Scheduled to launch in the first half of 2009, the new system, Tdex+, is based on the Liffe Connect platform used by the Euronext.liffe derivatives exchange and will allow TSE to introduce features such as market-maker functionality. The Tokyo exchange said it evaluated several electronic trading systems in use at major stock exchanges around the world before opting for the NYSE platform.

TSE has almost exclusively used domestic suppliers such as Fujitsu, which the exchange has blamed for several technology glitches over the last couple of years, including problems that on Feb. 8 halted some derivatives trading. But the New York Stock Exchange and TSE signed a technology-sharing agreement early last year, and “this seems to be the first public initiative to come out of that relationship,” said Larry Tabb, CEO of New York-based Tabb Group. “While it remains to be seen whether TSE will sever Asian relationships and replace them with Western technology relationships, this certainly is a directional change.”

“NYSE Euronext’s technical and operational expertise in various markets such as the capital and derivatives markets, within multiple localities in Europe and [the U.S.] is of indispensable value to us,” said TSE chief executive Atsushi Saito in a statement.

Neil Katkov, analyst in Tokyo for Boston-based Celent, called it one of the most significant moves TSE has made in a long time. “This is the first time that the Tokyo Stock Exchange has put in a major piece of technology from a foreign supplier,” he said. What likely made the move easier is that there was no preexisting system in place, said Katkov.

“The Tokyo Stock Exchange didn’t have to shut down a long-term relationship with an existing supplier,” he said. “Also, in the options market, international options exchanges are far and away the leaders–Japan has a very small options market. So it makes sense to use foreign know-how to try and set one up.”

It also may indicate that TSE has abandoned rumored plans to merge with the Osaka Securities Exchange, which trades futures and options. “The Osaka exchange is furiously independent and has resisted all offers,” he said.

Though Katkov said that the deal with NYSE is not necessarily a sign that Tokyo is looking abroad for a suitor, it does reflect a trend toward partnerships among global exchange. “The business climate has turned to co-opetition replacing competition,” he said.

NYSE’s deal with the Bursa Malaysia is a prime example, added Katkov. On April 21, Bursa Malaysia announced it had launched a direct-market access platform for its derivatives market that is based on NYSE’s Secure Financial Transaction Infrastructure, or SFTI, market access technology. “Five years ago, I don’t think NYSE would have done anything like this,” he said. “It would have protected its franchise aggressively.”

Sam Johnson, chief executive of Advanced Trading Solutions, the recently formed umbrella for the NYSE Euronext’s commercial technology business, called Asia an area of “tremendous importance” to the exchange. “As capital markets there continue to grow rapidly we hope to continue to build upon our meaningful partnerships with the most important exchanges in that region,” he said. NYSE last week said that the Philippine Stock Exchange has agreed to implement its NSC platform, and the Stock Exchange of Thailand is also a customer.

SFTI had been used by U.S. brokers connecting with NYSE, said Tabb, and then expanded to Europe. The expansion into Asia “will enable them to better facilitate a global integration of both the NYSE and Euronext markets as well as with other markets they have relationships with,” he said.

“As a node on the global SFTI community, this new solution provides truly open and global access to our market through a variety of networks and end-user applications,” said Bursa Malaysia COO Omar Merican in a statement.

International growth is particularly important now, said Dushyant Shahrawat, analyst at Needham, Mass.-based TowerGroup, with slowdowns in North America and Western Europe and the growth of alternative trading systems in the developed markets.

“While NYSE Euronext is a major force in U.S. and Europe, its limited presence in Asia, the Middle East and South America remains a weakness for it,” said Shahrawat, “especially as rivals like Nasdaq and CME Group make aggressive moves into these markets.”

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The product, which is designed to speed up communications and synchronize data from applications running in separate locations, is particularly helpful, according to the vendors, for financial firms that need to coordinate interactions between systems running in multiple clustered computing environments, or in cloud computing.

Ottawa-based Solace makes hardware that accelerates the flow of messages by eliminating the system interruptions and other traffic obstructions that come with software-based messaging products, said Chris Pittaway, sales director for Solace’s Tokyo office. “And the other benefit,” he added, “is that the latency that you do get is very consistent–you don’t have the outliers that you would get with a traditional software-based solution.”

By integrating Solace’s hardware with the GigaSpaces eXtreme Application Platform, or XAP, firms can move data across wide area networks more quickly and efficiently, say the companies, allowing for distributed data mirroring across distant geographies. Neither company has customers using the combined technology, which is now available, but there are pilot projects under way, according to Pittaway.

