Fintech Aims To ‘Atomise’ Research10.31.2019
Fintech Limeglass has launched to ‘atomise’ research by using technology to tag reports in real-time so that they can be easily and quickly searched by the recipient at a granular level.
Rowland Park, chief executive and co-founder of Limeglass, said in a report this week that the research market needs innovation as the majority of reports are still being consumed by the buy side as multiple page PDF and HTML documents sent by email, despite advances in technology. Park has more than 30 years’ experience in the research industry and founded and grew start-ups IDEA Global and 4CAST, which focused on macroeconomics, policy and financial markets intelligence.
Park wrote in the report that financial decision making rests on a three-legged stool – market data; breaking news; and research, which provides wider context for decision making.
“The development of tools to better handle market data and breaking news have transformed, and continue to transform, the way activity in the financial markets is conducted,” he added. “However, financial research and analysis (no less important as a source of information) has seen comparatively little to no innovation in the last few decades.”
The report gave the example a government bond trader looking to purchase German bunds. There could be information in a report on the 10-year bund as well as useful analysis on a potential shift in the European Central Bank’s stance in an article within a document on the outlook for German GDP.
Limeglass uses a process it calls “Document Atomisation” to enable the trader to easily find all this data. The firm’s proprietary software uses natural language processing, artificial learning and machine learning to tag reports so they are transformed from unstructured text into organised, API readable information. There is appropriate paragraph-level tagging for context within a standardised cross-asset and macro taxonomy without analysts having to change the way they write.
“Once the insights in the research have been broken down in this manner, they can be reassembled in any number of different combinations to perfectly suit the needs of the individual market participant at any given moment,” said Park.
For example, the bund trader would find the relevant paragraph within the German GDP document, and other information they may want for context such as the German Purchasing Managers Index numbers without having to read the reports one-by-one.
“Research atomisation is a fundamental building block in providing personalised research to users whilst delivering a trackable and traceable model for how research is generated and consumed,” added Park.
Sandy Bragg, principal at consultancy Integrity Research, told Markets Media in an email that Limeglass offers a level of granularity that brokerage firms have been considering for some time under the rubric of ‘componentization.’
“However, other priorities such as implementing systems to track buy-side interactions have taken precedent,” added Bragg. “While Limeglass will likely find some interest on the sell-side, traction on the buy-side may be tougher because research management systems offering broader organizational capabilities may have more urgency.”
MiFID II impact
The European Union’s MiFID II regulation required the unbundling of research payments from the beginning of last year, and most asset managers have chosen to pay for research out of their own revenues. Before MiFID II research costs were often ‘bundled’ into transaction commissions and paid by investors, with many buy-side firms not monitoring how much of their clients’ money was being used to pay for research.
Rebecca Healey, global head of market structure at institutional liquidity pool Liquidnet, said research unbundling in the European Union has led to a changing role for execution as part of the investment process.
She said in a report this month: “The ability to access, analyse, interpret and act upon the information now available in a global 24/7 economy will be how active managers can deliver better fund performance for end-investors. Automating the investment process will be what differentiates the active managers who survive versus those that will not.”
Healey gave the example of a multi-billion dollar discretionary fund which used systematic analysis to review all research reports, emails, instant messages and trader notes to extract data signals and create a shadow portfolio. Over a three-year period the strategy outperformed the fund’s own P&L.
Our Head of Market Structure + Strategy, EMEA, @_RebeccaHealey, considers the growing importance of data and digital transformation in asset management, arguing that, despite the industry's challenges, its opportunities for success have never looked greater. pic.twitter.com/4gUSnmEHkW
— Liquidnet (@Liquidnet) August 13, 2019
“It will not only be necessary to absorb an increased quantity of data from a continuing variety of sources but to also have the ability to efficiently aggregate and analyse this data in order to extract actionable insight,” she added.
The UK Financial Conduct Authority reviewed the impact of MiFID II on the research market and estimated that investor savings from unbundling could reach nearly £1bn ($1.25bn) over five years.
The FCA said in a report last month that the quality of asset managers’ research valuation models varies and the UK regulator re-iterated that it expects buy-side firms to refine their models to ensure they are acting in the best interests of their clients. The report also said there are a wide range of sell-side research pricing levels.
Buy-side budgets for externally produced equity research have fallen between 20% and 30% since unbundling was introduced. The regulator explained this was due to fund managers having a more targeted approach to procurement, fewer and more focused analyst meetings, as well as increased competition.
“Buy-side firms told us they are still getting the research they need, despite lower budgets,” added the FCA. “This implies that most savings reflect greater competition and market efficiencies, including firms better assessing how much and what type of research they need.”
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