Asset Management Industry is Notorious for Waste: Its About Blockchain, You Blockheads. NOT Bitcoin,
Blockchain Dapps Can Mitigate Risk of “Death By Drop Copy”
Any asset manager in today’s world who has more than $500 of AUM does not need to be fluent in the language of fintech, blocktech or be able to explain ‘the internet of things’ to understand the benefits of embracing blockchain dapps and the power of distributed ledger technologies. Any asset management firm that claims to be operating in the world of institutional fund management does need to get on the blockchain bus–or risk getting run over by it.
(courtesy of Prospectus.com LLC) As part of ongoing series “Its About Blockchain, Blockhead, Not Bitcoin!”, FT reporter Attracta Mooney hit the yellow zone of the target in a recent column profiling the how, where and why investment industry asset managers in UK, Ireland, Luxembourg, Hong Kong, Singapore, Taiwan and Australia could enjoy nearly $3billion in annual savings were they to embrace blockchain’s distributed ledger powered processes. After all, the new ‘internet of things’ blockchain value proposition for securities industry purposes is specifically designed to deliver at very least, greater efficiency in work flow, greater trust in the information being shared, enhanced transparency among trade processing constituents and more effective use of human capital resources.
Where? Let’s focus on the back office, the central place where administration of transaction reporting, accounting, trade processing and related legacy “drop copy” tasks take place. How? Distributed Ledger dapps leveraging the blockchain ecosystem are intended to mitigate duplicitous human interactions within the context of transaction affirmation, transaction processing, transaction reporting and transaction documentation.
If the above is confusing to you, or if you have not yet interrogated any of the thousands of simple-to-understand primers and tutorials on this topic (including the growing assortment of content pieces published in the news section of Prospectus.com) then you should
schedule a call with a fellow named George Chrisafis, who oversees fintech merchant bank SenaHill Partners’ Emerging Tech and Infrastructure Advisor Group. George is an IT industry grey beard with 30 years of domain expertise and his CV includes senior roles at the world’s biggest banks. When it comes to distributed ledger—as well as AI applications being developed for the securities industry, George is a reliable source of insight.
bring a high school or college-aged family member to your office and have them deliver a 5 minute dissertation on the topic of blockchain and distributed ledger, and to limit the cryptocurrency explanation to 1 minute. For some, the topic is confusing, but this is confusing, there is no shortage of simple primers and tutorials that frame the value proposition of distributed ledger.
Why Asset Managers Should Embrace Blockchain applications Barring above steps to independently confirm the thesis put forward in the FT article (excerpt and link below), let’s jump straight to the topic that best defines the purpose of asset managers: MONEY. Now let’s delve into the real cost and real expenses associated with their role(s) from both a human capital perspective and IT angle. [The information cost (research) and marketing expense components can be addressed in a different opinion piece}.
From a human capital expense perspective, transaction reporting tasks are notorious for their duplicative and redundant steps spread across various internal departments; many back-office professionals lament the high risk of Death by Drop Copy, simply because much of their time is spent drop-copying one file from one software application into an unconnected software application that performs a different task. From an IT perspective, let’s opine that most investment management firms are spending considerable sums each year on software licenses, software maintenance, and software administration. Succinctly, blockchain applications can save tens, if not hundreds of thousands of dollars to an established asset management firm—in turn enabling a firm to deploy those cost savings to revenue producing initiatives and recalibrating how internal human capital resources are better utilized.
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Well Matilda, as if the universe of corporate bond electronic trading platforms isn’t crowded enough, despite clear signs of consolidation taking place for this still nascent stage industry (e.g. upstart Trumid’s recent acquisition of infant-stage Electronifie) , one more corporate bond e-trading platform has its cr0ss-hairs on the US market. The latest entrant is UK-based Neptune Networks, Ltd., a consortium controlled by sell-side investment banks that has inserted electronic trading veteran Grant Wilson as interim CEO. Neptune’s lead-in value proposition’ is perfecting the IOI approach to capturing liquidity, and also offers a tool kit of connectivity schemes that bridge buyside and sell-side players.