The question may be, is this a real problem, or technology looking for a market? “It could be a bit of both,” said Neil Katkov, a Tokyo-based analyst with research firm Celent. “But it’s a trend that we’ve seen, a response to the growing complexity of the brokerage technology space.”

Part of the problem, noted Katkov, is the widespread use of algorithmic trading strategies and automated trading systems. “This is producing a lot of data issues for companies,” he said. However, he added, “it’s hard to say how applicable or useful a financial services firm is going to find a particular vendor’s products.”

A problem with some applications is that they are designed to wait for confirmation that a message was received before sending a second, said Shawn McAllister, VP of architecture at Solace. On a local network, where computers are physically close together, that does not add up to significant delays. “But when you add in the distance between New York and London, that could generate 50 milliseconds of latency per message per round trip,” McAllister said.

Solace sends messages one right after another–resulting in hundreds of times more messages if long distances are involved. But the product also checks that messages are delivered and includes management controls to help diagnose problems. “This is a much more efficient use of existing bandwidth,” asserted McAllister.

A typical asynchronous communication approach–where one side sends out messages without pausing for a response–can result in lost data, said Shay Hassidim, CTO of GigaSpaces, which has offices in New York, San Francisco, London and Herzliya, Israel. The GigaSpaces-Solace approach breaks up the journey into several segments, said Hassidim, with a checkpoint at the end of each to check the integrity of data, and buffers to keep the information moving as quickly as possible. This, he said, creates a “totally reliable communication chain between source and target.”

A typical application of the product, say the companies, would be in backup data warehouses for disaster recovery purposes, or in data repositories in multiple locations for quicker access by far-flung branch offices.

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Technology providers that cater to buy-side firms are knocking on doors in an industry that has seen widespread losses and sharp reductions in assets under management, as well as mergers, bankruptcies and outright frauds.

According to Hedge Fund Research president Kenneth Heinz, 2008 was the worst year on record, with losses averaging 18.3 percent. Research firm Eurekahedge says assets under management fell from a peak of $1.9 trillion in 2007 to $1.5 trillion. But despite the financial damage, industry observers note that the buy side is still making select investments in technologies that can save time and money.

In speaking with analysts and executives from financial firms and technology companies, Securities Industry News identified ten areas that will remain a focus:

1. Offshoring. Whether it means using a third-party vendor or opening an office in a low-cost location, offshoring has become a common solution for saving money on salaries. Firms that had been on the fence–or merely experimenting with the lower wages in India and China–are expected to fully embrace the approach this year, due to economic necessity.

In a November survey conducted by Boston-based Aite Group, capital markets executives said they plan to offshore an average of 16 percent of their software development in 2009. Aite analyst Adam Honoré says that firms will bargain harder this year with their outsourcing providers to drive down costs, with chief information officers looking for quick returns on investment. “Overall, cost minimization is on top of the operational agenda,” agrees Isabel Schauerte, a Celent analyst in London. However, according to Celent, many large capital markets firms have already taken full advantage of offshoring, making it difficult to eke out additional savings.

2. Automation. When times are good, it’s easy to throw bodies at a problem. In a downturn, however, institutions face more acute pressure to rethink operations and find manual processes that can be automated or eliminated.

“We’re always tweaking our compliance software to make the human component less labor-intensive,” says Greg Hold, president of Hold Brothers On-Line Investment Services, a direct-access trading firm in Jersey City, N.J. Two or three years ago, when Hold Brothers had 300 traders, it did closeouts by hand. Now that there are 1,200 traders worldwide, the firm uses software that “allows us to automate what used to be done manually. Traders now have certain stop-loss parameters that automatically get closed out.”

3. Cloud computing. Software companies have long known that economies of scale can be gained by keeping all applications in one central place. While hedge fund administrators offer fund managers back-office services, other vendors, inspired by the success of companies such as Salesforce.com, are offering hosted, or cloud-based, versions of their software. “You don’t pay for implementation-flip a switch and you’re on,” says Aite Group analyst Denise Valentine, adding that companies that provide complex applications can charge implementation fees that are as much as 80 percent of the licensing costs.

“We certainly see interest increasing,” says Paul McTigue, senior business development manager at Calypso Technology, a trading systems company that offers its products on a hosted basis. The approach is especially appealing to smaller funds, adds McTigue.

4. Efficiency. Many buy-side firms have overlapping systems and underutilized technologies. Rather than purchasing new software, they can save money by combining platforms and leveraging functionality that is already available. For example, says Rajiv Krishna, global head of the securities practice at Bangalore-based Wipro Technologies, firms that use different systems in Europe, Asia and the U.S. are now considering retiring entire sets of applications in a particular geography and replacing them with, say, those used in the U.S.

