This statement from the Financial News a few months ago coincides with a wave of technological innovation that is deeply transforming the industry. Historically, access to market information, modeling, quantitative analysis, and client reach have allowed bulge bracket banks to dominate the market for quality research.
Startups are creating the next generation of financial software that will have a dramatic impact on the production and distribution of equity research. The playing field is about to get less uneven.
For financial analysts, it is becoming ever easier, more affordable, and in the near future, sustainable, to work with no strings attached. Is this the dawn of broadly available, truly independent analysis?
THE END OF MARKET DATA EXCLUSITIVITY
Access to market data has historically been the privilege of richer financial firms, essentially because of vendor oligopoly. Bloomberg & Reuters, the two big entrenched providers of high-priced feeds, have thus far resisted attacks from smaller players. In addition to being over-priced, data from these vendors is also imprisoned in proprietary terminals and is therefore hard to integrate into other systems. It is illustrative to note that Bloomberg, which has been selling market data for 34 years, only began to provide more open access via an Application Programming Interface (API) in 2012!
As is frequently the case with oligopolies, innovation has suffered. The closest challengers, such as FactSet, have managed at best an ineffective “me-too” strategy, based on:
- Price as the main/only differentiator
- Customers safely locked into long-term subscriptions
- Strict cancellation policies with heavy penalties
MODERN COMMERCIAL MODELS TO THE RESCUE
The status quo of market data vendors is being overturned by well-financed FinTech players, leveraging the latest technology to provide data customers flexibility & pay-as-you-go consumption.
Quandl, founded in late 2011, is probably the most emblematic of the new market data drivers. Tammer Kammel created his data platform based on a simple observation:
“How is it that in 2010 all human knowledge is consolidated on Wikipedia and quantitative knowledge is a huge mess?”—source
Claiming to cover 12 million datasets as of this writing, Quandl makes them accessible in a variety of open, easy-to-integrate formats. More recently, premium data like Zacks Research or even Chinese stock fundamentals from DataYes have been added, at prices that put them within the reach of independent analysts. Quandl attacks legacy business models on several new fronts via:
- On-demand consumption (including lots of free resources)
- Price transparency
Detractors might argue that merely providing raw market data more cheaply is not enough to unseat the big guys. But affordable data is rapidly being paired with sophisticated analysis tools that smaller players can leverage. Producing quality research no longer requires enormous resources.
POWER TOOLS ARE NOW FOR EVERYBODY
Unless you have been living under a rock, you’ve heard of 'Big Data’ so often by now that it starting to give you buzzword fatigue. Annoying as it might be, this is driven by some rather good news – cheap, practically unlimited computing power is now ubiquitous. This has profound consequences for the investment community.
One example: As an equity analyst, you rely on company fundamentals. But are they always trustworthy? As TagniFi puts it:
“In 1900 John Moody wrote the first Moody’s Manual by collecting data from company reports and manually recording the results. For 112 years this was the approach to collecting data which was slow, expensive, and prone to error.”
To detect and correct errors, TagniFi's algorithms automatically cross-check financial statements filed with the SEC and standardise them between periods or companies. Their fundamentals data become not only timely but also verified. An added bonus – they will be offering customers end-of-day quotes for free from now on.
Another example: asset managers often have their own valuation models but are also keenly interested in analysts' hypotheses and input parameters. Yet no means exist beyond e-mailing back and forth between the asset manager and research producer to discuss the complexities and subtleties of valuation. Enter Thinknum, a web application that allows analysts to value companies with a powerful online tool and easily share the results. Boutique research firms or independent analysts will be eager to use the product for obvious cost reasons and to improve collaboration with their clients.
But are data access and a powerful toolchain all it takes to produce great analysis? After all, financial data is only one of many information channels.
SENSING THE MARKET’S PULSE, FROM YOUR SOFA
Beyond fundamental analysis, being well-connected with the buzz on market floors is considered a definite competitive advantage. But physical presence or nurtured insider connections are no longer the only ways to follow the market pulse. Here too, new tools are making it possible to incorporate market sentiment in one’s analysis from anywhere.
StockTwits, for example, is an early player that data-mines Twitter comments on stocks. They’re one of many startups working hard to find the "canary in a coalmine". The true trading worth of these new systems remains debatable for now. However, their reach and real-time capacity are already far better than your own human network at identifying and processing important drivers. Automatically bringing relevant themes to the attention of the analyst helps not only to shorten a lengthy and costly research process, but also to provide richer information by discovering hidden or hard-to-find sources.
Powerful tools enable the creation of better research. What remains now is getting your customers' attention.
DEMOCRATIZING THE DISTRIBUTION OF EQUITY RESEARCH
The very first alternative research platform, Seeking Alpha, is now a widely-known community of "serious investors”, with contributors ranging from market professionals to passionate amateurs. Their first user signed up way back in March 2005! Through the quality of carried content, but also the variety of fresh alternative investment opinions on US stocks, Seeking Alpha has slowly made its way to portfolio managers desks, or rather, screens. Tom Beevers, a 10-year veteran european equities fund manager at Newton Investment Management, and founder of a new crowd-sourced investment platform recalls:
“As an asset manager, we used to get swamped by too-similar research from investment banks. Many of us started to read Seeking Alpha on a regular basis. I then decided to start StockViews, foreseeing new equity research models to emerge.”
The equity research financing model is broken and soon-to-be enforced budgeting through mandatory Research Payment Accounts (RPAs) will inevitably change the buy-side's consumption behaviour. Spending will evolve to become:
- Wiser, as the failing commission dealing model will no longer allow access to an unlimited supply of research producers
- À la carte, as tighter budgets force purchasers to pick and choose, since research will inevitably come (at last!) at a price
- Better controlled in terms of ROI, as all research purchase decisions are recorded and evaluated post-facto
Modern online distribution platforms are just around the corner because they constitute a natural answer to the industry's changing needs. At Alphametry, we believe that the future of equity research lies in a marketplace that makes it easy for asset managers to find and directly buy relevant & quality research notes from a much wider field of independent experts.
Successful platforms (think eBay, AirBnB, Über, Amazon…) ‘curate’ sellers through a variety of means to offer buyers quality products or content. Ultimately, they all offer a mechanism for building trust between members. Trust modifies buying behaviour and enables transactions between qualified individuals.
FinTech companies are transforming finance in general, and the investment research industry in particular.
The immediate visible impact of their “platform” approach is putting smarter, better research analysis and production tools within easy reach of independent analysts. Wider and faster distribution thanks to trusted online consumption is the next frontier.
Transparent global marketplaces with open integration and user connectivity in their DNA will allow equity research pricing to finally emerge, opening new working opportunities for talented individuals across the globe. There will be teething pains, but in the longer term, true experts being able to monetize their valuable knowledge and labour is only good news for the professional investment community. Something that was impossible to imagine at scale only a few years back.
The aftermath of the recent financial crises has led many market professionals to think that equity research is dying. In reality, it is profoundly transforming for the better. Irreversibly.