Earlier this week, a Jeffries Group banker was slapped with a $49,000 fine for using an encrypted messaging phone app to trade confidential client information.
He's not alone - thousands of Wall Street's elite have embraced WhatsApp as an easy and virtually untraceable way to circumvent compliance, get around the HR police, and keep bosses in the dark, Bloomberg reported on March 30.
And the U.S. Securities and Exchange Commission (SEC) is struggling to find a way to crack down...
Exactly What Is WhatsApp?
WhatsApp, owned by tech giant Facebook Inc. (Nasdaq: FB), is an end-to-end encrypted instant messaging app for smartphones. Basically, it allows users to send messages, photos, and videos back and forth that are essentially untraceable.
Once messages are deleted on the app, it's as though they never existed. Some settings even allow users to have the messages automatically deleted after a preset amount of time, similar to how Snap Inc. (NYSE: SNAP) works.
How Encrypted Messaging Is Used on Wall Street
How messaging apps like WhatsApp are used on the trading floor and beyond varies.
"At the big banks, employees will often use such apps to gossip about what they're looking to buy and sell, or even boast about a particularly profitable trade," an employee at a Wall Street firm told Bloomberg on March 30.
This may seem innocent enough, but here's the concern...
A "don't ask, don't tell" mindset prevails in most of these firms, according to Bloomberg - which means employees can get away with whatever they want.
And they do.
Several employees at one multibillion-dollar hedge fund used WhatsApp to regularly exchange sensitive market intelligence with one another, according to a source for Bloomberg. And one investment banker admitted to routinely sending screenshots of chats showing one hedge fund's positions to another client to win more orders.
[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]
Even worse, in December 2016, a money manager responsible for $50 billion of New York state's pension fund investments was indicted for accepting at least $180,000 in bribes from two bond salesmen. The bribes included a $17,400 watch, prostitutes, and cocaine - all in return for business that generated millions in commissions. According to the indictment, both parties used WhatsApp to conduct the transactions "in an effort to keep their communications from being monitored by law enforcement."
Must See: Get $45,000 Worth of Our Best Stock Research for Just Pennies a Day
"If you look the other way on this, it's only going to get worse," said Warren Small, a financial crimes professor at Middlebury Institute of International Studies to Bloomberg. "With financial transactions, temptations and the rewards are just too great."
Big Brother Is Watching... or at Least Trying To
According to the SEC, financial firms need to keep records of all written business communications, no matter how small.
But the use of encrypted messaging apps for work-related communications is making it harder and harder for firms to monitor their employees' conversations.
"They're always behind," said Jack Rader, a managing director at ACA Compliance Group, a firm that sets up monitoring systems for financial services. "It's almost impossible for a compliance department to stay ahead of communications technology that is available for employees," he said to Bloomberg.
How You Can Profit
As of January 2017, WhatsApp has over 1.2 billion monthly active users - up 18% from 2016.
Citigroup forecasts the app could generate revenue of $1 billion just this year.
And that revenue is only growing...
In fact, Citigroup predicts WhatsApp could grow to $2 billion by 2018.
Money Morning Director of Tech & Venture Capital Research Michael A. Robinson - a 34-year Silicon Valley veteran who is an expert at identifying the best tech investments - suggests traders take advantage of this surge right now.
Facebook, WhatsApp's parent company, currently trades at $142 a share. That might seem like a hefty price tag...
However, Robinson thinks it's actually a bargain.
"The fact that Facebook saw its sales shoot up 122% and its profits surge 145% in the past two years doesn't even begin to tell the full story here," Robinson told Money Morning Members on March 28.
And he's identified three other tech stocks poised for the same growth...
Follow Money Morning on Twitter @moneymorning, Facebook, and LinkedIn.