The impact of regulations on the purchase of investment research and the need for an audit trail has led to the launch of single management platform for buyside firms.
The new regulations in Europe are expected to put pressure on institutional investors to change the way they deal with research reports. While the final scope and detail of the new regulations are still unclear, fund managers from outside Europe could be expected to seek out such new platforms as a way of managing research flows and saving money.
And with the possibility of similar regulations in Asia, regional attention could start to focus on the need for a new way of sourcing investment research.
Yesterday Seed Alpha was launched by its founders, who have touted it as a way of dealing with issues around paying for equity research.
The cloud-based platform provides a "warehouse" of research reports from various providers, allowing users to search and buy the individual papers they require, while leaving an audit trail, in contrast to the standard practice of reports being provided to clients by brokers.
Hong Kong-based co-founders Edward Stockreisser and Shan Han said their aim was to tackle the problems buyside firms faced in sourcing the best research.
“It’s always been hard for managers to cut through the noise to find research that really generates alpha,” said Shan.
The key regulatory issue for investment research is the potential impact of the MiFID II rules in Europe.
Executing brokers currently put aside a portion of the commission paid by managers into a separate account. Every quarter managers then rate the quality of the research provided by the firms that execute its trade and this portion of the commission is re-distributed to brokers at the top of the list.
The European Securities and Markets Authority (Esma) has been arguing that paying commissions directly conflicts with the requirement for fund managers to provide best execution to clients, since managers are more likely to execute with brokers that have provided them with good research.
Esma has retreated from a complete ban on using commissions to pay for research, but revised proposals include significant changes that will impose stringent guidelines on how research must be paid for using client commissions.
Seed Alpha said that in the current environment, when research was paid for, “it’s 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.”
The Seed Alpha platform acts as a bridge between creators and users of research reports, and while the platform charges a monthly fee, purchases are still conducted between providers and users.
Stockreisser and Han said they expected demand for Seed Alpha to be based on different requirements depending on the geographic location – in Europe the motivation would be dealing with regulation; in emerging markets and more remote parts of the world it would be about getting access to content; and clients in the US would look for the product to manage workflows due to “information overload”.