Potential efficiencies are often overlooked. Although most companies run Microsoft Corp.’s productivity and communications applications, some don’t fully utilize features that are built into the programs or can be customized quickly and cheaply. “Our customers already have these tools,” says Colleen Healy, Microsoft’s general manager for financial services. “All this software is already in-house. It may take only a partner to add the vertical functionality. And there is an ecosystem of partners who know these customers and solutions.”

5. Virtualization. While storage and server virtualization usage is widespread on Wall Street, allowing firms to get the maximum use of those resources, the technology continues to evolve. Portland, Ore.-based start-up RNA Networks, for one, helps firms do the same with the memory chips in their servers. RNA adds a virtualization layer between the server and some or all of its on-board memory, enabling other servers to dip into it when necessary. As a result, a firm can improve speed, reduce costs, or both. “Saving money is definitely one of the value propositions,” says Andy Mallinger, VP of marketing at RNA. “Most of the work we’re doing now has to do with hedge funds, with arbitrage and with low-latency traders. The performance we’re able to offer is better than anything these folks have seen.”

6. Service-oriented architecture. Also known as Web services, service-oriented architecture, or SOA, is a way to build applications in small, discrete pieces that can talk to one another using open standards. Theoretically, SOA is more flexible than the traditional approach: building large, monolithic systems that speak proprietary languages and require expensive middleware to make them work with other platforms. But it takes time and money to switch existing software over to the new architecture.

However, service-oriented architecture offers a sizable short-term benefit that can make it attractive even in stressful times, says Hub Vandervoort, chief technology officer of SOA infrastructure products at Progress Software Corp., a Bedford, Mass.-based provider of application infrastructure technology. SOA applications are easier to keep an eye on, he says-”You can inject probes. To the extent that the firm is already in an SOA posture, it makes new reports, new visibility, real-time surveillance much easier.”

7. Business process management. Another advantage of SOA in today’s climate is that it’s a natural fit for business process modeling systems, which make it easier to set up new monitoring and reporting processes–a capability that could come in handy if much anticipated hedge fund regulations arrive.

Asset management firm Coris Capital of South Africa, for one, needed to reconcile assets and liabilities across different funds and three core systems–member administration, fund accounting and a product design and structuring solution from Microgen. Tom Crawford, managing director of London-based Microgen’s financial systems division, says Coris opted for his company’s SOA-based Aptitude business process management tools, which allowed the firm’s staff to design new workflows via a graphical interface, significantly speeding up development time. It took about two months to establish the requirements and two more to build the system, a process that would have taken at least twice as long using traditional approaches, according to Crawford.

8. Open source. Adoption of the open-source Linux operating system is widespread on Wall Street, and the OpenOffice productivity suite is steadily catching up to Microsoft Office in functionality. Aite’s Honoré says that more technology providers should consider offering their software at no cost–while charging for add-ons and advisory services–as a way to cope with a difficult sales cycle.

One vendor doing just that is San Francisco-based Marketcetera, which offers an open-source trading platform. “Previously, organizations had to be willing to shell out a large purchase price in the expectation that six to nine months later, the implementation would do what they want,” says CEO and co-founder Graham Miller. Firms using Marketcetera’s trading platform avoid that initial cost–which could be around $250,000–as well as ongoing licensing fees.

9. Better execution. With best-execution mandates in the U.S. and European Union, smart-order routing tools and platforms that accommodate multiple prime brokerages will remain a top spending priority for the buy side in 2009, says Celent’s Schauerte.

Today, there are about 40 exchanges, dark pools and electronic communications networks providing liquidity in the U.S., according to Raj Mahajan, president of trading at SunGard Data Systems. It can be tricky for a buy-side firm to track down the venue with the best possible price–”Nightmare is a good word,” says Mahajan. Following its October acquisition of Paris-based trading systems provider GL Trade-rebranded as SunGard Global Trading-the financial technology giant says it can help firms meet their best-execution requirements with offerings ranging from simple tools for small equities-based hedge funds to global, multi-asset-class, multibroker systems for the largest buy-side firms.

10. Risk management. With many hedge funds already having failed and the likelihood of worse to come, investors are demanding transparency and more attention to risk management. In the regulatory arena, new Securities and Exchange Commission chairman Mary Schapiro, former CEO of the Financial Industry Regulatory Authority, supports registration of hedge funds and other initiatives such as tighter oversight of credit rating agencies.

