Shaking up broker execution and research
April 28, 2015

Today sees the launch in Hong Kong of Seed Alpha, a platform for managing the delivery of institutional investment research. Co-founder of the firm, Edward Stockreisser, points out that it offers an holistic solution for buy-side and research provider needs, rather than "shoving the wrong content in front of people for the commission". Buy-side firms can access research in a format similar to online music platforms and benefit from a transparent audit trail showing who is using the research and what was paid for it. For researchers, the new service provides instant access to a universe of potential consumers.

An early adopter of Seed Alpha is Ballingal Investment Advisers, whose founder and CEO, Andrew Ballingal, comments: "We, along with the rest of the industry, have been looking for ways to manage the research bill that allow us to demonstrate best practice to our clients. Seed Alpha gives us the ability to effortlessly manage the vast amounts of research we consume, while providing an audit trail for customers and regulators. We've seen increasing demand from our investors to know exactly what their money is paying for in terms of research and commissions and this is a great way to easily demonstrate that what we're paying is adding value and alpha to their portfolios and investment process."

For asset managers across the globe, the research acquisition model is being shaken up by changes in Europe, driven largely by MiFID II. This European Union Directive, which came into force in July 2014, is to be transposed into each member state's national law by July 3, 2016 – with implementation set for January 2017. MiFID II came about from a review by the European Commission of certain provisions of the 2007 Markets in Financial Instruments Directive ("MiFID"), part of Europe's Single Market Programme to remove barriers to cross-border financial services, and foster a level playing field, across trading venues in the European Economic Area (EEA).

Recent developments include the European Securities and Markets Authority (ESMA) issuing technical advice on MiFID II in December 2014. According to Martin Wheatley, chairman of the UK's Financial Conduct Authority (FCA), asset managers will need to engage with brokers in a "revolutionary" way in order to fulfil client requirements.

Much equity research is provided without charging an explicit fee, in return for dealing commissions. According to Boston Consulting Group, estimates indicate that as little as 10% is actually read. Where a fee is paid for research, this is funded from assets under management, not fees, yet there is no audit trail to prove to end-investors or regulators that the research being paid for is actually providing alpha-generating ideas.

Under the new UK rules, all research must be priced, its use must be justified and an audit trail must be in place to administer the accountability process. Funds outside the UK are expected to begin using the new FCA regime as a benchmark in meeting client demands for greater transparency and equivalent treatment.

The Europe-wide rules, still subject to approval, stipulate that a research payment account will be needed to continue the use of commission payments, while the size and frequency of charges to clients must be agreed in writing. The effectiveness of research, and its value for specific portfolios, must be addressed.

In Asia, commission sharing arrangements (CSAs) play a particularly significant role for big institutional investors and their global funds. CSAs allow a certain amount of broker commissions to be siphoned off and used to pay for research credits, moving the model away from the ‘broker vote' which sees execution business assigned according to perceived value of research. The credits can be used by the investment manager to pay for research via specialist research providers. Consultancy firm Greenwich Associates estimates that 80% of tier 1 fund managers in Asia use CSAs, while across all firms, 51% of long-only firms and 30% of hedge funds make use of them.

Asset managers will need to engage with brokers in a revolutionary way in order to fulfil client requirements.

The FCA stated in February 2015 that the present model of CSAs use "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." While other national European regulators may disagree, this potentially creates a new dimension to the European rules. Buy-side firms and their service providers will find matching FCA and ESMA requirements a challenge on two fronts. Firstly the new arrangements are unprecedented and will need considerable infrastructure to support them. Secondly the migration from existing arrangements will be complex and potentially risky.

While brokers are not directly governed by the rules, adherence to them by institutional investors and asset managers will impose the same model on the provision of execution and research. Brokers will need to move from a largely execution-driven system of payment to a more independent model that can better support clients. Accessing research will become a more detailed process. Information will be pulled by the buy-side, rather than pushed from the sell-side – and there is sure to be a dramatic shift in the way that research is consumed, priced and valued across the world.

Seed Alpha co-founder Shan Han notes that the buy-side will become better placed to source the best research and that dramatic changes are ahead. "It's always been hard for managers to cut through the noise to find research that really generates alpha," he says. "Seed Alpha solves that problem by gathering all the research onto one searchable, intelligent platform that learns and adjusts according to user behaviour.

"Bringing sudden and full transparency to a previously opaque industry is going to be uncomfortable for some, no question about that," he adds. "But what you'll see as this kind of technology gains traction is a genuine change in favour of quality providers. If their research is good, the buy-side will demand it. We want everyone to be talking about ‘best research' and finding it through Seed Alpha."





