New Research Distribution Platform Emulates Amazon

February 25th, 2015

Two technology entrepreneurs have launched a “public beta” for a new distribution platform for research, information and applications, AIREX™ Market.  The online marketplace offers a la carte product from thirteen suppliers including Deutsche Bank, FactSet, Morningstar, Thomson Reuters and S&P Capital IQ.  The new product has launched with an impressive list of vendors, but now the real challenge begins.

Airex Inc. was founded in 2012 as Tinga Technologies LLC by Stephen Kuhn and Christopher Williams, experienced technology entrepreneurs.  During an interview, Stephen Kuhn said the idea for the company came to them after they considered monetizing a trading algorithm, deciding instead to develop a platform that would be agnostic to all financial ideas.

While the platform is open to a spectrum of users ranging from retail investors to corporates, the initial target market is smaller asset managers with assets under management below $1-2 billion believing that this audience is under-served by existing sales channels at investment banks and other major suppliers.

Deutsche Bank offers its equity research reports for $100 to $400 per report.  Morningstar sells reports for $50 while Thomson Reuters sells their fundamental reports for $47.50.  Factset sells earnings transcripts for $105 each while S&P Captial IQ sells them for $35 apiece.  Nasdaq OMX is offering data on its indexes for free (data which can also be obtained free on their website).  Stephen Kuhn said the onboarding process for major suppliers has been taking over a year.  Airex plans to have over 1000 vendors on its platform by year end.

Airex offers a variety of approaches to reassure suppliers that list product on the platform will not cannibalize existing client relationships.  Some suppliers supply a named list of clients or competitors to be blocked while others black out categories of users.  Deutsche Bank embargoes its research reports for 7 days, believing that its core clients would not find embargoed reports valuable after a week.

According to Stephen Kuhn, Airex will be focusing on attracting buyers to its platform.  It plans to purchase online advertising and is already conducting PR with its beta launch.  The company is hiring a direct sales force and asks suppliers to conduct marketing on its behalf.

A key strategy for attracting users is its AIREX Market Partner (AMP) Program™ which provides a white label, hosted, turnkey version of its platform.  Airex is hoping to convince companies to offer the white labeled platform to their customers, clients, and website traffic.  It is targeting prime brokers, custodians, investment banks, banks, retail brokerage firms, wealth management platforms, financial technology companies, corporates, consultancies, and academic institutions with the program.

Suppliers will receive 70% of product sales with Airex retaining 30%.  When private labeled, the first 10% of product sales goes to the private label distributor, with suppliers and Airex splitting the remainder 70%/30%.

Our Take

It is ironic that Airex is launching while Dodilio, another research procurement platform, is shutting down.  However, Dodilio required potential buyers to post RFPs on its platform and it would then find suppliers.  The Edinburgh-based Electronic Research Interchange (ERIC) launched last fall adopted an Ebay type model where buyers can bid on research product.  In contrast, Airex aspires to be an Amazon for investment research, showcasing supplier products that buyers can browse through and select.  The technology platform is more sophisticated than Dodilio or ERIC and the vision is broader both in the content it seeks to sell and the methods it uses to attract buyers.

As Deutsche Bank’s participation suggests, even bulge banks are open to finding incremental revenues to defray costs.  For Deutsche, the proposition is relatively low risk since reports are its lowest value research product and even those will be embargoed.  The participation of vendors which also distribute research product such as Factset, Thomson Reuters and S&P Capital IQ indicates that they see Airex as additive rather than as a direct competitor.

The big question for Airex’s suppliers is whether the platform can generate sufficient sales to make participation worthwhile.  Kudos to Airex for attracting name brand anchor tenants.  Now the real challenge will be to create sufficient traffic to keep the tenants happy.

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Stifel Looking To Snap Up Sterne Agee In 14th Deal

February 23rd, 2015

According to various sources, Stifel Financial Corp. is currently in discussions to acquire Sterne Agee Group – the 14th such deal for the St. Louis-based middle market financial services firm over the past ten years.  A definitive deal between these two firms could be announced in the next few days.

Possible Deal in the Offing

Late last week, a report from Bloomberg revealed that Stifel Financial Corp. is in discussions to acquire Birmingham-based brokerage firm, Sterne Agee Group, Inc.  Executives from both firms declined to comment on the matter.   If the deal goes through, the combined firm would have about 3,000 financial advisors and close to $200 billion in client assets.

