Research Pricing Vexes Sell Side
MiFID II’s research unbundling requirement has left the sell side scratching its head in how to price its research for its buy-side clients.
Sonali Theisen, global head of market structure & data science at Citi jokingly said that she did not want to address how her firm is approaching the issue with a 10-foot pole but she did share her thoughts on from an industry perspective during a MiFID II for Non-Europeans panel discussion last week hosted by Bloomberg.
“There are so many hybrid research functions that large sell-side firms are still trying to figure out where we think it fits,” she said. “We have desk analysts that work alongside our clients to work on a name and take down a risk. It is almost impossible to quantify that resource.”
The chances of the sell side developing an a la carte menu of individual research products is slim, according to Neil Scarth, principal at Frost Consulting and who spoke on a separate panel.
The UK’s Financial Conduct Authority, considered one of the most aggressive regulators, rejected including such a mandate for the sell side in its 600-page implementation document.
“This comes from the recognition that even they recognize that the very same thing can have a very different value to different people,” he said. “The value of a fantastic piece on Facebook to a deep value investor probably is not very high because deep value investors can never own the stock but a growth investor might find it incredibly valuable.”
Meanwhile, the sell side may look to develop tiered-access offering, aspirational pricing, and price-price taking models, according to fellow panelist Neil Shah.
Tiered-access would not be a novel model, added James Bennett, managing director, Markets at Greenwich Associates. “We’re all familiar with the American Express’s green card versus gold card versus platinum card,” he said. “It means a different level of service and value for different thresholds.”
One potential scenario for a bulge-bracket firm would be to provide global access for ‘X’ hours and access to sales coverage on a corporate basis, Shah offered.
Taking an aspirational approach, a sell-side research provider could value their research at $100,000 but start at a low price, such as $25,000, and evolve the price over time, he added.
And with a price-taking model, the sell side firm would simply price its research and see if any buy-side firm bites.
Of the three models, Greenwich Associate’s Bennett believes that the tiered-access model becoming the dominant model as sell-side providers work with independent research providers to deliver an enhanced research offering.
There are three key areas where action is required.
Some material changes have come out of ESMA’s review of algorithmic trading.
A consolidated tape will significantly improve transparency and create a level playing field.
AFME said there should be mandatory free data contribution to the consolidated tape.
The review is an opportunity to recalibrate MiFID II regulations post-Brexit.