“The regulator is likely to come up with much more stringent ways for things like, ‘How do you assign a fair value to your portfolio?’” says Priya Bajoria, senior engagement manager for banking and capital markets at Bangalore-based IT services provider Infosys Technologies. The upshot, she says, is that “a lot of dollars have been set aside for risk management and compliance-related work.”

For many it is not just about the money–there are concerns about Vista’s performance when it comes to business productivity applications. According to a testing report issued late last year by Devil Mountain Software, Vista, compared to Windows 2000 and Windows XP, “is easily twice as demanding and requires state-of-the-art hardware in order to perform adequately.”

For Hold Brothers On-Line Investment Services, a Jersey City, N.J.-based direct-access trading firm, that was a significant consideration. “In our mission-critical environment, where latency is extremely important, Windows XP Professional was the better choice because it has lower latency than Vista,” asserted CEO Greg Hold.

Vista is more “bloated” than Windows XP, said Hold, requiring more memory and processing power. The firm tested Vista, he said, and decided to stay with the older operating system after determining that it runs trading software faster.

Speed, emphasized Hold, is critical for his firm and its clients-mostly day traders. “In trading, milliseconds are extremely important to users, where they might not be important to the general public,” he said. “Some kinds of day trading are extremely latency-sensitive–a fast news trader may make millions a year, but one who’s just a few milliseconds slower might not make any money at all. That’s why we’re sensitive to the speed of an operating system, its CPU utilization” and how much memory it takes to run.

Hold Brothers is sticking with XP on the desktops of its 300 employees and contractors, and on the 450 client desktops it controls. “There are only a couple of remote users whose choices we can’t control who use Windows Vista,” he said. “We will support it, but we really try to push people onto Windows XP Professional. Our relationships with our traders are very strong. They rely on us to make a living, so they are very prone to listen to our software recommendations. We have more input in what operating system our clients would use than a typical brokerage firm.”

Hold said his firm hasn’t decided whether it will eventually upgrade to Vista–or its successor Windows 7, due in late 2009 or early 2010–or go in a different direction entirely. Hold Brothers is small and agile, he said, and there’s plenty of time to decide before Microsoft cuts off support for Windows XP, currently scheduled for 2014.

XP Support

Many firms are opting to hold off on migration, a decision eased by Microsoft’s announcement in October that it will continue to offer XP downgrades. Microsoft spokesperson Ted Ladd noted that the Windows Vista Ultimate and Business editions come with downgrade rights, and Microsoft will provide XP disks to manufacturers through July. The hardware companies can continue to install the downgrades past that point, he said, as long as they have enough disks.

In fact, according to Devil Mountain, 35 percent of all PCs sold are downgraded to XP at the point of sale or shortly after being purchased. In the financial services sector in particular, companies looking for increased performance are shifting to the 64-bit version of Windows XP. “If you look at Wall Street types of activities, they can’t afford latency, and they can’t afford downtime,” observed Rod Nelsestuen, research director for financial strategies and IT investments at Needham, Mass.-based TowerGroup.

Despite the eventual removal of XP from the shelves, added Nelsestuen, the extended support will continue to slow adoption of Vista. “Windows XP is operating well and companies are happy with it,” he said. “And you’ve got the issue of what you need for new hardware. Vista, like any new operating system, has a bigger footprint.”

Some firms also prefer to standardize all their desktops, said Matt Rosoff, analyst at Kirkland, Wash.-based research firm Directions on Microsoft. “A lot of companies enforce a consistent image on all their PCs, and if they already have a wide deployment of XP, they will downgrade new PCs to XP as well,” he explained.

In the fiscal quarter ended Sept. 30, Microsoft’s client segment, which includes its Windows operating systems, saw a year-over-year revenue increase of 2 percent. The Redmond, Wash. giant had expected 6 percent to 7 percent growth, said Rosoff. Microsoft attributes the numbers to retail consumers opting for lower-cost versions of Vista, or Internet machines without the OS.

Vista currently accounts for 19 percent of operating systems in use, according to Net Applications, up from 10 percent at year-end 2007; 68 percent are XP. “We are seeing Windows Vista make steady growth among business users, with receptiveness for the product growing,” said Al Gillen, an analyst at Framingham, Mass.-based research firm IDC. “However, the market has not broken wide open with a sudden shift or acceleration to favor Windows Vista over Windows XP. At the moment, the story for Windows Vista continues to be one of linear growth.”

Trading Up

There are, however, factors that may push companies to upgrade. Service Pack 1–released in February for enterprise users, and March for everyone else–has fixed most of the bugs and other problems associated with Vista, said Stevan Vidich, Microsoft’s industry technology strategist for capital markets.