Privately held Sterne Agee offers comprehensive wealth management and investment services to a diverse client base including corporations, municipalities and individual investors.   The firm employs over 2000 professionals located in 31 offices across the US and in London; 150 of whom are financial advisors in its Private Client Group and 600 independent advisors in its Financial Services unit.  Sterne Agee currently manages $26 billion in assets. The firm’s clearing unit works with 90 broker-dealers nationwide.

Stifel Financial provides securities brokerage, investment banking, trading, investment advisory, and related financial services through its wholly owned subsidiaries to individual investors, professional money managers, businesses, and municipalities.  The firm generates approximately $2.2 bln in annual revenue and employs 2,100 investment advisors and 150 independent reps.  The firm also has $173 bln in assets under management.  The middle market financial services firm has been on an acquisition tear in the past decade – closing thirteen deals over this period (see below).  Stifel is set to release its 2014 Q4 earnings on Monday after the markets close.

The 14th Deal in the Past Decade

Most analysts explain that Stifel’s potential acquisition of Sterne Agee should not be seen as terribly surprising.  Over the past decade, Stifel management has been aggressively capitalizing on acquisition opportunities that have arisen in the financial markets as the brokerage industry has experienced turmoil in the wake of the financial crisis.  The list below outlines the thirteen deals that Stifel has closed since 2005.

2005 – Legg Mason Capital Markets

2006 – Miller Johnson Steichen Kinnard’s private client group

2007 – Acquired Ryan Beck, separately purchased First Service Bank

2008 – Purchased 17 offices from Butler Wick

2009 – Acquired 56 branches from UBS

2010 – Thomas Weisel Partners Group

2011 – Stone & Youngberg

2012 – Miller Buckfire

2013 – Knight Capital Group’s bond-trading business, also merged with Keefe, Bruyette & Woods

2014 – De La Rosa & Co., Legg Mason Investment Counsel & Trust

End Of Tumultuous Few Years

The fact that Sterne Agee is looking to sell its brokerage business is not terribly surprising either.  Over the past few years the Birmingham-based brokerage firm has been mired in scandal.

Two years ago, a former chief financial officer, Brian Barze, sued Sterne Agee alleging that its CEO, James Holbrook, had misused company assets for personal purposes.  According to the lawsuit, Holbrook fired Barze, after he confronted Holbrook about how he was abusing company resources.

Then, last May Sterne Agee’s board of directors voted to fire Holbrook and his son William as the firm’s COO and install new leadership.  This was at approximately the same time that the company learned that the U.S. Treasury Department and the U.S. Department of Justice were looking into Holbrook’s affairs.  In June, two Sterne Agee shareholders filed a derivative lawsuit on behalf of the company against its board.

Finally, in December Sterne Agee sued Holbrook for allegedly using company assets and resources in activities that were not in Sterne Agee’s best interest but were, instead, in Mr. Holbrook’s personal interest.

Strategic Rationale

As we mentioned previously, a deal between Stifel and Sterne Agee would not be surprising on a number of accounts.  However, we also think there are fundamental factors which make this deal sensible.  Clearly, the past few years have been challenging ones for the broker-dealer community due to regulatory and competitive pressures.  During periods like this, you often see more consolidation as the firms involved gain greater economies of scale for their sales and operations activities.

In addition, a potential acquisition of Sterne Agee by Stifel Financial Corp. would greatly bolster Stifel’s presence in the increasingly profitable independent broker-dealer industry.  Stifel currently has approximately 190 independent reps through its Century Securities Associates Inc. subsidiary.  Sterne Agee, on the other hand, has about 630 independent reps on board.  Adding those reps would enable Stifel to promote an attractive platform to independent reps – a key in expanding into the more profitable and increasingly popular “hybrid” model in the retail financial advice business.

Lastly, an acquisition of Sterne Agee would significantly expand Stifel’s lucrative wealth management business. Approximately 56% of Stifel’s $2.2 bln in annual revenue is generated from its wealth management business.  Sterne Agee’s asset management business would would increase Stifel’s AUM by 15% and could help boost overall firm revenue by an estimated 8% – 9%.

