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Wall Street Firms Increasingly Adopt Web 2.0 Dec 18, 2007 URL: http://www.wallstreetandtech.com/showArticle.jhtml?articleID=205100034
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With their ability to foster online collaboration and build user communities, Web 2.0 technologies -- including wikis, blogs, RSS feeds and social networking sites such as Facebook, Linkedin and MySpace -- are attracting millions of people every day. In a bid to stay ahead of the curve and reach investors where they spend their time, Wall Street firms also have been exploring the Web 2.0 landscape: some cautiously while others have jumped in wholeheartedly -- making their applications more compelling to their clients and their employees.
The list of financial firms deploying Web 2.0 applications, both within the enterprise and externally, is growing. TD Ameritrade, Bear Stearns and Wells Fargo all have announced new 2.0 applications in the last few months. "Enterprise social networking is still in its exploratory stages," observes Matthew Nelson, senior analyst with TowerGroup. [Ed. note: At press time, Nelson left TowerGrouo to join Omgeo as director, market intelligence.] "But it is going to become standard. The industry simply can't afford not to go this way because that's the way people in general -- employees and customers -- are shifting."
Since investors often look to confirm their trading ideas with other traders, the collaborative nature of Web 2.0 is a perfect fit for the trading community, asserts Jay Pestrichelli, who heads TD Ameritrade's active trader group. "Traders aren't sitting alone in their basements, in silos, trying to make money," Pestrichelli points out. "Some of the best traders I know have other traders they talk to -- they share strategies. It makes them better traders."
With the aim of helping clients generate trading ideas over the Web, TD Ameritrade recently joined forces with online community PredictWallStreet, incorporating it into its own Web site. The tool enables TD Ameritrade clients to research, track and share opinions about the market. In addition to predicting the movement of a stock or index, PredictWallStreet also allows clients to view quotes, while a direct link to a trading ticket on TD Ameritrade's site enables them to actually buy or sell the stock. >>
"If we invite 1,000 clients in a room, they will start sharing ideas, talking about ways to seize market opportunities," relates Pestrichelli. "That's why communities are such a big deal. Talking about their trading successes is something clients like to do."
To further build communities, TD Ameritrade also has teamed with Minyanville, whose Buzz and Banter blogging tool delivers ideas and analysis from 30 Wall Street analysts as the market moves. Rather than simply delivering traditional reports or market snapshots, the tool goes one step further: It allows clients to watch conversations among analysts unfold, and to read analysts' updates and opinions in real time.
According to Pestrichelli, TD Ameritrade also has started exploring the use of Web 2.0 within the enterprise itself. "Most of that research is coming on the heels of our intranet site. Some of the things we're looking at are internal blogs and wikis to help with training, as well as video to help communicate messages and get away from global E-mails," he says. "We want to clean up everybody's inboxes and drive them to our intranet."
Wells Fargo also has been developing Web 2.0 tools, experimenting with internal blogs, wikis and RSS feeds. The bank has more than 100 internal blogs that it uses to improve communication and coordination among its own employees, as well as for employees to interact with customers. "We use our blogs to communicate when we have a new product we're rolling out and to share what we're hearing from our customers," says Danny Peltz, EVP, wholesale Internet and treasury solutions, at Wells Fargo. "Our executive leadership have also been using blogs to instill values and touch more people across the company," he adds, pointing out that the bank has 16,000 employees scattered across 50 States.
Last spring, Bear Stearns launched a Web portal, Bear View, based on Ajax, a Web-development technique that speeds data exchanges with a server in order to make Web pages more interactive. The portal supplies investment tools and services to its largest brokers, dealers and investment management customers. The company used General Interface, an Ajax tool from Tibco, to build the Bear View portal, which allows investment managers, equity traders and currency brokers to access a range of services in one place through a single interactive interface. In addition to streamlining money transfer processes and giving investment managers the choice of 70 currencies, the Web site also can provide real-time market data; quick access to contact and client lists; and real-time information on holdings, trading positions and account balances.
According to TowerGroup's Nelson, who authored a recent report on Web 2.0, Dresdner Kleinwort also is among the leaders in Web 2.0 adoption. The investment bank, Nelson's report notes, has been using blogs and wikis internally since 2005.
A Transformational Channel
Ultimately, says David Schehr, research director at Gartner and author of a report on the use of Web 2.0 by brokerages, traditional investment firms and brokerages no longer have a choice -- they must embrace Web 2.0 or risk losing out to competitors, particularly a new generation of Internet brokers. Pointing to a wide gap in the way traditional brokers and the new generation of Internet brokers leverage Web 2.0, Schehr suggests that even the most cutting-edge traditional brokers still have a way to go to catch up.
Brokerages can be divided into three groups, says Schehr. First, there are traditional full-service brokerages -- such as Merrill Lynch, Morgan Stanley and Wachovia -- that are using the Web simply as another channel through which to provide the same content and services they provide on the telephone or through their branches. Next, there are established discount brokers, such as E-Trade, that initially embraced self-service technologies to reduce servicing costs -- first via automated telephone-based trading, then via dial-up PC connectivity and, by the late 1990s, through Internet-based trading. For these discount brokers, Schehr explains in his report, "The post-2000 decline in trading frequency made it appear that the Web-only brokerage was not a viable business model." As a result, these brokers also use the Web as just another transaction and service channel among several possibilities.
The third group, however, is a new generation of Internet brokers -- such as Zecco, thinkorswim and TradeKing -- that have been using the Web as a transformational rather than a supplemental channel, Schehr says. "Rather than attempting to grow by competing with large firms for the mass market, these firms identify focused markets looking for specific functionality or services," Shehr writes in his report, citing as an example option traders, more frequent traders and highly self-directed investors. "They then target their efforts to these niches."
