In an effort to find an alternative to ‘Instant Bloomberg’– the messaging service that currently dominates trading communications – several major Wall Street firms led by The Goldman Sachs Group, Inc. (GS - Analyst Report) are nearing a deal to acquire stake in a chat and instant messaging startup, Perzo Inc. The report, first published by Reuters, stated that the investing firms include banks, asset managers and hedge funds.
These financial institutions – Morgan Stanley (MS - Analyst Report), JPMorgan Chase & Co. (JPM - Analyst Report), Bank of America Corp. (BAC - Analyst Report), Deutsche Bank AG (DB - Analyst Report), HSBC Holdings plc (HSBC - Analyst Report) and BlackRock, Inc. (BLK - Analyst Report), Maverick Capital Ltd. and Citadel LLC – are contemplating an investment of $40–50 million in Perzo. Recently, the companies obtained term sheets for the deal and signed non-disclosure agreements.
What Messaging Services Mean for Financial Institutions?
In the Wall Street forum, messaging applications provide crucial support in conducting day to day business. An underwriter uses these applications to share bond price levels with investors, while hedge fund managers communicate trading ideas. Traders use the messaging applications for communicating with the sales staff.
What Led to the Latest Move?
A still low interest rate of environment, soft trading volumes, increased regulatory and compliance costs and higher capital requirements has limited revenue growth of many financial institutions like Goldman. Thus, in addition to resorting to alternative source of revenues, these firms are forced to undertake cost control measures to drive operational efficiency and profitability.
The financial companies have to incur around $20,000 a year for the messaging service, data, trading and news terminal provided by Bloomberg LP. Also, Bloomberg customers are unable to buy only the messaging system. Instead, they have to purchase the entire terminal. Hence, these banks and institutions have been seeking alternatives that could enable them to customize services according to their requirements.
In early 2013, for the purpose of creating an alternative to the Bloomberg messaging platform, Goldman had launched a project internally called ‘Babel.’ However, as the project was initiated, it came into light that Bloomberg's news division reporters had access to information on how the bank employees were using their terminals.
This revelation led to dissent between Bloomberg and Goldman, alongside other major financial institutions. Bloomberg in turn issued a public apology and altered the policy to prevent reporters from getting access to crucial client data.
The Perzo Benefits
Based in Palo Alto, California, Perzo is startup company founded by David Gurle. The company’s messaging services will be provided free to its customers. Further, the application is ‘open-source,’ which implies that customers can use the application in their systems and customize it as per requirements.
Will Perzo Be a Good Alternative to Bloomberg?
Being a dominant player in the market, Bloomberg’s chat service currently has a huge user base of as many as 320,000. Hence, financial institutions resorting to an alternative messaging platform like Perzo may face some challenges at the initial stage.
As electronic medium has replaced manual trading, there has been growing concern regarding the safety of keeping crucial data. A heavily and importantly used messaging system must be secure enough to achieve success and replace an existing player.
Market is not very confident about the impact of replacing ‘Instant Bloomberg’ on Goldman's orders for Bloomberg terminals. Also, it is not known yet whether Goldman would continue Bloomberg’s messaging system simultaneously with the new application.
However, with the major financial companies investing in Perzo, it seems that Goldman will benefit from the messaging service as there will be a number of customers using the new system.
Goldman currently holds a Zacks Rank #2 (Buy).