Promoting indication-of-interest orders ( pre-trade real-time AXE indications) as opposed to actionable bid-offer constructs that are ubiquitous to equity trading platforms, is a technique that other US-based corporate bond trading platforms are already advancing. Neptune is also not alone in their positioning an ‘all-to-all’ model as a means to inspire buy-side corporate credit PMs and traders to embrace electronic trading, a seemingly counter-culture technique that enables them to swim in the same pool as sell-side dealers aka market-makers. The distinction that Neptune brings to the table is girth and size, thanks to its sponsors Goldman Sachs, JP Morgan, Credit Suisse, Morgan Stanley, UBS, Citi and Deutsche Bank, each of which maintain board seats. Unlike the other players in the space that are focused on building a “round lot marketplace” (as opposed to retail size orders that MarketAxxess (NASDAQ: MKTX) specializes in, Neptune carries over 14,000 individual ISINs daily, claims that its average order size is 5mm, total daily gross notional in excess of $115bn, and according to Neptune’s marketing material, over 22,000 individual ISINs have been submitted to the platform since January 1st.
Lots of e-bond trading platforms, but none are incorporating bond ETFs, at least not yet.
As compelling as Neptune’s value proposition is, some corporate bond e-trading veterans are quietly wondering whether these initiatives are somehow missing the memos being circulated throughout the institutional investor community profiling the rapid adoption of corporate bond ETF products in lieu of their long-held focus on individual corporate credits.
According to e-bond trading veteran Jay Berkman, who helped launch BondNet in 1994 when it was the industry’s very first web-based exchange platform for investment grade and high yield bonds, and who now serves as an advisor to fintech merchant bank SenaHill Partners, the firm that has led early fund-raising rounds for Trumid, Electronifie and EMbonds (SenaHill also advised on the recent Trumid-Electronifie combination), “Anyone who follows the trends [and follows the money] can’t help but appreciate that a broad assortment of Tier 1 investment managers, RIA’s and even public pensions’ use of bond ETFs is increasing in magnitude by the week, not the quarter. Added Berkman, “If you’re operating an electronic exchange platform for corporate bonds, and your users are rapidly increasing their use of fixed income exchange-traded funds, having a module for ETFs would seem to be a natural next step.”
Others in the industry have suggested to MarketsMuse reporters that enabling users to trade the underlying constituents against the respective corporate bond cash index along with a module for create/redeem schemes, or even a means by Issuers can distribute new debt directly seems to make “too much sense.” But then again, these same industry experts acknowledge the political landmines that would most assuredly be encountered by those trying to disrupt and innovate within corporate bond land are perhaps too much for those who need to prove their business models before aiming at new frontiers. Continue reading →
The notoriously fragmented universe of upstart electronic bond trading platforms that aim to address “the lack of liquidity” concerns voiced by institutional fund managers and deliver e-bond trading tools that enhance transparency and make trading fixed income products easier for buysiders is starting to consolidate. This week Trumid, founded in 2014 and funded by among others VC icon Peter Thiel and investor George Soros announced the acquisition of competitor Electronifie, founded by former Goldman Sachs ‘braniac’ fixed income trader Amar Kuchinad. Electronifie, also founded in 2014 has been fixed on delivering an “all-to-all” round-lot trading platform for investment grade corporate bonds.
Fintech merchant bank SenaHill Partners, which spearheaded the initial funding round for Trumid during its startup phase and was later engaged by Electronifie to assist in identifying strategic investors, brought the two companies together for transaction. SenaHill Securities served as financial and strategic adviser to Electronifie in the transaction. Upon closing, over 350 institutions will be on board Trumid Market Center, the company’s all-to-all trading network for corporate bonds. This includes 20 of the top 25 asset managers in the world and 60 broker-dealers. Following a regulatory approval process, Trumid expects the transaction to close early in the second quarter of 2017. Terms of the transaction were not disclosed.
