Research ‘Massacre’ Expected

Shanny Basar

Research is expected to decrease at the beginning of next year as new unbundling rules come into effect but independent providers with specific expertise may benefit in the long run.

Maxime Mathon, head of communication and marketing at AlphaValue, told Markets Media: “There will be a massacre for research in the early months of 2018 as asset managers downgrade their budgets and sellside reduces coverage.”

However he continued that over time, once buyside firms have research budgets in place, then it will be viable for independent firms with specific expertise to provide more research e.g. covering small and midcap stocks.

MiFID II, the regulations covering financial markets in the European Union, will come into effect at the beginning of next year. One of the requirements of MiFID II is to separate payments for research, which have historically been bundled into trading commissions, in order to increase transparency and reduce conflicts of interest. Asset managers can choose to either pay for research out of their own P&L or from research payment accounts, where they have agreed a budget with their clients, but can designate a third party to administer the RPA on their behalf. The buyside will also have to track their consumption of research and assess its quality.

AlphaValue is an independent equity and credit research provider based in Paris that already charges fixed fees for research. The firm covers 490 large European caps, approximately 80% of the Stoxx600 universe. Mathon said: “We don’t have the weapons of execution and corporate access, but just provide pure independent research.”

Clients pay AlphaValue for different levels of access such as access to written research or analyst contact through email, a meeting or a live chat on the firm’s website.

“A number of fund managers can participate in a live chat with an analyst at the same time and that is a big advantage,” added Mathon. “We are testing this with clients and once it goes live it will be a game changer.”

This month AlphaValue, agency broker ITG and independent consultant FinFees hosted an event for the buyside on MiFID II unbundling. A poll of 87 asset managers at the event found that 89% are preparing for MiFID II, 3% are ready and 8% have not started.

More than half, 60%, of asset management companies  in the poll said they expect to wait until MiFID II launches on 3 January 2018  to implement unbundling. Nearly one-third, 31%, said in the poll they have not yet decided on how to pay for research, 28% said they will continue to use client funds to pay for research and 18% will use their own revenues.

Liquidnet, the institutional block trading network, said in a statement today it has launched a partnership with ONEaccess, a corporate access and research valuation platform, to provide institutional investors with technology to manage, track, and pay for eligible research under MiFID II.

Liquidnet already operates a commission management service to track and make payments from aggregated commission sharing arrangements and research payment accounts across brokers, currencies, and asset classes. ONEaccess enables investors to create a framework for research valuation and monitor and analyze all of their interactions with research firms in one place.

Rob Laible, head of equity strategy at Liquidnet, said in a statement: “Whether they are tracking broker targets, commissions or payments, as traders adapt their workflows for MiFID II, it’s essential that they have the tools they need to relieve administrative burdens so they can get back to capturing alpha and delivering performance to their funds and their firms.”

This month Illuminate Financial Management, a venture capital firm focussed on fintech for capital markets, invested in FeedStock, an intelligent information management platform. FeedStock filters, categorizes and tracks investor research using artificial intelligence software, which can be embedded into clients’ internal systems. In addition this month Commcise, which provides integrated commission management technology for asset managers, and Westminster Research Associates announced a partnership.  Westminster is owned by broker Convergex and provides custodial aggregation solutions and access to a network of independent research providers.

Mathon: “Fund managers will also want to measure alpha from research and there are no universal tools for doing that today.”

Consultancy Celent said in a recent report that both the buyside and sellside are currently focussed on complying with the MiFID II requirements but then the long-term focus will have to shift to the commercial implications of how alpha-generating research should be monetized.

“Much like the fish that doesn’t see the water, the buyside has been swimming in non-priced investment research for so long that it has never considered what it was worth, how much it uses, the level of cross-subsidization, or frankly what it needs,” added Celent.

Mathon said: “Research marketing will be a new world after MiFID II as firms find new ways to gain visibility and keep their influence on the market e.g. LinkedIn allows useage of research to be monitored,”

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