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Big Banks Threatened by Chat Room Regulation

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Written by Lydia Sine
Edited by Sarah Mejia

One of the key elements of conducting business in the big bank industry is the use of computer chat rooms. Chat rooms allow traders to electronically connect and communicate internationally across banks. The importance of the chat rooms is to provide communication between traders. Recently, in response to an increase in regulatory standards by government organizations (such as the SEC and the CFTC), these chat rooms have become a target for examination. They are legal, but regulators have begun to see that these chat rooms have potential to serve as a platform for information sharing, insider trading, and market manipulation.

Suspicions of poor management behavior while using chat rooms are supported by past cases such as that of a chat room called “The Cartel”. Regulators scrutinized The Cartel after conversations between traders were made public. The chat room transcript proved the traders were misusing the chat room for other practices than simply doing legal trading business.  There were conversations of idle, inappropriate chatter such as jokes between the traders of how they possess the ability to influence currency exchange rates. Records also showed that the traders were sharing private and closed information with competitors.  In response to this behavior, those traders were suspended from conducting business.  Other cases of regulated chat rooms resulted in large fines as well as damage to the reputation of the banks involved.  In response to the increased regulation of the chat rooms, many big banks have been performing internal reviews to analyze the purpose of chat rooms on their trading floors. Among other consequences, they are concerned with the possibility that regulatory issues may damage the company’s reputation.

Reputation is tied closely with corporate social responsibility.  The aim of many firms is directed towards serving each one of its individual stakeholders.  Many corporations have been reviving the internal structure of their companies in order to uphold their reputation in the eyes of stakeholders. Using corporate social responsibility emphasizes this theory of maximizing each stakeholder’s value. Customers, investors and regulators all desire to work and be associated with a company that invests in and maintains a positive reputation.

J.P. Morgan is one of the corporations that is performing internal reviews on the use of chat rooms on their trading floor. They are doing this with the aim to preserve the bank’s reputation and avoid unnecessary regulatory issues. They are reviewing the purpose of their chat rooms and analyzing whether the chat rooms are being misused for illegal insider and information sharing. They are also concerned with other attributes that could lead to unwanted regulatory action or public release of chat records to hinder the reputation of the bank.  In the case that J.P. Morgan disables the use of chat rooms between its traders, they are looking to find an alternative solution to communication issues that the chat rooms solved. A fragment of their review analyzes the use of individual and conference phone calls as well as e-mail chains that could be used as a substitute to the function that chat rooms currently have in the trading business.

By performing internal reviews, J.P. Morgan is executing good management. All stakeholders are appreciative in seeing a company in which they are invested care for and consider actions that uphold a positive image for the company. Stakeholders also desire to be associated with a company that ensures safe and legal business is taking place within the corporation. I think that J.P. Morgan as well as many other big banks need to be continually aware and active in the analysis of how regulatory issues from poor business activities, such as inappropriate conversations in computerized chat rooms, affect each stakeholder. It is important for corporations to engage in honest and legal behavior. If business transactions are not, it is imperative that big banks take notice of and act within management to assure that they are controlled. The role of chat rooms for traders in the big bank industry is currently crucial to making time-sensitive decisions and foreign exchanges, but the question of if there is a technology sufficient enough to replace it is still being analyzed by review boards across multiple big bank corporations.

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**Due to technical difficulties, we recently had to switch domains and transfer all of our website content.  Please keep in mind that while we have been publishing articles for two years, the published dates shown may not reflect the initial publish date.

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Stausburg, Jenny. “Banks Weight Barring Chats.” Wall Street Journal [New York] 11 11 2013, C1. Print.

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