“We pride ourselves on building a strong user network and delivering great products that make corporate bond trading easier. Trumid continuously strives to improve all aspects of our clients’ trading experience,” says Mike Sobel, president of Trumid. “The Electonifie team shares that vision and the combination of our networks will enhance the all-to-all liquidity available on the Trumid platform.”
Trumid recently closed a USD28 million capital raise, with participation from existing lead investors Thiel and Soros, as well as from new partners including CreditEase Fintech Investment Fund. With this capital, Trumid will continue to proactively grow and improve its offering, including its data science effort Trumid Labs, expansion of its salesforce, and development of new products.
According to e-bond trading pioneer Jay Berkman, a SenaHill Network Advisory Board member, who in 1994 helped introduce BondNet, the industry’s first web-based, inter-dealer electronic trading platform for corporate bonds, stated “As evidenced by the nearly two-dozen initiatives launched during the past 4-5 years alone, there’s been no shortage of smart folks who recognize the need for a centralized platform in which corporate bond market participants can transact in an efficient manner, particularly in the Dodd-Frank world in which the role of liquidity-providing sell-side dealers has been greatly diminished.” Added Berkman, “The plethora of platforms launched during the recent decade has created further fragmentation within an already-fragmented marketplace, so now it makes perfect sense for there to be a consolidation. This deal is a clear sign that roll-up schemes, where the vision that 1+1=3 is the next logical step for those who embrace the view that electronification of bond trading is good thing.” Continue reading →
Those of us who have worked in and/or around the world of electronic trading for more than 15 minutes readily know about REDI, the ubiquitous direct access execution platform for stocks and options that was introduced by Spear Leeds & Kellogg in 1987 to its professional clearing customers, a universe that grew to thousands of professional traders across the globe. For those not old enough to remember Spear Leeds aka SLK, it was one of the financial industry’s largest specialist firms with it biggest boots on the ground on the NYSE and Amex, and for decades, one of the largest clearing agents for stock and options exchange members and upstairs prop traders. SLK was also one of the industry’s most recognized upstairs market-makers until being acquired by Goldman Sachs in 2000 for a whopping $6.5bil. For those in the know, Goldman’s record-setting acquisition was attributed in part to a fellow by the name of Neil DeSena, “a boy from Bayonne” whose name was synonymous with REDI from the day it was first introduced in 1987, to the day the platform came under Goldman Sachs stewardship, to the day in 2016 when REDI was sold by GS for $1bil to Reuters Plc, and for every day in between, including now, when a trader somewhere in the world uses REDI to send a buy or sell order for stocks, options and/or futures into the now global OEMS platform.
History has already shown that the usually prescient Goldman Sachs wanted not only SLK’s prop-trading business and its clearing customers-which delivered hundreds of millions in high-profit revenue , GS also wanted to be at the forefront of electronic trading and SLK provided that. And, it was Neil DeSena who offered that entree. Until his untimely passing last week, barely three months after celebrating his 52nd birthday, Neil DeSena’s name and the brand name REDI remained forever intertwined, despite the fact that Neil had retired from his role as a Goldman Sachs MD several years ago. It was DeSena who was widely-credited for taking the REDI electronic platform from a closed stock and options order routing system for SLK clearing customers to a a billion-dollar, global OEMS platform synonymous for trading stocks and listed equity options. Upon Goldman’s acquisition, Neil became a GS managing director and under their banner, he built REDI into the industry leading global multi-asset trading system, expanding data centers and global networking through Europe and Asia with full interdependency/redundancy, creating a fully 24×7 global institutional trading platform. In 2015, Goldman sold REDI to Reuters for a cool $1bil.
Ironically, Neil DeSena was not an inventor, nor a prodigy software wonk, and not an MIT-educated computer geek or a Harvard MBA. Neil came to the financial industry as most did ‘back in the day’; he was a humble, but eager “boy from Bayonne” who came from a middle-class family and like so many others from the hamlets near the world’s trading centers, he aspired to work on Wall Street’s trading floors. As noted in his bio at SenaHill Partners, the fintech merchant bank Neil co-founded in 2013 with Justin Brownhill after retiring from Goldman, Neil’s first Wall Street job was typical to that of other 23 year olds; he scored an entry-level, back-office clerk (for retail broker Quick & Reilly). After rising through the ranks and learning how to leverage technology and lead people, Neil joined SLK in 1992, where he became the first employee of REDI. To the tens of hundreds that Neil since touched throughout his personal and professional life, ‘the rest is history’, but Neil’s history and the legacy he leaves behind cannot go without mention.