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FCA Issues Statement Supporting Ban On Research Commissions

February 19th, 2015

The UK Financial Conduct Authority (FCA) issued a statement today clarifying its interpretation of proposed European regulation governing the payment for investment research with client commissions.  As we have previously reported, the FCA interprets the pending MiFID II regulation as banning the use of client commissions for the payment of investment research.  The statement reveals a confused view of commission sharing agreements (CSAs) and acknowledges taxation problems with its approach.  It also contains an implied threat to implement its preferred regime irrespective of the final European regulation.


As we have discussed previously, a key issue in the interpretation of the pending MiFID II regulation is whether CSAs would be a permitted vehicle for research payment accounts envisioned in the new regulation.  It is no surprise that the FCA thinks not.  “In our view, the intention of the technical advice is to create a ‘hard dollar’ research market, with the option for research invoices to then be paid either by the investment firm itself, or a from a research payment account linked to the client portfolio that has benefitted (sic) from the research received.”

It appears that the FCA views CSAs as linking research payments to commissions rather than separating research payments from execution, as they were designed to do.  In their current form, CSAs unbundle commissions into a research component and an execution component, allowing asset managers to direct the payment of the research component to the research providers it designates.

In fact, if we look at the FCA’s own description of the ideal research payment process, we see that CSAs are compatible with all provisions but one:  “In the technical advice, ESMA proposes that the research payment account and charge should be agreed upfront between the portfolio manager and their client, and be based on a budget set by the firm relating to their external research needs and not linked to trading volume or values.  It also requires the portfolio manager to be responsible for operating the research payment account and managing the allocations made from within their budget.”

While asset managers are responsible for overseeing the CSAS and managing the allocations, technically the CSAs are operated by the investment banks.  However, the FSA believes that “tools developed in the context of CSAs – such as software platforms to manage these accounts” are “transferrable (sic) to managing the new research payment accounts ESMA proposes.” It seems inconsistent to allow asset managers to use third party software providers to manage the research payment accounts, but not investment banks.

Fixed Income and other non-equity markets

The new regulation would apply to all asset classes, not just equity.   Fixed income, commodity and currency research would have to be paid for separately, and unlike in equity markets where there are unbundling mechanisms like CSAs in place, there is no precedent for this.  Trading in these markets is largely principal-based, with the deal’s spread paying for any research provided.  The FCA believes that spreads would narrow, but there is no prior experience to substantiate this.  Given increasing capital pressures on banks, there are concerns for liquidity and market making if spreads narrow further.  A more likely outcome would be reduced levels of non-equity research.


Since we have already expressed at some length the drawbacks we see in the FCA’s position, we will not repeat them here.  Let us instead look at the FCA’s responses to industry concerns.

  • Taxation. The FCA’s regime would subject all research payments to VAT.  The FCA argues that this would level the playing field for independent research providers currently paid with hard dollars.  [Note: our surveys suggest that approximately half of IRP payments are through CSAs and on average around a third are cash payments.]   While IRPs appreciate the FCA’s intent, they are concerned that a 20% whack to overall research payments will result in lower payments irrespective of payment method.
  • Competitiveness with non-EU asset managers. The FCA’s view is that “a more competitive research market has the potential to lower costs and improve returns to customers, which should make EU investment managers more rather than less competitive.”  We think the FCA is optimistic.  We suspect regulatory arbitrage is a more likely outcome, as asset managers shift research payments to domiciles which allow commission payments.
  • Competitiveness of smaller asset managers. The FCA thinks that smaller asset managers will not be disadvantaged under its regime because the research fees will be viewed as distinct from the annual management charges.  However, since the hard dollar research fees would be calculated similarly to the AMCs it is very likely that asset owners and their pension consultants would view the research fees similarly to the AMCs.  This would harm smaller asset managers who are unable to fund the research payments out of current AMCs, but would also significantly shrink the overall budgets for research in the domiciles where the FCA’s regime is implemented.

Our Take

Believe it or not, we are very sympathetic with the FCA’s desired goals of improving transparency and fostering a more competitive research marketplace.   If the FCA had the support of its American cousins, perhaps there would be some chance of effective implementation of its brave new world.  That, however, ain’t happening.  If the FCA pushes the envelope too far, the ends will be self-defeating, just like its ban on payment for corporate access with client commissions.  On the other hand, if the FCA were able to moderate its position slightly to permit CSAs as a vehicle for the research payment accounts, then it is likely that the controls it desires — budgeting and client engagement — are likely to become global best practice.

