Research Faces Tougher Grading
As MiFID II removes the link between research and execution, the buy side faces a challenge of determining how useful research from the sell side and independent providers truly is.
The process has been a bit haphazard historically as asset managers equated opened emails as a proxy for consumption, according to Blair Livingston, CEO of Street Contxt.
“We found that more content is opened for deletion than is opened to be read,” he said. “If you count opens to determine the allocation of commissions then you are allocating commissions to firms whose research you’re deleting and creating a system that rewards spammers indirectly.”
By analyzing aggregated user data from its research distribution platform, Street Contxt found that if an article is open but not opened two seconds later, the recipient deleted it.
Livingston suggests that asset managers and other consumers of financial research need to track the lifecycle of the research from arrival, to its use within the firm, and the final results of any investment decisions based on the research.
Firms should track how long recipients read the research content, whether they re-read it, shared it with colleagues, or tagged or annotated the research, according to Livingston. “All of these actions speak much louder quantitatively than saying ‘Great analyst with good insight,'” he added.
Once asset managers start measuring the performance of the research content from their research providers, Livingston expects the buy and sell side will have a far easier time determining who has the best content.
According to aggregated user data from Street Contxt, some content providers have an open rate of only 1 or 2% while some providers have open rates for their content as high as 55 to 65%. “There’s a massive amount of delta,” said Livingston.
He unsure whether research unbundling will lead to more or fewer content providers, but he expects to see the bifurcation of the research market.
“The best content providers on a given topic will be able to charge more for their research than they could have historically because of the transparency and the quality of their content,” said Livingston.
Content providers likely will migrate some of their focus from overserved subjects to those that are underserved, he added.
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.