstra thinks so. When he started out on the European Options Exchange (now Euronext Amsterdam) in the mid-1980s, life on the floor was a far cry from the world of the modern trader, sitting alone at a blinking terminal.
“Stock movements are so much faster now,” Staalstra points out. “They happen in seconds, not days. Everyone has access to the same information, so it’s much more of a level playing field. On the old options trading floor, if something happened you heard it live... on your desktop [trading programme], you rely on looking at a couple of square pixels at the time [something happens].”
Let’s chat
The umbrella term for the use of new communication technology driven by web-based platforms is Web 2.0. This is the idea that the web is being redesigned around user-friendly technology that encourages people to talk to one another, rather than delving into the unknown by themselves.
The huge potential of such forms of communication for social activities such as trading is clear. But no one has combined these so skilfully – or targeted them so squarely at the derivatives market – as Active Hedge.
Staalstra calls his Ilinqu the first integrated Web 2.0 live programme, combining all standard web-based communication forms (video, chat, audio, web conferencing, file sharing) into one completely scalable platform. “We have streamlined every technology into one platform,” as Staalstra puts it.
For instance, the problem Staalstra highlights above – relying on having your eye on a few square pixels when disaster strikes – is addressed by a live alert function, which can inform you (and any number of others) of predefined scenarios.
Opening windows
The Ilinqu system has won praise from investors who use it – the system powers an online community for the 250 most active options traders of BinckBank, the Dutch broker. One user called it “almost as good as a trading pit on the old floor”.
“Actually, maybe it’s even better,” Staalstra says. “This can be anonymous, if you want it to be. People are way more open. Everyone tells everyone anything here… If a person has a question about the direction of a product, everyone will hear the answer. It has an enormous flywheel function.”
There is a real feeling in the market that the technologies now driving information sharing are making trading more meritocratic.
“It’s an interesting point,” says John Jacobs, the man responsible for overseeing Nasdaq OMX’s social media strategy. “The internet’s been the great leveller. Before, this information was only available to people in the [trading] room.”
A quick look at Nasdaq Community, Nasdaq’s social media hub, proves an eye-opener. Articles laden with comments, a list of its most active users and a roster of stock tips (replete with bull and bear symbols) all point to a hive of activity.
The site already claims some 7,000 users – although Nasdaq “haven’t fully promoted it yet”, as the bourse’s Bruce Hashim points out. There is a real sense that, even if Nasdaq left the site to run as it is now, it would manage to sustain itself.
Perhaps it is ironic that the world’s original electronic stockmarket, the first to open up the possibility of trading remotely, should be so keen to develop an online trading experience that echoes the old atmosphere of the pit.
Or perhaps Nasdaq, founded in 1971, was simply 40 years ahead of the curve in pinpointing how people want to communicate.
Jacobs offers a useful analogy: “Social media is like being in your office. You see a crowd of 10,000 people chanting outside your window... you want to go down there and see what the heck is going on,” he says. “What we’re doing is opening that window.”
I ask what market feedback has been like in the few months since launch. “Tremendous,” Hashim says. “We were astounded at the time, energy, and passion put into answering [others’ queries]. People really are leveraging the intelligence of the community,” he enthuses.
Make it simple
Staalstra agrees, suggesting that responsiveness to the needs of end users will ultimately drive the take-up of new technology.
He makes a good case. “You have Skype on your laptop for free,” he points out, “and yet you chose to call me. The key to getting people to use [Web 2.0] is to make it user-friendly. If you want to talk to me on Skype now, it’ll take you five minutes just to get started.”
Instead, he suggests, maximum emphasis should be placed on single-click usability.
“Right now [on Ilinqu], I can pick up the phone to a hundred guys at the same time. It has transparency. It has immediacy.”
And the market seems to agree: “To me it wasn’t that this was new technology. We have had this type for quite some time,” one FOW award judge commented about Ilinqu. “To me, the innovation came in how it was packaged for business, and combined the many existing technologies into what appears to be a very coordinated solution that companies can utilise straight out of the box.”
Allan Schoenberg, CME Group’s director of communications, has been a keen champion for social media at the world’s largest derivatives exchange.
Yet he sounds a cautionary note against overexpanding social media, saying market players could be overwhelmed by a bewildering array of options.
“There are just so many tools available,” he says. “I don’t think you want to do too many things. It becomes fragmented… The first step is finding the people we need to talk to.”
CME has done a pretty good job of that. At the last count, the exchange had more than 750,000 followers on Twitter, which it uses to communicate news and ‘re-tweet’ titbits from across the industry.
Staggering though this number is in a niche industry, that mark has since been eclipsed by the Chicago Board Options Exchange’s own Twitter page.