Generally, larger organizations are slower to swap operating systems since they tend to have a lot of proprietary software and sizable technology ecosystems comprised of computers, networking equipment, servers, security devices and peripherals, as well as the protocols, standards and tools that link the various pieces. All of a company’s applications and technology components have to be tested against a new operating system. If anything doesn’t work, it has to be upgraded, replaced or worked around.

“There’s a lot of application compatibility testing, a lot of regression testing that has to take place,” said Vidich. For example, he said, Citigroup has publicly committed to deploy Vista on 325,000 corporate desktops, but because of the size of the project, implementation will take three years to complete.

The biggest compatibility hurdle, he added, is Vista’s tighter security. “Windows Vista security has been improved considerably compared to Windows XP,” said Vidich. Under XP, typical desktop users have administrator privileges, giving them and their software access to key information such as the registry. Under Vista, that security hole has been closed off, creating compatibility problems with older software.

To solve the problem, Microsoft created virtual system resources for applications to play with, noted Vidich. Instead of changing a real system registry, for instance, the software changes a dummy registry. “This is making it more difficult for malware and viruses to attack Vista,” he said.

In both units sold and market penetration, Vista’s adoption is slightly ahead of where XP was at the same point after its release, said Rosoff of Directions on Microsoft. However, it’s impossible to make accurate comparisons because the industry has changed-there are more PCs and new customers every year, noted Rosoff. “I wouldn’t read too much into the numbers.”

Wall Street firms use SOA internally to integrate applications, create employee portals that bridge silos, and build Web sites for customers that bring in information and tools from a variety of applications, both in-house and from third-party providers.

The problem is that service-oriented architectures are composed of a complex–and ever-evolving–set of protocols. While the low-level standards are well developed, tested and universally used, they are more appropriate for the transfer of information like market data than clients’ sensitive transactions.

For Web services that connect to back-end systems, SOAs usually employ Soap, or the simple object access protocol, while Rest (representational state transfer) is used for customer-facing technology such as Web 2.0 applications. Soap is well supported by SOA vendors: Whether software is written in Microsoft’s .Net or Java, it can send and receive Soap messages, which are generally simple requests for information such as the price of IBM stock at a particular time.

Companies that use SOA for more complex processes typically select a technology provider’s platform and all the high-level standards that vendor supports. Many SOA platforms come with an enterprise service bus (ESB) that helps join Web services together. But firms are leery of opening up their SOA infrastructure to the outside world, preferring to limit interactions to the most basic level.

“Wall Street companies have deployed SOA and have spent a lot of money on it, but nobody has asked us yet to plug our services into their ESB–they’re just not there yet,” says Stephane Dubois, founder and CEO of Xignite. The San Mateo, Calif.-based company offers more than 60 subscription-based Web services, ranging from market data to interest rates.

According to Dubois, most of Xignite’s 400 clients–half of which are in financial services–use Soap or Rest. “But when they use Soap, they use it very simply, no advanced standards, no technology layers,” he says. “As far as I know, nobody is relying on the standards for security.” Instead, firms protect their data by keeping it behind corporate firewalls or on a virtual private network.

Pablo Grana, chief architect at Globant, a Hopkinton, Mass.-based software outsourcing company, says that data transaction standards are not yet proven. “It would be very risky to base a product or a project on the transaction specifications related to SOA right now,” he notes.

Technology giants such as IBM and Microsoft have backed different standards, with smaller vendors falling in line behind. And standards-setting bodies including the Web Services Interoperability Organization, Organization for the Advancement of Structured Information Standards and World Wide Web Consortium each have their own sets. For example, widely adopted standards for security include WS-Security, WS-Trust and SAML (security assertion markup language), and there are dozens more with highly specific purposes, such as partly encrypting a message so that only certain people can read more sensitive information.

When two companies decide to communicate via Web services, they have to agree on a common set of standards. These individual negotiations make it difficult to deploy complex Web services widely. “The standards question is still a moving target,” says Mike Curtis, VP of strategy at Dallas-based security vendor Critical Watch.

In financial services, security requirements are particularly stringent. “There is a high sensitivity to keeping data on-site,” he observes. “They’re historically on the far end of conservatism, keeping things close to the vest, not connecting out.”

Implementation Issues

Even when vendors adopt the same standards, that doesn’t mean they’re supporting them in the same way, which can mean extra work and higher costs for firms trying to launch external SOA initiatives.