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Today sees the launch in Hong Kong of Seed Alpha, a platform for managing the delivery of institutional investment research. Co-founder of the firm, Edward Stockreisser, points out that it offers an holistic solution for buy-side and research provider needs, rather than "shoving the wrong content in front of people for the commission". Buy-side firms can access research in a format similar to online music platforms and benefit from a transparent audit trail showing who is using the research and what was paid for it. For researchers, the new service provides instant access to a universe of potential consumers.

An early adopter of Seed Alpha is Ballingal Investment Advisers, whose founder and CEO, Andrew Ballingal, comments: "We, along with the rest of the industry, have been looking for ways to manage the research bill that allow us to demonstrate best practice to our clients. Seed Alpha gives us the ability to effortlessly manage the vast amounts of research we consume, while providing an audit trail for customers and regulators. We've seen increasing demand from our investors to know exactly what their money is paying for in terms of research and commissions and this is a great way to easily demonstrate that what we're paying is adding value and alpha to their portfolios and investment process."

For asset managers across the globe, the research acquisition model is being shaken up by changes in Europe, driven largely by MiFID II. This European Union Directive, which came into force in July 2014, is to be transposed into each member state's national law by July 3, 2016 – with implementation set for January 2017. MiFID II came about from a review by the European Commission of certain provisions of the 2007 Markets in Financial Instruments Directive ("MiFID"), part of Europe's Single Market Programme to remove barriers to cross-border financial services, and foster a level playing field, across trading venues in the European Economic Area (EEA).

Recent developments include the European Securities and Markets Authority (ESMA) issuing technical advice on MiFID II in December 2014. According to Martin Wheatley, chairman of the UK's Financial Conduct Authority (FCA), asset managers will need to engage with brokers in a "revolutionary" way in order to fulfil client requirements.

Much equity research is provided without charging an explicit fee, in return for dealing commissions. According to Boston Consulting Group, estimates indicate that as little as 10% is actually read. Where a fee is paid for research, this is funded from assets under management, not fees, yet there is no audit trail to prove to end-investors or regulators that the research being paid for is actually providing alpha-generating ideas.

Under the new UK rules, all research must be priced, its use must be justified and an audit trail must be in place to administer the accountability process. Funds outside the UK are expected to begin using the new FCA regime as a benchmark in meeting client demands for greater transparency and equivalent treatment.

The Europe-wide rules, still subject to approval, stipulate that a research payment account will be needed to continue the use of commission payments, while the size and frequency of charges to clients must be agreed in writing. The effectiveness of research, and its value for specific portfolios, must be addressed.

In Asia, commission sharing arrangements (CSAs) play a particularly significant role for big institutional investors and their global funds. CSAs allow a certain amount of broker commissions to be siphoned off and used to pay for research credits, moving the model away from the ‘broker vote' which sees execution business assigned according to perceived value of research. The credits can be used by the investment manager to pay for research via specialist research providers. Consultancy firm Greenwich Associates estimates that 80% of tier 1 fund managers in Asia use CSAs, while across all firms, 51% of long-only firms and 30% of hedge funds make use of them.

Asset managers will need to engage with brokers in a revolutionary way in order to fulfil client requirements.

The FCA stated in February 2015 that the present model of CSAs use "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." While other national European regulators may disagree, this potentially creates a new dimension to the European rules. Buy-side firms and their service providers will find matching FCA and ESMA requirements a challenge on two fronts. Firstly the new arrangements are unprecedented and will need considerable infrastructure to support them. Secondly the migration from existing arrangements will be complex and potentially risky.

While brokers are not directly governed by the rules, adherence to them by institutional investors and asset managers will impose the same model on the provision of execution and research. Brokers will need to move from a largely execution-driven system of payment to a more independent model that can better support clients. Accessing research will become a more detailed process. Information will be pulled by the buy-side, rather than pushed from the sell-side – and there is sure to be a dramatic shift in the way that research is consumed, priced and valued across the world.

Seed Alpha co-founder Shan Han notes that the buy-side will become better placed to source the best research and that dramatic changes are ahead. "It's always been hard for managers to cut through the noise to find research that really generates alpha," he says. "Seed Alpha solves that problem by gathering all the research onto one searchable, intelligent platform that learns and adjusts according to user behaviour.

"Bringing sudden and full transparency to a previously opaque industry is going to be uncomfortable for some, no question about that," he adds. "But what you'll see as this kind of technology gains traction is a genuine change in favour of quality providers. If their research is good, the buy-side will demand it. We want everyone to be talking about ‘best research' and finding it through Seed Alpha."