At Quark our clients include innovative leaders in investment research, the majority of which are sell-side producers of research. To best serve these clients we stay active in several forums and standards groups that are watching and responding to the impacts of the new regulations. This activity, plus ongoing conversations with our clients, gives us unique insight on the impact of MiFID II in investment research marketplace. One of the most important topics on the minds of those in the industry: How is MiFID II impacting research budgets?
At this time we know that institutional investment firms are struggling with defining research budgets because:
1) They don't know how research is going to be packaged and priced. Most research producers are providing some basic pricing information in large packages, but the entire marketplace is just now being developed – so no one currently knows what the pricing and packaging will be in 1-2 years from now as the participants settle into this new marketplace.
2) The buy side is still grappling with how/when/if to charge their clients for investment. This is made considerably more difficult because the US is not implementing the MiFID II regulations and cross-border investment relationships make chargebacks to clients difficult to allocate, defend, and even calculate.
Another major topic the industry is grappling with is whether some managers will reduce their investment in research at the expense of client returns. This affects both the clients and their investment managers as well as potentially impacting smaller stocks and industries.
First, as investment managers will have limited budgets to spend on research, they will certainly not have access to the same quantity of research they had previously. However, they will have buying power and will be able to compare research offerings, create their own ratings and valuation measurements for research quality, and be able to demand better research from their chosen providers.
Most industry experts estimate that investment managers were receiving access to over one million research documents per year. Clearly no individual or even complete teams can consume that much information, and talk amongst investment managers is consistent: most of that content was just noise anyway. As one simple example, institutional investors who take a longer view of their investment portfolio do not really care, nor want intra-day analysis, but research producers send those reports more as a marketing and branding effort to keep their name in the investor's view. Reducing the noise will also help the research producers to focus on and improve their highest value research.
Arguably, it takes as much or even more time and effort to research smaller companies and niche industries, but will investment managers be willing to pay the same or higher fees for research produced for these smaller segments of opportunity? Without coverage, will smaller and newer companies and sectors get less investment and therefore struggle to succeed?
Yes, there is a danger that – especially during investment volume downturns – reductions in budget for research could impact results. But that risk appears to be more than offset by the ability for investment managers to demand and receive higher quality research where the new competitive marketplace will require research producers to create better, more usable research in order to compete for their slice of those limited research budgets.
Demanding higher quality
So, these two main issues intersect for producers of investment research who want to remain competitive in the era of MiFID II. Is it possible to produce high-value research while driving down research costs?
Absolutely. And to do so, forward-thinking investment research firms are looking to technology. Traditionally, research has been created in a highly manual, copy/paste work effort to create monolithic, print-focused PDF documents which are often highly repetitive in their content.
For example, a quarterly equity report will have a single, first-page summary, a longer multi-page summary, and then a series of expanded, detailed topics that are covered in the summary along with all the disclosures and disclaimers. And, as a PDF or even a static HTML file, the charts and graphs are frozen images representing snapshots of rich data and analysis models. An investment manager must work hard to get to the detail they need at any given moment, and trying to compare analysis from different producers is extremely time consuming.
With their new buying power, investment managers can start to demand higher quality research: in depth and focus of content, but also in technical value to assist in their business process. Research should be available in rich, interactive HTML supporting:
- Interactive charts and tables that allow the investment manager the same or better data tools than a personal investor using web-based investment tools
- Research documents that are richly described with metadata – this exists today and is shared between producers and distributors, but rarely is directly accessible to investors except through search fields
- Content with standardised embedded semantics so that they can easily find and even compare "Risks" between sequential research documents on the same topic by the same producer, and even better if enabled across the same topic by different producers. Another example is being able to do faceted search within one or more research documents so that searching for a specific company or ticker can be limited to that company's name being used in specific context such as "competitor.”
Technology can help solve these problems by applying content automation to both the production of research and the consumption of research.
It isn't clear that investors nor research producers have had the time to understand the coming changes that will be required when investors finally start taking advantage of their buying power and a competitive marketplace. Both sides have been running hard just to be able to participate in this new marketplace. But in very short order, one to two years, the new dynamics of supply and demand for research will force a dramatic improvement in the quality and value of research which could easily dwarf the benefit of MiFid II's intend impact on research: avoiding conflicts of interest for trading banks that provide research as a free service to its investor clients.
Dave White, CTO, Quark Software
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