Equity research faces growing business and regulatory issues today. Shrinking market volumes, new regulatory requirements and transparency obligations are forcing financial market players to re-think the role of equity research in capital markets. Despite being a key part of the investment value chain, research is more than ever looking for fair valuation. Alphametry CEO Fabrice Bouland in his most recent keynote shares his findings, thoughts and insights on the fundamental challenges — the production, distribution and consumption of investment research. Learn more about: * The changing role of equity research in the investment process * How technology is transforming research procurement * What to expect from the upcoming MiFID II regulations * New trends and opportunities

1. JUNE 2015, GENEVA, SWITZERLAND
RE VO LU T I O N I N I NVE S T M E NT RE S E A RC H
A LO O K AT E CO N O M I C , D I G I TAL & R E G U L ATO RY C H A N G E S

2. T H I S P R E S E NTAT I O N I N C LU D E S I N S I G H T S I N S P I R E D
BY N U M E RO U S I NTE RV I E W S W I T H A N ALYS T S A N D
AS S E T M A N AG E R S D U R I N G T H E PAS T 2 4 M O NT H S

3. I b e c a m e a n e nt re p re n e u r 1 5 ye a r s a g o e s s e nt i a l l y
t h a n k s to t h e I nte r n et .
B efo re c re at i n g B ro ke r h u b , a n E q u i t y d e r i vat i ve s
p l at fo r m a n d OTC ex , a n i nte r - d e a l e r b ro ke r, I s p e nt
9 ye a r s a s a p ro p r i et a r y vo l at i l i t y t ra d e r at
B N P Pa r i b a s .
I a m fo n d of te c h n o l o g y a n d e n j oy t h e c h a l l e n g e of
b u i l d i n g i n n ovat i ve b u s i n e s s e s .
FA B R I C E B O U L A N D , C E O , A L P H A M E T RY

4. A N I N D U S T RY I N T RO U B LE ?
T H E S TAT E O F E Q U I T Y R E S E A R C H

5. S H R I N K I N G
R E VE N U E S
G L O B A L E Q U I T Y R E S E A R C H
B U D G E T I N B I L L I O N S ( U S D )
2007 2013 2017
3,4 $US
4,8 $US
8,2 $US
Source: Frost Consulting, in The Economist ‘Analyst Beware’, May 16, 2014

6. CO NTE NT
D I S P E R S I O N
Dominant incumbents
Emerging expertise
New producers

7. S U P P LY
I S S U E S
Coverage concentration
Market opacity
Out-of-date delivery

8. T H E C H A N G I N G N E E D S
O F AS S E T M A N AG E M E NT
A D J U S T I N G T O T H E I N V E S T M E N T P R O C E S S

9. T H E E X PA N D I N G R E S E A RC H U N I VE R S E
REGIONAL OPPORTUNITIES
NEW STRATEGIES
DATA-DRIVEN

10. I N D U S T R I AL I Z E D
P RO C U R E M E NT
Acquisition process
Content exploitation
Business analytics

11. D E E P E R
I NTE G R AT I O N
Numerous origins, types and
formats
Actionable content
Automated trade execution

12. Expanding universe
Procurement industrialisation
Deeper integration
Shrinking revenues
Content proliferation
Supply issues
C H A N G E SI S S U E S

13. SAV I N G E Q U I T Y
R E S E A RC H

14. T H E CO M M I S S I O N
S H A R I N G AG R E E M E NT
R E S E A R C H U N B U N D L I N G PA RT 1

15. H O W T H E C SA WO R K S
RESEARCH BUYER
BROKER
RESEARCH PROVIDER

16. Source: University of Edinburgh Business School/Bloomberg, December 2014
T H E S U CC E S S O F C SA s
About the same
17 %
More in 2015
59 %
Less in 2015
24 %
Compared to 2010, do you
expect CSAs paid to independent
research providers to be…

17. — M A R T I N W H E AT L E Y, C H I E F E X E C U T I V E O F T H E F C A
There is a strong evidence to suggest the
current model of using dealing commission
to pay for research reduces transparency and
creates a link between research spend and
trading volume, without a clear assessment
of the value this offers to investors.
“