Neil DeSena was a classic innovator and entrepreneur who always maintained a prescient view when it came to the future of marrying technology and financial markets. He was less a student of technology than he was a student of human behavior and the inherent opportunities that technology-based solutions could provide to one of the world’s biggest industries. Better than most, including the legions of Wall Street technology and business development gurus, Neil had an innate and intimate understanding of the the mindset of those who navigated stock and options marts and what they would need to be more efficient and more effective, before those savvy-traders knew themselves. It was Neil’s thought-leadership, his uncanny ability to gain the trust and confidence of those around him, his foresight as to how/where/why technology could be leveraged, and perhaps most of his all, his endearing personality and sense of integrity that served as a benchmark for so many people he encountered.
Never one to rest on his laurels and certainly not like so many from the finance industry who aspire to build wealth for themselves and retire to a life of luxury, when Neil left Goldman Sachs, it took little time to decide “What’s Next?” Joining hands with Justin Brownill, one of the trading tech industry’s most successful entrepreneurs, the two formed SenaHill Partners in 2013 and framed the firm to be one of the very first fintech merchant banks focused on fostering upstart and industry disrupting financial technology firms. Since the firm’s creation barely four years later, more than two dozen finance industry tech pioneers have joined as network advisory board members; each contributing expertise, relationships and insight in their respective areas and helping to review nearly 2500 business plans submitted to SenaHill. The collective of professionals has gained the attention of finance industry and tech industry titans and has put wind behind the sails of dozens of disruptive startups focused on areas from bitcoin and distributed ledger to financial-flavored media platforms.
Irrespective of the degree of success enjoyed by enterprising start-ups that DeSena and Browhill have helped guide, Neil DeSena’s truest success is illustrated less by counting the literally hundreds of people who came to offer kindness and support this past weekend to Neil’s wife Carolyn and his three young children, Madeleine, Neil Anthony, and Jack, but more by the legacy he leaves; Neil always reminded those who were smart enough to listen that “material success is fleeting; honor and integrity are the most important virtues, as it those qualities that we should all be remembered for.”Continue reading →
Identifying the top fintech financiers is no easy task these days. It seems like only yesterday when MarketsMuse curators were among the first to advance the phrase “fintech” in the course of profiling startups seeking to disrupt the financial services sect, many of which have been led by sell-side veterans who made their best trades building innovative financial technology applications for bulge bracket banks and institutional brokerage platforms. At the outset of this now mainstream trend towards disruption of legacy financial technology tools and applications, fintech was a label given to trading system firms; now it is a ubiquitous moniker used to categorize a full-blown industry that counts more than 3000 start-ups and fast growing enterprises across the globe.
(feature images courtesy of YANN LEGENDRE)
Fintech is still the term used to to describe fast-moving firms that deliver Web 3.0 trading system and institutional broker tools, but also now includes enterprises that have brought peer-to-peer lending, crypto currency, distributed ledger companies and other offerings that are rapidly changing the way financial industry firms operate, and more important, the behavior of end-users across the globe. Along the way, this evolution has also created a cottage industry of bankers, private equity firms and VCs who share the catchphrase “What’s Next?” and whose respective vision is focused on the “next great thing” within the context of the way we interact when conducting a financial-centric task.