“Conformance with a standard is one thing on paper and another thing to make it work out of the box, on the ground,” notes Vivek Mehra, VP of global financial services and insurance at San Ramon, Calif.-based IT vendor Keane. Because of the way that SOA has evolved, he says, technology providers implement standards differently and many use proprietary messaging. As a result, firms may have to write additional code to make pieces fit, he says.

For internal projects, cross-vendor compatibility is less of a problem, since companies generally pick a single vendor and stick with it. “They tend to use the full stacking inside the corporation,” says Globant’s Grana. “When companies really need to expose their services [to the outside], they tend to use more lightweight specs.”

One of the first decisions a firm makes when moving to SOA is whether to use Microsoft’s .Net or a Java-based framework from vendors like IBM. “Related to Java versus .Net, there’s a lot of talk about interoperability,” Grana says, “but there are still lots of edges that are really rough. No matter which you pick, you always have troubles talking to the other side.”

If custom programming is required to set up each point-to-point link, it defeats the purpose of SOA, points out Matthew Gardiner, senior principal at CA, an Islandia, N.Y.-based supplier of IT management software. “We’re still in the murky transition,” he says. Meanwhile, external SOA is used for cloud computing, software as a service, Web 2.0 and other rich, Web-based applications, he says.

Business Needs

Although internal usage of SOA promises to save firms money when developing and integrating applications, it can be costly in the short term-both in terms of money and speed.

For financial firms, transactions are measured in nanoseconds. An SOA infrastructure, while elegant in theory, is not necessarily optimized for speed. In addition, SOA messages are based on the extensible markup language (XML), a long-winded format for encoding information. The advantage of XML is that it is easily understood by both machines and people, but older messaging standards such as the financial information exchange (FIX) protocol are extremely compact and move quickly across networks. Even if the security standards were all there, switching to SOA messaging would add lag time, and the migration is expensive.

And while the move toward a universal set of standards and implementation processes has been slow, firms aren’t exactly clamoring for progress. Take, for example, OppenheimerFunds, which is in the middle of a full-scale conversion to SOA, using an ESB to pull all the pieces together. The key, says Geoff Youell, the firm’s AVP of architecture, is picking projects that make immediate business sense. “They’re prioritized based on business or strategic value,” he says.

The firm is not currently using Web services to connect with counterparties, explains Youell, and when it does link, it will be for basic information calls. “We are working with a third-party firm, enriching financial information for customers, and we will be moving to Web services for that,” he says.

Globant’s Grana agrees that, for now, SOA is used primarily for integration of internal systems. Connections between firms are “not really a business need right now, at least from what we see here,” he says. According to Keane’s Mehra, it will take two to five years before standards evolve to the point where SOA is the norm for transactions between firms.

Overall, SOA standards are about at the same place they were two years ago, says Xignite’s Dubois. The main difference is that the deployments are much larger. “Some people are pulling 100 million transactions a month,” he says. “These volumes you didn’t talk about two years ago.”

Mayur Pahilajani contributed to this report.

This article originally appeared in Securities Industry News. (Paid subscription required.)

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Twitter, launched by San Francisco-based Obvious in late 2006 before being spun off, is a cross between an online discussion board and instant messaging system, allowing people to post short updates-capped at 140 characters-on their activities. Users can subscribe to each other’s updates, or tweets, and have them sent to their Twitter screens. Some Twitter posters develop armies of followers.

Early adopters, as with most other social media platforms, were primarily teenage girls and the technology obsessed. But usage has spread quickly in recent months-the platform regularly grinds to a halt due to heavy traffic-and Twitter, with its powerful community-creation mechanism, is becoming widespread among groups such as venture capitalists, journalists and stock traders.

Because members select the people they want to follow, Twitter communities are self-organizing. Twitterers can see who the users they follow subscribe to and follow them as well. If a particular user is particularly annoying, one click makes them vanish from your screen.

Twitter users often link to news items or blog entries, discuss issues of mutual interest, spread gossip and provide coverage of events in real time. For Howard Lindzon, partner at Toronto-based hedge fund Knight’s Bridge Capital Partners, Twitter is both a useful research tool and a way to share information with a closed network of friends. A major attraction of Twitter is that, unlike securities trading message boards, “it’s not spam-filled, with people talking about penny stocks,” says Lindzon. “It’s really a closed conversation with people.” Lindzon is so enamored with the platform that he created StockTwits, a service that searches for Twitter postings that mention stock symbols. “We’re creating an aggregator where people can listen in on what people are saying,” he says.