18. T H E R E G U L ATO RY S H I F T
R E S E A R C H U N B U N D L I N G PA RT I I

19. Financial Conduct Authority 9
Feedback statement on DP14/3 – Discussion on the use of dealing commission regime FS15/1
February 2015
1.25 By clearly separating the payment for research from execution arrangements, it removes the
inducement risk and conflicts of interest for portfolio managers that their execution behaviour
and choice of brokers may be unduly influenced. This will drive proper scrutiny by portfolio
managers over the amounts paid for research and the benefits it provides and also improve
their ability to monitor and comply with best execution obligations on behalf of their customers.
1.26 Importantly, it recognises that external research can be a core cost of business to a portfolio
manager in developing investment ideas. It will, under ESMA’s proposals, be a cost and charge
that is akin to a portfolio manager’s own spending on analysts and internal research, which
they already reflect in their upfront annual management charges (AMCs). Research would no
longer be paid for in transaction fees that have no correlation to the quantity and value of
research received and consumed.
1.27 ESMA’s approach will also promote transparency and competition in the market for research,
allowing independent providers to compete more easily with larger brokers based on price and
quality – encouraging a focus on value-added coverage.
1.28 The ‘research payment account’ option created by ESMA also takes into account some of the
concerns expressed by stakeholders in the consultation (and in responses to our DP) on the
impact on smaller asset managers and the availability of small and medium-sized enterprise
(SME) research in the market.
1.29 The flexibility over how research costs are absorbed by portfolio managers should also reduce
concerns over the short-term transition to this new model. It will allow portfolio managers
to budget and pay for research that adds value to their clients, while adding scrutiny such
that it is unlikely managers will continue to pay for low value, duplicative research, reducing
overproduction and inefficiency in resource allocation by providers.
1.30 Overall, we believe it will address long-standing concerns from our supervisory work that current
market practice – even with our specific dealing commission rules and disclosure requirements
– is not delivering a good outcome for investors. The combination of improved cost control
and scrutiny over research purchasing and execution decisions by investment managers, with
more effective competition in the market for research, should lead to improved outcomes for
investors.
Our views on technical aspects of ESMA’s advice
Interaction with Commission Sharing Arrangements and existing market practices
While borrowing some features from CSAs, ESMA clearly expresses the view that CSAs ‘do
not entirely address the conflicts of interest at stake’ and indicates that they have ‘formulated
additional requirements which are aimed at further limiting these conflicts of interest.’ In the
technical advice, ESMA proposes that the research payment account and charge should be
agreed upfront between the portfolio manager and their client, and be based on a budget set
by the firm relating to their external research needs and not linked to trading volume or values.
It also requires the portfolio manager to be responsible for operating the research payment
account and managing the allocations made from within their budget.
Moreover, current CSA approaches would seem incompatible with the intention of ESMA’s
proposals, and specifically the view that there should be no link between execution and
research payments. The fundamental principle underpinning ESMA’s advice is that research
— F i n a n c i a l C o n d u c t A u t h o r i t y
F e e d b a c k st at e m e nt o n D P 1 4 / 3 – D i s c u s s i o n
o n t h e u s e of d e a l i n g co m m i s s i o n re g i m e
“ M O R E O V E R , C U R R E N T C O M M I S S I O N
S H A R I N G A G R E E M E N T S ( C S A ) A P P R O A C H E S
W O U L D S E E M I N C O M PAT I B L E W I T H T H E
I N T E N T I O N O F E S M A’ S P R O P O S A L S , A N D
S P E C I F I C A L LY T H E V I E W T H AT T H E R E
S H O U L D B E N O L I N K B E T W E E N E X E C U T I O N
A N D R E S E A R C H PAY M E N T S . ”

20. RE S E A RC H
PAY M E NT
ACCO U NT
( R PA )

21. S E PA R AT I O N F RO M
E X E C U T I O N
Specific payment account
Ban of corporate access payment
with commission
Not linked to execution volume
or value
R E S E A RC H S P E N D I N G
T R A N S PA R E N C Y
Price disclosure
Assessment of investment value
vs. spending
Approved budget and reporting

