There will be some big changes ahead for the capital markets industry, stemming from changes in the research industry in 2017. Not only will the creation, distribution and consumption of research evolve, but this will cause changes in the underlying infrastructures of investment banks, brokers and asset managers too. Unbundling research from trading commissions is a necessary requirement of MiFID II, due to come into force on January 3 2018. And in doing so, this unbundling and move away from cross-subsidisation will impact other areas of the business, such as ECM and corporate access, market making and flow trading.
MIFID II will be a key agent of change for the research industry, but it is not the sole driver shaking up what has traditionally been a fairly static sector. There are other reasons behind the restructuring of the provision of research. Some banks, which are under continued regulatory pressure, are closing their research departments, or focusing coverage on top tier clients only, as they search for more profitable cost centres. Others have downsized, or in investment banking terminology “juniorised” their research and distribution teams. A recent report by Quinlan & Associates estimated a 25-30% reduction in global research spend by 2020.
In some instances, this has impacted coverage, with depth and breadth compromised, as the output focused on the more profitable large cap sector has come at a cost to coverage of small and mid-cap firms. Coverage of less fashionable stocks or sectors has also been impacted, so if they do have a renaissance, there may not be adequate insight about them, thus impeding their growth potential.
On the sell side we have also seen banks look at new, innovative business models with vendors. For example, Societe Generale will now provide Asian research via an online, curated platform from fintech start-up Smartkarma. Other market options include a la carte purchasing solutions, auctioning of analysts’ time or subscription plans, to highlight a few.
For asset managers, these changes also require more complex tools to evaluate research and set budgets, and who pays for it. Some of the larger firms have built up their research teams internally, but many are using this change to focus on some of the underlying issues they face with research. For example, asset managers are looking for ways to overcome the daily information overload that they experience, with ever greater portions of their day wasted trawling through insight that is not suited to their need, nor timely. A PDF document is only as fresh as the day it is created and many people are looking for ways to get closer to the analysts and get real time, demand-driven insight. This need is ever greater as the prolonged interest rate environment is pushing them to look for innovative ideas to generate alpha.
Independent analysts are the least likely to be negatively affected by the shifting landscape. New distribution platforms have emerged that are offering solutions that run from publishing to distribution and efficient monetization of work. Many of the analysts and insight providers themselves are looking into new ways of collaborative working, wanting a more flexible environment, particularly if they are emerging from banks and setting up shop on their own. Independent investment analysts may have a competitive advantage outside of the confines of a bank, which are increasingly affected by increased regulation, compliance costs and potential or perceived conflict of interest, as with the recent case of the government of Indonesia cutting ties with JPMorgan due to their downgrade on Indonesian stocks.
Whatever choice the sell side and independent research providers make for providing investment insight, and however the buy side decides to gain access to those services, it will not all be decided this year. 2017 marks the start of the transformation of investment insight, a final move away from the PDF document and into a multi-year cycle of innovation.
Change can cause many short term pains, but with it comes some fantastic opportunities to capitalize on new ways of gaining access to dynamic insight more quickly, and in more areas, just when it is needed. There can be very few industries with people more capable of reacting positively to change and 2017 will be the year when we really start to reap the rewards.
2017 is the year when the research industry shakes it up: pushed by MiFID, but pulled by the desire to create a better, more efficient and effective investment insight industry.
Jon Foster, Co-Founder, Chairman, Smartkarma