However, its latest statement reinforces the impression that it will be the FCA’s way or the highway.  The FCA not too subtly indicates that if the EU regulation is not to its liking, it will implement its regime even if it is for the UK only.  That smacks of petulance rather than regulatory wisdom.

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Guidepoint Buys German Expert Network

February 17th, 2015

Guidepoint Global LLC, the second largest expert network, expanded its European footprint through the acquisition of a German expert network, Innosquared GmbH.  Terms of the transaction were not announced.  The acquisition is further evidence of the rebound in the expert network business.

Innosquared is a Dusseldorf-based expert network focused on sourcing experts from the EMEA region.  Its network included 35,000 experts, and Guidepoint now says its EMEA network includes 50,000 experts.

Innosquare was founded in 2009 by three German executives.  Benjamin Lüpschen, a former corporate strategist in the consumer industry, has infused Innosquared with particular expertise in the consumer sector.  Jan-Florian Schlapfner also came from a corporate background. Roland Richter was a Gerson Lehrman Group Council Manager before founding Innosquare, bringing insights into expert network operations.

Innosquared has about 24 employees, having expanded rapidly in 2014.  As of April 2014 it was recruiting for 6 positions and in July of last year it opened a London office.  Innosquared has a strong presence with corporates and management consultants, claiming relationships with eight of the ten top global consulting firms, helping to diversify Guidepoint’s business mix.

Meanwhile, Guidepoint has also been growing organically as it recovered from declines in 2010 and 2011 caused by the US based insider trading investigations.  Although Guidepoint was mentioned in insider trading complaints, its compliance procedures protected it from accusations of wrong doing.

Last month Guidepoint launched a brand makeover.  It shortened its name to Guidepoint, introduced a new logo and launched a new website.

Guidepoint has prior acquisition experience, having successfully integrated Vista Research after its 2009 purchase from Standard & Poor’s.  Guidepoint is reported to have paid between $10 and $13 million for Vista, considerably less than the $40 million S&P paid when it acquired Vista.  Given Innosquared’s size, it is likely that Guidepoint’s latest purchase was less than its payment for Vista.

The Innosquared founders will continue to retain management roles.   Branding has not been decided, but given Guidepoint’s recent brand makeover, it is likely that Innosquared’s brand will eventually be subsumed under Guidepoint’s.

Our Take

Guidepoint is next largest expert network after industry behemoth Gerson Lehrman Group.  The Innosquared acquisition does not add significantly to Guidepoint’s overall network of 200,000+ network of experts, nor significantly to its estimated $60 million in revenues, but it provides a strong presence in continental Europe for future growth.

The acquisition is another sign of the robust recovery of the expert network segment (now renamed as ‘knowledge brokers’) from the dramatic declines in usage in 2010 and 2011 during the early stages of the insider trading investigation.  While there has been consolidation in the expert networks serving institutional investors, new firms continue to enter the business.  Expert networks in regions outside the U.S., such as Innosquared, largely escaped the downturn, and some are now challenging the US based expert networks on their home turf.

Press release:

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Wall Street Jobs Picture Worsens in January

February 11th, 2015

Despite the healthy January nonfarm payroll report released last week, the jobs picture on Wall Street worsened significantly.  Layoffs at Wall Street banks and brokerage firms surged while new hiring posted a meager gain during the first month of 2015.  The poor January jobs picture reflects that Wall Street firms are trying to right size their businesses given lower trading and commodities revenues and increased currency risks that were seen in late 2014.

January 2015 Challenger, Gray & Christmas Report

According to the Challenger, Gray & Christmas monthly Job Cuts Report released last week, the financial services industry saw a tenfold surge in planned layoffs from 490 layoffs announced in December to 5,375 layoffs announced in January.  The January layoff total was the largest monthly layoff figure reported since February 2014 and was 12% higher than the number of announced layoffs reported in January of 2014.

The weakness seen in layoffs was also seen in new hiring.  During January, financial services firms announced a meager 200 new jobs to be filled, a 29% drop from December’s modest 283 new jobs reported.