This new class of brokerages is "more than a continuation of the 'race to the bottom' of the scale of decreasing commission costs," Schehr points out in his report. "The critical difference is in the business and technology approach they take, and in how they are leveraging the long-tail opportunities of the Internet to serve niche markets," he writes.
According to Shehr's report, Zecco.com, the 18-month-old subsidiary of California-based broker-dealer Equinox Securities, oversees more than 16,000 registered accounts. "The firm emphasizes online communities through blogs and forums produced through user contributions," Schehr writes. "One aspect of this is that the firm does not require a user to be an account holder. Participants can sign up to be 'myZecco' participants without becoming clients of the online brokerage." Users can search for blogs or forums of interest based on strategies, profiles or portfolio holdings.
TradeKing (www.tradeking.com), a two-year-old Internet broker, also focuses on communities and blogs. Like Zecco, the concepts of account holders and community members are separate, Schehr says. All account holders have access to the community portions of the site, but non-account holders can sign up for access as well.
Security 2.0
Along with the transformational powers of Web 2.0, however, come new security threats. In fact, security is one of the biggest challenges companies face when deploying Web 2.0 tools, says Ryan Berg, cofounder and chief scientist for Ounce Labs, a provider of source code vulnerability analysis solutions. "Web 2.0 applications enable anyone to have access to your source code and can expose you to attacks without you knowing it is happening," he explains. "With Web 2.0, attackers have much more inside knowledge of how your applications work. You have to recognize that the minute you put your code in the browser, you no longer own it."
Wall Street firms say they are well aware of the need to address users' security concerns. According to TD Ameritrade's Pestrichelli, for example, when the online broker brings in third parties, such as PredictWallStreet, these partners go through very rigorous security procedures. And, "We never give our third parties access to clients' data," he says.
"Clients want to know they're secure. And we offer them the Asset Protection Guarantee," Pestrichelli says, explaining that the broker will cover a client's losses if an account is compromised. "We just ask customers to be vigilant, to watch their statements and, if something is wrong, to report it to us. And we also ask them to work with us to resolve the situation. But if there's any type of issue at all, we'll be there with them."
Wells Fargo's Peltz also stresses the importance of securing Web 2.0 applications. When you log in, "We want to know who you are, what you are entitled to do," he says. "There is also the physical security of data centers and firewalls. And a lot of the social Web 2.0 sites tend to be anonymous. But since we have a relationship with our customers, every user has to sign in. And our new online community today is invitation-only."
Balancing security concerns with usability, however, can be a challenge. "The pressure is high for enterprises to use 'cool' platforms," says Scott Kisser, manager, financial services - information security, at BearingPoint. "There are advantages about the technology, about having tools you can use to upload [material] yourself," but there are security concerns when you start sharing information with other communities, he stresses.
According to Karim Zerhouni, an analyst with BearingPoint, one major security concern with Web 2.0 is improper code reviews prior to release. "Internally, organizations rarely spend the time on proper coding techniques and security," he asserts. "Usually their focus on security is external and about customer-facing [issues]. This is a major gap in the industry. The importance of how we're going to treat data is just as important as external-facing applications."
Zerhouni says making the effort upfront to ensure security is a worthwhile investment. "Typically, organizations don't like spending money upfront," he continues. "But if an enterprise makes sure it is secure, the great advantage of [Web 2.0 technologies such as social networking sites and virtual world Second Life] is that they allow you to genuinely interact with anyone who is there, too."
Virtual Compliance?
Another challenge presented by the collaborative nature of Web 2.0 applications, particularly in the highly regulated financial services industry, is compliance. Communication among certain groups is prohibited by regulators. "Securities firms have very discrete functions that need to be 'walled off' from other functions," TowerGroup's Nelson cautions in his report; "One example is investment banking from proprietary trading."
How do companies such as Dresdner Kleinwort put up such walls? "You can't just open up a single blog or wiki to the entire company," Nelson tells WS&T. "You roll out a platform and make it available, ... but you provide permissioning and very careful control, which all of these tools support, and then let the individual functional units set up their own team-based sites. Investment banking might have their own."
The best way for companies to make enterprise 2.0 work without crossing regulators, Nelson says, is for employees to collaborate within their own silos -- "so investment bankers can collaborate with other investment bankers in a different geographical area," he explains.
Ensuring the objectivity of information that is provided to investors also is key to avoiding the regulatory fallout. "If you go back to the late 1990s, one of the things we know occurred was people using unvalidated message boards for pump-and-dump schemes," says Gartner's Schehr, adding that people would tout stocks on the Internet, misleading investors and inflating the prices of the stocks before dumping them and making a profit. New Internet broker TradeKing has addressed this issue by monitoring account holders' trading activity, certifying that trades were carried out and posting the information to its Web site, Schehr notes. "So if an investor says, 'I bought stock xyz on this day, sold it then and made this amount of money,' TradeKing can say, 'We can confirm this. That person really owned this stock,'" he explains.
TD Ameritrade's Pestrichelli also says his firm ensures the information it gives its clients "is as objective as possible." "With PredictWallStreet, clients can give their opinions. If you vote, you see everyone else's vote," he relates. "But people can only vote once. That keeps it as objective as possible."
TD Ameritrade clients also can obtain objective information from the Buzz and Banter site, where industry analysts share their opinions, Pestrichelli points out. "Of course, we need to follow regulations," he says. "And from a business perspective, you want to build trust with your clients. If they feel manipulated, if they feel they're going into a snake pit, they won't come back."
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