“Like many new to the social media arena, CBOE started out with modest expectations,” says Cynthia Elsener, a corporate communications official at the firm. “Just one year later, this effort has given the exchange a reach of over 760,000 followers, currently making us the largest exchange Twitter user and probably among the top three financial institution Twitter users.”
Media melding
As the battle of the tweets intensifies, a clearer picture is emerging of where innovation will be hottest over the coming months. The Americans appear to be making the running.
As well as answering Nasdaq with its own community site, myCBOE, the Chicago bourse has augmented its press releases through what it calls ‘media melding’.
“We were looking for a unique way to distribute news and distinguish CBOE in the social media space,” says Carol Kennedy, another communications executive at the exchange. “We began producing multi-media releases… with embeddable videos and images. This appeals to the blogosphere and enables us to reach the growing number of online financial news sites. Even at this early stage, we’ve expanded our new media reach to over 100 blogs.”
Then, in early March, CME hit back with a new blog, Open Markets, designed “to communicate CME Group’s views and help spark a dialogue on a broad range of issues that affect a diverse, and increasingly interrelated, array of financial markets”.
Particular focus will be given to regulatory noises from Washington, the CME says. Expect a free and frank exchange of views.
“We’re getting more people from the exchange involved,” Schoenberg says. “For instance, on LinkedIn, we talk to customers who use our products… we have an interest rate group, for instance.”
The bourse also runs a group aimed at journalists writing in finance, featuring such topical discussions as “New guidelines from Finra: has social media gone mainstream?”, “Do you write a blog or have a favorite blog you follow?” and “Is Twitter the new wire service?”
Schoenberg says the real challenge, however, is finding out what customers ultimately want from a Web 2.0 strategy.
“Social media is not a silver bullet.” he warns. “You have to use these tools intelligently. [People] are coming, that’s great, but are they really participating? The only way we can tell is if people are giving us feedback.”
The online boiler room
Is there a danger that these communication systems could be abused for nefarious ends?
Everyone in the industry at the time of the dotcom boom will recall the actions of US whizzkid Jonathan Lebed, who showed how easy it was to hype cheap stocks on internet message boards before trading them on at a quick profit. His efforts garnered him hundreds of thousands of dollars in a few short months, as well as the less welcome attentions of the SEC.
Concerns have been raised on the client side, too. In December, the National Futures Association submitted a rule amendment to the CFTC regarding what it considers acceptable use of social media by its members.
All NFA members will now have to submit promotional materials sent out via social networking sites, blogs, chatrooms, forums, audio/video segments and even hyperlinks to the association for pre-approval.
“We certainly have light moderation,” concedes Hashim at Nasdaq. “We garner a wide range of opinions – we’re not Big Brother.” His colleague Jacobs points out that: “You have to sign up to a code of conduct.”
“[And we] have the power to take [users] off,” he adds. “More to the point, they can be ignored.”
Once again, perhaps people power, even in an online context, is the purest form of market feedback. Much like a floor trader executing orders for ‘pump and dump’ brokerages might expect to be given the cold shoulder in the pit.
Rating the customers
Nasdaq operates a points-based rating system for its Community users, with the most helpful members gaining higher ratings from their peers. Anyone promoting their own interests is likely to be given short shrift, Hashim points out.
Schoenberg, meanwhile, suggests the industry already knows how to handle the dangers of misinformation. “I don’t really think […] it’s our MO to regulate,” he says. “That’s where the SEC and the CFTC get involved.”
So where next? It’s hard to pinpoint where technology will evolve on the web as a whole, let alone whether it’ll be useful or harnessable for the derivatives industry. As Hashim says: “A lot of it’s trial and error... in a way you’ll always be a third of the way through your project.”
Staalstra concurs. “For us, it’s one big experiment. We’re expanding every day. We’ve added broadcast capabilities, just in the last month.”
Staalstra sees big potential for the growth of Ilinqu among institutional investors. “I see the big banks as very keen to have a good customer retention programme,” he says. “We’ve been doing this for five years, only for two banks in Holland during that time. Now, we’re talking to seven or eight banks in western Europe. The big banks are slow movers, but I believe it will expand dramatically, especially in Holland.”
What might Web 3.0 look like? “I’m still trying to catch up with 2.0!” Jacobs laughs. “I think the bottom line is, people are going to want to access whatever they want, wherever.”
Hashim agrees: “More and more, you’ve got to bring the content to them in an ever more innovative manner.”
The way things are going, it may no longer be enough for exchanges to offer the best products and trading systems. Today’s consumer wants trading to be a social experience too.
Tom Osborn +44 207 779 8361 tosborn@fow.com