Timothy Sykes, a former hedge fund manager and author of “An American Hedge Fund,” is another proponent of Twitter. Sykes did not use Twitter when he ran Cilantro Fund Management. But today he uses Twitter to promote his blog, which offers investment advice “for entertainment purposes only,” and for research. Sykes says he follows the tweets of about 400 users, including stock traders and fund managers.

“You can get a sense of what people in the industry are thinking,” he says. “I would guess that there are thousands-or tens of thousands-of financial industry professionals who are not using their real names and following people,” says Sykes.

If Sykes was working for a big Wall Street firm, he wouldn’t be actively Twittering. “I definitely would not risk my company finding out, or the SEC coming down on me,” he says. “Someone could lose a lot of money because of your tweets. I wouldn’t risk it.” Instead, he would restrict his use to pure research, in a read-only mode. The Securities and Exchange Commission also uses Twitter, adds Sykes-to send out advice to retail investors.

As with other communication technologies that have proved useful-if short on security-in their public forms, vendors are working on enterprise-friendly, compliant versions of the platform. In addition to a variety of open-source projects, development efforts are under way at IBM Corp. and start-ups Brainpark and Workstreamr.

Until those solutions are released, vendors like Belmont, CA-based FaceTime Communications can help a company block Twitter and similar systems from desktops, though they can’t do much about personal laptops or cell phones. “In terms of Wall Street and the financial sectors, it’s a little early for those industries to adopt this particular kind of technology,” says Christopher Boyd, senior director of malware research at FaceTime. “They’re probably still wondering exactly how they can use Twitter.”

Many companies have a blanket prohibition against posting work-related material on social media platforms, enforcing it through a combination of blocking tools, company policies, education and direct monitoring. That’s the case at VSR Financial Services, the second-largest broker-dealer in Kansas. According to VSR president Chris Radford, the firm permits usage of Twitter and social networking sites for research purposes but not for outgoing or internal communications.

Interest in online communications has been picking up among reps, he adds. “We just had a national conference here and a majority of our representatives were asking about electronic communications-blogging, MySpace, Twitter,” he says. “We want to support the growth of sales. We want to support the acquisition of new assets-and we do that several different ways. But we also have a requirement to supervise the communications with the public and archive those communications.”

If Twitter and its clones continue to grow and become more useful-which isn’t certain, given that there are no current revenue streams for the products-firms may eventually have no choice but to embrace the technology. Enterprise collaboration and communication vendors including Microsoft Corp., Oracle Corp. and IBM may include Twitter-like tools in releases of their messaging products. IBM has already deployed the BlueTwit micro-blogging platform for its own employees.

San Francisco-based Brainpark is developing an enterprise-level version of Twitter. The company currently offers a hosted, on-demand version of the software, Synapse, hosted in a secure facility with offsite backups. In the next few months, it plans to roll out compliance functionality, including archiving, monitoring, identity management and keyword alerts, says company co-founder and CEO Mark Dowds. Brainpark can also build onsite implementations for firms that want to keep all their communications behind a corporate firewall, adds Dowds.

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Twitter, launched by San Francisco-based Obvious in late 2006 before being spun off, is a cross between an online discussion board and instant messaging system, allowing people to post short updates–capped at 140 characters–on their activities. Users can subscribe to each other’s updates, or tweets, and have them sent to their Twitter screens. Some Twitter posters develop armies of followers.

Early adopters, as with most other social media platforms, were primarily teenage girls and the technology obsessed. But usage has spread quickly in recent months–the platform regularly grinds to a halt due to heavy traffic–and Twitter, with its powerful community-creation mechanism, is becoming widespread among groups such as venture capitalists, journalists and stock traders.

Because members select the people they want to follow, Twitter communities are self-organizing. Twitterers can see who the users they are following are subscribed to and follow them as well. If a particular user is particularly annoying, one click makes them vanish from your screen.

Twitter users often link to news items or blog entries, discuss issues of mutual interest, spread gossip and provide coverage of events in real time. For Howard Lindzon, partner at Toronto-based hedge fund Knight’s Bridge Capital Partners, Twitter is both a useful research tool and a way to share information with a closed network of friends. “I’ve been using Twitter for about six or seven months,” he says, adding, “some friends of mine had invested in it, so I was shown it early in the cycle.”

A major attraction of Twitter is that, unlike securities trading message boards, “it’s not spam-filled, with people talking about penny stocks,” says Lindzon. “It’s really a closed conversation with people.”

Lindzon is so enamored of the platform that he created StockTwits, a service that searches for Twitter postings that mention stock symbols. “We’re creating an aggregator where people can listen in on what people are saying,” he says.