22. A REGULATORY JOURNEY

23. July 2014
The UK Financial Conduct
Authority (FCA) aggressively
calls for a ban of fund managers'
license to pay for research with
client commissions
December 2014
The European Securities and
Markets Authority (ESMA) backs
away from research commission
ban but introduces a Research
Payment Account (RPA) with a
specific charge to the client

24. February 2015
The FCA views Commission Sharing
Agreements (CSAs) as linking research
payments to commissions and interprets
they are ‘no longer compatible’ with
upcoming MiFid II regulations April 2015
The European Commission (EC) issues a
draft showing concessions which would
allow fund managers to notify clients
instead of receiving their approvals for
research budgets
June 2015
Deadline for The European Parliament and
Council to approve ESMA’s final technical
advice. If legislated as a “directive” instead of
"regulation,” it would allow National Competent
Authorities (NCAs) to interpret the guidance

25. January 2017
MiFID II takes effect

26. R E S E A R C H U N B U N D L I N G PA R T I I I : T H E 2 0 B I L L I O N $ Q U E S T I O N
TO BA N O R N OT TO BA N
re s e a rc h p ay m e nt w i t h d e a l i n g
co m m i s s i o n

27. VALUAT I O N
R PA : T H E C O N S E Q U E N C E S

28. ?– A F U N D M A N A G E R
How do you price
something which has
been free for 40 years…
“

29. Source: Survey, Bloomberg Institutional Equities Event, June 5, 2013
C H AL LE N G E S I N VALU I N G R E S E A RC H
Regulatory Clarity
7 %
Disparate Evaluation
10 %
Pricing Benchmarks
21 %
Transparency
37 %
'A la carte' pricing
25 %

30. Ease market discovery
Establish valuation metrics
Promote price transparency
W H AT I S N E E D E D FO R VALU E TO E M E RG E

31. I NVE S T M E NT R E S E A RC H 3 . 0
A N I N D U S T RY R E B O R N

32. T H E R E G U L ATO R
T RE N D # 1
Investor-centric
Information transparency
Regional policies convergence

33. D I G I TAL R E S E A RC H
T RE N D # 2
Exponential data production
Analytical tools democratisation
Research componentization

34. A DA P T I N G O RG A N I SAT I O N AL
S T R U C T U R E S
T RE N D # 3
Digital asset capabilities
Value chain fragmentation
Increase collaboration

35. C H A N G I N G
D E M O G R A P H I C S
T RE N D # 4
A free-lance society
The millennial portfolio
manager

36. T H E R I S E O F
D I S T R I B U T I O N P L ATFO R M S
T RE N D # 5
Interactivity value enablers
Brand new markets
Information industry re-intermediation

37. FA B R I C E B O U L A N D , C E O
i n f o @ a l p h a m e t r y. c o m
A l p h a m et r y i s a n o n l i n e m a r ket p l a c e fo r a s s et
m a n a g e r s to s e a m l e s s l y d i s cove r a n d b u y u n i q u e
i nve st m e nt st rate g i e s f ro m a w i d e s co p e of e q u i t y
ex p e r t s .
We s c re e n co nt r i b u to r s wo r l d w i d e a n d c a l c u l ate
re a l - t i m e p e r fo r m a n c e a n d a c t i v i t y m et r i c s to h e l p
t h e m e n g a g e m o re e a s i l y w i t h t h e b u y - s i d e
co m m u n i t y .
T h e A l p h a m et r y te a m i s co m p o s e d of c ro s s - i n d u st r y
ex p e r t s w i t h d e e p b a c k g ro u n d s i n f i n a n c i a l m a r ket s
a n d h i g h - ava i l a b i l i t y co m p u t i n g a n d i nf ra st r u c t u re .

38. I n p r i vate b et a s i n c e
d e c e m b e r 2 0 1 4
O p e n p u b l i c b et a
s u m m e r 2 0 1 5 !
P re - re g i ste r at
w w w. a l p h a m et r y. co m