Schumpeter | The battle over chat in finance

New party line

New party line

By T.E. | NEW YORK

“WALL STREET” and the “smart money” have long since dispensed with the need to be contained in one place, be it New York, London or Tokyo. What now knits together much of the upper echelons of finance is the Bloomberg terminal, which can be found in most offices of financial institutions around the world (pictured). This is because the data cockpit not only provides access to a vast collection of information, but because of a useful chat function—although it, in theory at least, could be replaced by an alternative.

In a few weeks theory is likely to be put to a test when a new system will be introduced that builds on efforts by Goldman Sachs and Perzo, a little known startup. Details such as ownership are still confidential, but there is talk of dozens of equity stakes held by other investment firms. And others can apparently still join in: it will be open to all users. The motto is “the more the better”—which will be essential if the new messaging network is to succeed.

The Bloomberg chat system is valuable in particular because it is helpful to have financial data and messages shown on adjoining screens when evaluating securities or trading. Copying and pasting data without losing formatting is another benefit. Once a user is hooked, it is convenient to stay within the system. The Bloomberg system processes an estimated 20m chat messages daily.

If Goldman and other financial firms want to establish an alternative, it is for four reasons. One, terminals are expensive; the annual fee is approximately $20,000. Many employees could presumably survive with cheaper and more limited systems, if they could be weaned from chat. Secondly, Bloomberg terminals only offer limited tools for compliance departments, for instance to monitor messages. The new alternative is supposed be more flexible.

The third concern is Bloomberg’s handling of data. A year ago, there was a minor scandal when it became apparent that its reporters could see whether clients were active on the terminal, and make various informed inferences (this feature has been disabled). The largest issue, however, is power. Bloomberg is a crucial source of information—one of the three most important ingredients in the financial markets, along with capital and contacts. Goldman & co. simply don’t want to be too dependent on one source.

Ordinarily, the prospect of the big firms collaborating would be terrifying, but they face obstacles. The most important is that Bloomberg does an excellent job in an area where the cost of failure is vast. Another is that collaboration between financial firms is always fraught: they jointly underwrite securities and lobby for political advantage, but they are sensitive when it comes to information and do not always play well together. And then there is another new Bloomberg alternative: Markit, another financial-data provider, has created a system that allows to communicate accross different messaging services. The hope of Goldman and its partners to replace Bloomberg is inevitable; doing it is anything but.

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