The January Challenger Gray & Christmas report is consistent with business prospects revealed by many banks in their Fourth Quarter earnings calls, stemming in large part from lower fixed income trading and commodities revenues, to increased currency risks, and lower long-term interest rates.

Specific Bank Layoff Announcements

Last month, JPMorgan Chase & Co. said it plans to cut more than 350 jobs later this year in the Rochester, New York area. JPMorgan employs close to 1,500 in the Greater Rochester area.  The bank has notified local employees about the job eliminations in late summer or early fall from its mortgage banking operations. The cuts are due to a decrease in mortgage modification work, as well as mortgage refinancing in general, according to a JPMorgan spokesperson.

In January, Canadian bank CIBC also announced that it is laying off more than 500 employees.  The Toronto-based bank confirmed that it is reducing staff across the organization, but it did not specify the total number of layoffs it might implement.  “These reductions reflect an overall alignment of our resources that allows us to better serve our clients and ensure that we are operating efficiently,” a spokesperson said.

Conditions Improving?

Even though the 4th Quarter was weak for many Wall Street banks, there are some signs that conditions are improving as we enter 2015.  Executives at Goldman Sachs, Citigroup and Credit Suisse have all recently commented that trading activity picked up in January as investors are taking on new positions or hedging bets on everything from the direction of interest rates to energy prices.

At the Credit Suisse Financial Services Conference in Miami, Lloyd Blankfein, Goldman Sachs chairman and chief executive noted that events in the Middle East and Russia, a recent selloff in oil prices, and developing interest-rate policies around the world as helping to draw many investors back to the markets. “That creates the need for people to again look at what their portfolios are, compare their expectations about the future, modify their positions, and then increases our role as an intermediary.”

Impact on the Research Industry

So, what does this mean for hiring in the research industry?  Clearly, some of this will depend on whether trading continues to improve throughout the rest of the year.  A better trading environment could boost banks’ willingness to add staff to their research departments.

However, we doubt that sell-side firms will become aggressive in restaffing depleted research departments due to increased regulatory pressures.  In our minds, one of the biggest unresolved issues for most research management is what ESMA decides to do with its MIFID II proposal regarding the use of client commissions to pay for external research.

When all is said and done, we believe that the hiring outlook for research analysts, sales people, and other research support staff at sell-side and independent research firms could improve this year when compared to 2014.  However, we don’t think that research hiring at Wall Street firms will be particularly robust in 2015.

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Brawl Erupts Over European Regulation

February 9th, 2015

Pending European regulation impacting payments for investment research has taken a dramatic new twist in the past couple of weeks.   UK regulators recently launched a campaign to interpret the pending language as a ban on using dealing commissions to pay for research.   After getting over their initial shock, European market participants are now mobilizing to petition the European Commission directly.  The struggle over the final rules has now become a major regulatory brawl involving asset managers, investment banks, independent research firms, and the regulators from the UK, France, and Germany.

The story so far

Even faithful readers of ResearchWatch can be forgiven for getting lost in the maze of European regulation.  To recap, the Financial Conduct Authority (FCA), the securities markets regulator in the UK, has become increasingly uncomfortable with the current commissions regime over past two years.  Last June it issued new guidelines requiring asset managers to put values on bundled research, prohibiting payment for unused research and banning the payment for corporate access with dealing commissions.  One month later it released a discussion paper interpreting pending European regulation as a complete ban on the use of dealing commissions to pay for research, and supported the desirability of such a ban by citing abuses found in an industry review it conducted from November 2013 to February 2014.

The FCA’s aggressive position provoked a massive industry response seeking to influence the language in the next generation of the European Markets in Financial Instruments Directive (MiFID II).  The regulatory body responsible for drafting the initial regulatory language, the European Securities and Markets Authority (ESMA), received over 200 comment letters comprising an estimated 10,000 pages of text, much of it focused on the language impacting research payments and most of that negative.

ESMA released its draft language accompanied by explanatory discussion in December and industry participants breathed a collective sigh of relief.  The head of the UK trade association for investment managers was quoted in Institutional Investor on January 15th as saying, “The industry asked [ESMA] not to effectively ban the ability for investment managers to be provided with research paid for by clients’ dealing commissions, and ESMA has listened to that request.  They have proposed a regime which will allow for client dealing commissions to be the source of payment for research.”