“Many of the Fintech Finance 35 — those ranked by Institutional Investor as the leading financiers and facilitators of the ongoing entrepreneurial explosion in financial technology — have “partner” in their titles. Their firms are structured as partnerships, but all on the list are partners in a practical, day-to-day sense. They are as much strategic advisers and collaborators as they are funders; “partnerships” are what they offer to companies they invest in and usher toward growth and maturity.” Jeffrey Kutler, Institutional Investor Magazine
With that, its no surprise that Institutional Investor Magazine, which for years has been the harbinger of the financial industry’s best-in-class people (e.g. Institutional Investor All America Research Team is the bible used to benchmark equity and fixed income research analysts) has more recently started tracking the top funders and dealmakers from across the fintech ecosystem via II’s Annual Fintech Finance 35. And, hot off the press: II’s 2016 Top Influencers in Fintech Finance! With 35 top guns highlighted, MarketsMuse team arbitrarily picked out one of the profiles from the middle of list of 35 to share with our readers. The folks who have risen from last year’s #19 spot to this year’s #16 spot are the principals of SenaHill Partners, which is arguably one of the fintech industry’s leading pioneers. SenaHill positions itself as part investment bank, part PE investor, part adviser and part incubator. Below is the excerpt courtesy of II’s Jeffrey Kutler.
Principal investor, strategic adviser, and business accelerator, SenaHill Partners gets a lot of mileage out of just 14 people. “We’re hiring,” managing partner Justin Brownhill says — an auspicious indicator for the New York firm and perhaps for fintech deal flow overall. Founded by Brownhill and co–managing partner Neil DeSena in 2013, SenaHill is staffed by people with extensive banking, brokerage, and operational experience, further leveraged by an adviser network of dozens of industry veterans, who contribute strategic insights and help identify and vet investment candidates. “Two to three generations of knowledge,” hands-on experience and a roll-up-the-sleeves attitude set SenaHill apart, says Brownhill, 45, who was an investor in and executive at Lava Trading, which Citigroup acquired in 2004, and CEO of the Receivables Exchange from 2007 to 2012. “Venture capital in financial technology is a journey, not a me-too business,” says DeSena, 52, who started the REDI institutional trading business in 1992 and ran it until 2006, the last six years as part of Goldman Sachs Group. “ ‘Five years and exit’ isn’t the way it works.” SenaHill’s 22-company portfolio includes investment research and analytics site Market Realist, where Brownhill is a board member; blockchain smart-contracts company Symbiont, where DeSena is a director and former Morgan Stanley capital markets executive Caitlin Long recently became chairman and president; and WealthForge, a private capital–
raising platform that placed third in last year’s UBS Future of Finance Challenge (see Hyder Jaffrey, No. 30). Another holding, know-your-customer platform Trunomi, represents “reg tech,” the emerging regulatory-and-compliance category that Brownhill and DeSena are following alongside other fintech themes in capital markets, banking and payments, insurance, wealth management, and infrastructure. “The interest is now top-down,” Brownhill observes, referring to incumbent financial services companies’ openness to investing in or partnering with entrepreneurs. “They are hiring us to connect them with young, emerging technologies.” Says DeSena: “The incumbents need help. Their budgets are big but shrinking.”
Prospectus.com team of capital markets experts and securities lawyers specialize in preliminary offering prospectus, secondary offering prospectus and full menu of financial offering memorandum document preparation. More information via this link
The Fintech Finance 35 will be honored at the iiFintech Awards taking place on December 1. The awards program was designed to bring together the honorees of the Tech 50, Fintech Finance 35, and Trading Technology 40 to explore how financial technology will continue to transform the industry.
This ranking was compiled under the direction of Senior Contributing Editor Jeffrey Kutler. Individual profiles were written by Kutler, Asia Bureau Chief Allen T. Cheng, Senior Writers Frances Denmark and Julie Segal, and Staff Writer Jess Delaney, as well as by former Editor Michael Peltz, Content Editor Anne Szustek, Associate Editor Kaitlin Ugolik, and Assistant Editor Jen Werner. To read the entire story from II, please click here
2016 Top Fintech Financiers According to Institutional Investor
Blythe Masters, the former grand dame of derivatives for investment bank JP Morgan, who after a less-than-glorious exit from her senior role overseeing credit derivatives for House of Morgan and who reinvented herself as a blockchain babe and leads digital ledger startup Digital Asset Holdings, has proven that every cute cat has nine lives. In a press release issued this week, Depository Trust & Clearing Corp. aka DTTC, the industry-owned utility that processes transactions across the multi-$trillion repurchase agreement and government securities markets has entered into an agreement with the startup to test their blockchain application for use within the $2.6tril repo market sleeve so that lenders and borrowers across the often illiquid repo market can have a more efficient tool to track securities and cash flowing between counterparties.