Undercover Users

Timothy Sykes, a former hedge fund manager and author of “An American Hedge Fund,” is another proponent of Twitter. Sykes did not use Twitter when he ran Cilantro Fund Management–the fund closed last fall, just as the technology was gathering steam. But today he uses Twitter to promote his blog, which offers investment advice “for entertainment purposes only,” and for research. Sykes says he follows the tweets of about 400 users, including stock traders and fund managers.

“You can get a sense of what people in the industry are thinking,” he says. And judging by the posts from other fund managers and traders, he knows he’s not alone. However, there are probably many more who passively follow Twitter conversations, he adds. “I would guess that there are thousands–or tens of thousands–of financial industry professionals who are not using their real names and following people,” says Sykes.

If Sykes was working for a big Wall Street firm, he wouldn’t be actively Twittering. “I definitely would not risk my company finding out, or the SEC coming down on me,” he says. “Someone could lose a lot of money because of your tweets. I wouldn’t risk it.” Instead, he would restrict his use to pure research, in a read-only mode.

The Securities and Exchange Commission also uses Twitter, adds Sykes–to send out advice to retail investors.

As with other communication technologies that have proved useful–if short on security–in their public forms, vendors are working on enterprise-friendly, compliant versions of the platform. In addition to a variety of open-source projects, development efforts are under way at IBM Corp. and start-ups Brainpark and Workstreamr.

Until those solutions are released, vendors like FaceTime Communications can help a company block Twitter and similar systems from desktops, though they can’t do much about personal laptops or cell phones. Belmont, Calif.-based FaceTime, which offers anti-malware and regulatory reporting tools for instant messaging platforms, says it hasn’t yet received requests to monitor and archive Twitter conversations.

“In terms of Wall Street and the financial sectors, it’s a little early for those industries to adopt this particular kind of technology,” says Christopher Boyd, senior director of malware research at FaceTime. “They’re probably still wondering exactly how they can use Twitter.”

It will be hard for companies to get a handle on Twitter use, warns Boyd, since employees can log in from home and use aliases. And FaceTime has evidence that firms are, in fact, already using Twitter, according to Frank Cabri, VP of marketing and product management. “We’re actually communicating with some of our customers–many of whom are Wall Street customers–using Twitter,” he says. “Obviously, they’re getting these feeds somehow.”

Research Only

Many companies have a blanket prohibition against posting work-related material on social media platforms, enforcing it through a combination of blocking tools, company policies, education and direct monitoring. That’s the case at VSR Financial Services, the second-largest broker-dealer in Kansas. According to VSR president Chris Radford, the firm permits usage of Twitter and social networking sites for research purposes but not for outgoing or internal communications.

“Our reps are independent contractors, and we give them a lot of latitude in what they want to use in finding information,” Radford says. “If they want to use those mediums to conduct research, that’s their prerogative.”

Interest in online communications has been picking up among reps, he adds. “We just had a national conference here and a majority of our representatives were asking about electronic communications–blogging, MySpace, Twitter,” he says. “We want to support the growth of sales. We want to support the acquisition of new assets–and we do that several different ways. But we also have a requirement to supervise the communications with the public and archive those communications.”

As a result, neither independent reps nor company personnel are allowed to use Twitter for official purposes. “If they want to advertise or communicate that way, we haven’t seen a way to meet regulatory requirements,” says Radford.

Ken Pyle, compliance principle at VSR, says that the speed of communication is a major issue with the platforms. “We have to be able to catch it and review it on a real-time basis,” he explains. “For example, if they set up a Web site, they send us notices that they’re making changes in the Web site, we review it and then they can be released.” That process is not practical for faster technologies, he says.

If Twitter and its clones continue to grow and become more useful–which isn’t certain, given that there are no current revenue streams for the products–firms will eventually have no choice but to embrace the technology. Enterprise collaboration and communication vendors including Microsoft Corp., Oracle Corp. and IBM may include Twitter-like tools in releases of their messaging products. IBM has already deployed the BlueTwit micro-blogging platform for its own employees.

San Francisco-based Brainpark is developing an enterprise-level version of Twitter. The company currently offers a hosted, on-demand version of the software, Synapse, hosted in a secure facility with offsite backups. In the next few months, it plans to roll out compliance functionality, including archiving, monitoring, identity management and keyword alerts, says company co-founder and CEO Mark Dowds. Brainpark can also build onsite implementations for firms that want to keep all their communications behind a corporate firewall, adds Dowds.

Article first published in Securities Industry News. (Paid subscription required.)