Although ESMA’s draft language imposed very stringent conditions on the ability to pay for research with client commissions, including explicit research budgets and more detailed client notification, an outright ban on the ability to pay for research with trading commissions seemed to be averted.  That complacency ended two weeks ago as the FCA began an effort to promote its own interpretation of the draft regulation as in fact banning the ability to pay for research with dealing commissions.


A key part of the argument is whether Commission Sharing Agreements (CSAs) would be permitted under the new regulation.  In its explanatory discussion of the new regulation, ESMA seemed to support CSAs:  “ESMA has clarified in which circumstances the receipt of research does not qualify as an inducement … and is therefore permissible. In doing so, ESMA has elaborated on the suggestions to allow for commission sharing agreements.” (page 132 of ESMA’s report)

The draft regulation specified modifications, such as budgeting and client notification, seemingly to make CSAs conform to the new guidelines: “ESMA considers that the commission sharing arrangements (CSA’s) have elements that address the conflict of interests between brokers and portfolio managers in respect of research. However, the conditions under which such arrangements are currently operated often do not entirely address the conflicts of interests at stake…ESMA has therefore formulated additional requirements which are aimed at further limiting these conflicts of interest.” (page 133)

The FCA’s view is that the draft regulation does not permit the use of dealing commissions to pay for research.  The FCA also objects to having investment banks administer the monies used to pay for research.

The FCA Goes on the Offensive

The FCA has been meeting with various market participants to promote its point of view.  Last week it was reportedly represented at a dinner in Brussels attended by asset managers and other European regulators.  The FCA repeated their view that research payments could not come from commissions, but must be separately agreed hard dollar amounts paid by the asset owner to the asset manager.  The other regulators did not appear to share that view but are said to have been far less organized and forceful in their arguments.  The FCA has also been meeting with investment banks, with the Investment Association, which is the trade association for UK investment managers, and with EuroIRP, the trade association for independent research.

Industry participants are pushing back.  The CEO of Sanford Bernstein sent a letter to clients urging them to contact their trade association representatives or the European Commission directly with concerns.  Asset managers are reportedly telling regulators that the FCA’s interpretation is equivalent to increasing their management fees, which they are not able to do, resulting in reduced profitability, industry consolidation, and migration of assets from European domiciles.


Technically, formal comment on ESMA’s draft language impacting research payments is closed, but the European Commission is reportedly welcoming input from the industry on this topic.  The Commission will likely be hearing from the Association of Financial Markets in Europe (AFME), which is the trade association representing European investment banks, the Investment Association and its European counterparts, EuroIRP and others.  Reportedly even the regulatory authorities will be lobbying.   The FCA is expected to weigh in, as are the French regulators, L’Autorité des Marchés Financiers (AMF), who are very publicly opposed to a ban on paying for research with client commissions.  German regulators have been less vocal, but reportedly share similar views to the French.

The European Commission is expected to finalize the rules in June, after which they will be voted on by the European Parliament.  Ironically, a UK Member of European Parliament (MEP) has publicly opposed the FCA’s position, stating that “MEPs made it very clear to ESMA that disclosure of the use of commissions is sufficient and banning of commissions should be off the table.”

If the provisions impacting research payments end up as a directive, they will then need to be implemented by each country’s regulator.  However, it is possible that the provisions could be drafted as regulation which must be accepted by all EU members and not subject to country-level interpretation.

There is a rumor that the FCA is considering applying for an Article 4 exemption that would allow it to add further provisions to the final language.  However, it is also rumored that the Commission is not open to applications on this topic.  All of which suggests that this drama could continue even after the Commission finalizes the rules.

Problems with the FCA’s Argument

The FCA’s vision for research payments is, at its best, singularly impractical.  Reportedly the FCA is arguing that its interpretation of the ESMA language would create a payment process which is commission-like, allowing investment managers to draw on pools of client money as needed, without negotiation with asset owners.  The pooled amounts could be applied across funds and across investment teams as is currently the case with CSAs.  The FCA envisions that these commission-like research payments would be separate from management fees, subject to client sign-off if they are to increase but not construed by asset owners as part of the management fees.