Digital Asset Holdings, for which Masters is Chief Executive Officer, is considered one of the top 3 fintech companies focused on leveraging digital ledger technologies, the basic foundation of the cryptocurrency bitcoin. R3 Blockchain Group, whose investors include a consortium of 42 investment banks and financial service firms and is led by former inter-dealer broker David Rutter, along with Symbiont, the creator of Smart Securities and sponsored by merchant bank SenaHill Partners, are considered to be the other leading players in the space seeking to ‘institutionalize’ the value proposition of the technology that powers bitcoin.
(WSJ)-Depository Trust & Clearing Corp., a firm at the center of Wall Street’s trading infrastructure, is about to give the technology behind bitcoin a big test: seeing whether it can be used to bolster the $2.6 trillion repo market.
DTCC said in a statement Tuesday that it will begin testing an application of blockchain, the digital ledger originally used to track ownership and payments of the cryptocurrency bitcoin, to help smooth over problems in the crucial but increasingly illiquid corner of short-term lending markets known as repurchase agreements, or “repos.”
Repos play a critical role in the financial system by keeping cash and securities circulating among hedge funds, investment banks and other financial firms.
DTCC, an industry-owned utility that helps settle trades in the repo market and elsewhere, wants to apply blockchain technology to the market, so that lenders and borrowers can keep track of securities and cash flowing between firms in real time.
To test blockchain’s ability to improve repo trading, DTCC has tapped Digital Asset Holdings LLC, a startup run by former J.P. Morgan Chase & Co. executive Blythe Masters. Earlier this year, DTCC invested in the firm focused on blockchain applications, along with a range of banks including J.P. Morgan, Goldman Sachs Group Inc., and others.
Being a fintech thought-leader is ‘non-trivial’ as they say in the software world, but expressing vision, domain fluency and passion is arguably the first step that any aspiring thought leader, or for that matter, any already-established banker who navigates the deal world of Wall Street and surrounding areas needs to master–before believing that you can simply send a deck and get a check for A-round funding..
Taken from the playbook of MarketsMuse mentors at The JLC Group, “Sizzle Reel Strategy 201-How ‘old-style’ Wall Street firm uses contemporary, new media approach to burnishing their brand..”, below is a solid example of how merchant bank SenaHill Partners is rapidly becoming one of the top five firms in the rapidly evolving fintech universe.
Anyone who has followed the blog posts from The JLC Group for more than 15 minutes during any part of the last 10 years already knows that corporate make-over artisan has long advocated the use of digital media tools that incorporate sight, sound and motion as a way for enterprise executives to tell your brand story and frame your value proposition…Throughout the ad agency hallways in “LaLa Land” as well as along Madison Avenue, short-feature video, often known as ‘sizzle reels’ pack a punch that enables aspiring brands and thought leaders to fight above their weight class. The following ‘reel’ is a perfect illustration of this simple point.
Disclaimer- JLC Group’s senior principal is an “Advisory Board Member” for SenaHill Partners, the fintech merchant bank profiled in below clip–which was produced by Institutional Investor Films-
Disruptive Unbundlers, Securities Industry Untouchables, Fintech Aficionados and Innovative Altruists seek to level the investment research playing field, inspiring a bull market for independent research distribution channels, start-ups and disruptive schemes.
Investment research and expert ideas, whether within the context of equities analysis or global macro perspective, has long been the domain of sell-side investment banks, whose research insight is typically bundled as a ‘free product’ within the range of fee-based services provided, including trade execution. Those old enough to remember the ‘dot-com bubble’ days will recall that much of Wall Street’s so-called research was (and arguably still is) notorious for being heavily tilted towards “buy recommendations” in favor of the investment bank’s corporate issuer clients.
This clearly conflicted practice was perfected in the late ‘90s by the likes of poster-boy analyst Henry Blodget (since banned from the securities industry, and ironically, now Editor and CEO of financial media company Business Insider) and was lambasted by securities industry regulators when the “Internet bubble” burst. Those chasing-the-horse-after-the-barn-door-closed efforts since led to a regime of regulation and firewalls intended to distance in-house research analysts from their investment banker brethren so as to mitigate biased recommendations and conflicts of interest. Compliance officers across the industry found themselves facing a host of new rules, and that ‘compliance contagion’ served as the catalyst for a spurt in “independent research boutiques” offering “unbundled” and un-conflicted research sold as a stand-alone product with no ties to execution or trading commissions.
However compelling the notion, and despite the regulatory impetus to foster the growth of independent research boutiques, the business model for these firms has proven challenging during the past 10-15 years. Many boutique research firms floundered or failed for several crucial reasons, including but not limited to (i) the burdensome costs and means associated with creating a stand-alone brand, (ii) the challenge of delivering consistent and compelling content to institutional investment managers and sophisticated investors at a price point that could prove profitable and (iii) the non-trivial logistics required to deliver content in a compliant manner. In the interim, regulators stood by and observed, and digital delivery mechanisms for independent researchers only slowly evolved. Investment banks, never shy when it comes to creative workarounds, bolstered their research ranks and produced more content, even if mostly undifferentiated, but still promoted by the strength of the investment bank’s brand.
All of this is about to change again, causing some to conclude that regulatory market moves in cycles every decade or so, much like the stock market moves in cycles. The current bull market case for unbundled independent research is not a result of efforts by get-tough-on-Wall Street types such as New York Attorney General Eric Schneiderman or Massachusetts’ kindred spirits Elizabeth Warren and William Galvin, and the bull case is certainly not because of any efforts made by the SEC. To a certain extent, the positive outlook for those in the unbundling space is based on Moore’s Law and the advancement of Fintech-friendly applications, but it is more directly attributed to a new European Union law inspired by MiFID II, that if passed as expected, will require investment managers to pay specifically for any analyst research or related services they receive. With that new rule (which includes more than a few line items), many large money managers are starting to follow the proposed rules globally; investment banks in the U.S. (and obviously those in Europe) are devising new business models for one of their oldest and highest-profile functions: offering ideas to customers that banks can monetize through commission-based services.
More than some across the major continents believe that however much top investment bank brands are a decidedly powerful selling tool for research product, the power of the internet has enabled the distribution of independent research and enables a Chinese menu of pricing schemes via a continuously-growing universe of independent portals that invite content publishers to sell their products using an assortment of social media-powered distribution channels and revenue-sharing schemes.
Bloomberg LP has created its own independent research module accessible by 300,000+ subscribers in direct competition with Markit, the financial information services provider. Earlier this year, Interactive Brokers (NASDAQ:IBKR), the web-powered global online brokerage platform that provides direct market access to multiple exchanges and trading venues across the entire asset class spectrum quietly began enhancing its offering of third-party professional and institutional-grade research. IB’s 300,000+ accounts comprising professional traders and institutional clients may subscribe to research made available in the trading platform, Trader Workstation (TWS). At the same time, IB began promoting these third-party research providers via IB Traders’ Insight, a blog embedded within the firm’s Education module that covers the full range of investment styles from more than two dozen content providers.
While bolstering objective research content is a natural business extension for those having captive brokerage clients and for terminal-farm behemoths, perhaps even more interesting is that start-ups in the unbundling space are starting to percolate.
On the European side of the pond, UK-based SubstantiveResearch, created earlier this year by former EuroMoney Magazine publisher Mike Carrodus, is positioned to be an institutional research thought- leader that curates and filters both independent and sell side global macro research, with a sleeve that hosts regulatory events for investment manager content consumers and sell-side content providers. Start-ups in the US include among others, Airex Inc. , which dubs itself “the Amazon.com for financial digital content” and recently secured funding from fintech-focused merchant bank SenaHill Partners. TalkMarkets.com is another notable entrant to the space, and was created in late 2014 by Boaz Berkowitz, a former “Bloombergite” who was also the original brain behind Seeking Alpha. From the traditional financial media publishing world, industry stalwart Futures Magazine, recently re-branded as “Modern Trader” and the parent to hedge fund news outlet FinAlternatives is also embracing the research content unbundling movement as a means towards capturing more Alpha and better monetizing relationships with content providers. Each have their own business models, including the use of cloud-based technology and coupled with the muscle of creative online marketing, social media tactics and search-engine ranking techniques.
While the start-up space is often littered with short shelf-life stories, these new unbundled research distribution vehicles are being enabled by the fintech revolution and embraced by distributors of content, high-profile independent research providers, as well as by at least one major bank seeking to hedge its internal bets; earlier this year, Deutsche Bank inked a deal with upstart Airex, such that DB’s proprietary equity research is available on a delayed basis and can be purchased by any AIREX Market shopper. In the case of now 6-month old TalkMarkets, they are embracing an advertising-based business model, which is predicated on building an outsized audience of sophisticated retail investors for prospective advertisers. To date, they have enlisted more than 350 content providers and 10,000+ registered users. While there is no cost to access the platform, content providers are able to upsell subscription-based services and at the same time, earn ‘points’ that can be converted into the private company’s equity shares.
According to former sell-side global macro strategist Neil Azous, the Founder/Managing Member of think tank Rareview Macro LLC, and the publisher of subscription-based “Sight Beyond Sight” which is now being distributed across several channels apart from the firm’s website (including via Interactive Brokers), “Truly superior, high-quality content, including actionable ideas remains relatively scarce, but the fact remains, content has become commoditized. The good news is that banks are not the sole source of carefully-conceived research and the better news is that conflict-free content publishers can now more easily distribute via a broad universe of narrow-casting, web-based channels.”
Added Azous, “For independent research providers and trade idea generators, it’s arguably a watershed moment. As new rules take shape, content publishers, including those who previously worked under investment bank banners, can now reach an exponentially larger universe of content buyers through these new distribution channels. It’s a numbers game; instead of working inside an investment bank and trying to ‘sell’ a traditionally high-priced product to a relatively narrow list of captive clients, the more progressive idea generators can re-tool their pricing and make their product available to exponentially more buyers, and in a way that conforms to and stays within goal posts of compliance-sensitive folks.”
However much it makes sense to foster the easy distribution of independent and un-conflicted research, Wall Street et. al. is not going to easily abrogate their role for providing ideas or forgo the trade execution commissions derived from those proprietary ideas. Banks are reported to be devising new pricing models for investment research in view of EU proposals that could prevent research from being paid for using dealing commissions. In an unbundled world, where payments are separated, competition for equity and credit research may increase as asset managers look beyond traditional sources, which may trigger fragmentation. They may also move research in-house. The U.K.’s FCA, which is driving the debate, has endorsed the EU proposals.
As noted within the most recent edition of Pensions & Investments Magazine, Barclays PLC, Citigroup Inc., Credit Suisse Group AG and Deutsche Bank AG are working with clients to come up with pricing for the analyst research customers receive, according to bank executives. Prices are expected to range from roughly $50,000 a year to receive standard research notes, up to millions of dollars for bespoke research and open-door access to analysts.
“We are working to change the mind-set so that fund managers understand that research should be treated as a scarce resource. There is a great opportunity to tap into experts in their fields at brokers, but we need to really think about the value of research and determine the right amount to pay for it,” said Nick Anderson, head of equities research at Henderson Global Investors.
The following [excerpted] analysis is by Bloomberg Intelligence analysts Sarah Jane Mahmud and Alison Williams and helps summarize the current outlook. It originally appeared on the Bloomberg Professional service. Continue reading →