There are a number of problems with the FCA’s research payment picture.  If research payments are no longer tied to commission payments, then asset managers will have to charge their clients fees for research based on assets under management, which just so happens to be the same way management fees are calculated.  It would be perfectly natural for clients to view them similarly, if not identically.  Given that the FCA’s declared end-game is to have asset managers pay for research out of their own wallets, its assurances that research payments will be distinct from management fees seem naïve at best.

Further, the payment infrastructure around CSAs has been built over the last nine years.  Although asset managers control the payments made through CSAs, the infrastructure has been built by the investment banks not by the asset managers.  The FCA’s vision assumes that asset managers can replicate that payment infrastructure in less than two years.  Actually it will be less than a year and a half, because the current muddle won’t be clarified until at least June when the final rules are published.

Then there is the issue of ensuring a level playing field for asset managers who play by the FCA’s proposed rules.  At the moment, there are a number of European domiciles, such as Spain and Italy, which have not even adopted CSAs.  How warmly will those regulators be embracing the FCA’s more arcane approach and how capable will the asset managers in those countries be in implementing it?  For that matter, how vigorously would the French enforce regulations which they passionately believe would be detrimental to their financial markets?  It is unlikely that even in Europe the FCA’s proposed regime would be universally applied.

If we turn beyond Europe, the FCA’s formulation for research payments actually becomes toxic.  If UK asset managers “commission-like” payments are not commissions they cannot be combined with US 28(e) safe harbor assets and need to be quarantined, creating major headaches for global asset managers.

Our Take

The FCA and its predecessor successfully created a regime which improved commission transparency globally.  Even in the US, where the Securities and Exchange Commission did precious little to promote commission transparency, approximately 45% of asset managers have CSAs in place.  If research budgeting were implemented through CSAs, as the FCA endorsed as recently as last July, it is likely that the practice would be adopted on a global basis by many asset managers.

In contrast, the FCA’s current position is a prescription for widespread regulatory arbitrage.  It is not clear that the FCA’s system of research payments would even be implementable across Europe.  It would have no hope of being adopted outside Europe.

For research providers, the consequences of the FCA’s proposed regime would likely result in lower research payments as asset managers and their clients reduced the research-related fees.  Both investment banks and independent research providers would be impacted.  As we saw during the commission declines after the financial crisis, independent research providers are likely to be disproportionally impacted during large-scale cuts to commissions, as asset managers try to protect their relationships with the larger investment banks.

Nevertheless, before you start to think about shutting down your London offices, keep in mind that this saga is not over.  While the FCA has great prestige among European regulators, it may not carry the day in the final MiFID II rules.  Stay tuned.

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IRPs Lead Way to European Shorting Success

February 4th, 2015

The following article is provided courtesy of Edward Blad, Co – Head of London-based Marex Spectron Independent Research & CSA / Commission Management, specializing in introducing Independent Research to the buy-side.

European equity markets faced challenging headwinds throughout 2014 evidenced by a surge in volatility, an increase in the VIX, rising geopolitical risks as well as political risks closer to home. Despite these challenges, performance across markets was on the whole positive; the STOXX EURO 50 was up 4.9% in total Euro-dominated return terms and the STOXX EURO 600 was up 7.8%.

However, many active fund managers struggled to beat their benchmarks. A number of hedge fund managers were let down by their shorting strategies. Shorting is one of the most difficult skills for the buy-side to grasp, particularly in rising markets, as a positive beta stock market environment, such as 2014, will lift most shares whatever their fundamentals. This is what makes long / short strategies that can master their short exposure and beat the odds in the context of a positive market environment very appealing.

Historically it has been hard to find quality short ideas on European stocks, in part because investment banks rarely issue sells.  Fortunately, there are a growing number of Independent Research Providers that can support fund managers when looking for European shorting opportunities.

Such services are often based around trained chartered accountants who are able to scrutinise corporate disclosures in order to find anomalies in the published financial statements. Hedge fund managers typically do not have accounting backgrounds so can find partnering with forensic accounting and similar shorting specialist firms particularly rewarding.  Long only fund managers also have a use for such services to help identify accounting risk.

This article highlights five leading Independent Researchers that offer European short ideas and refers to a successful European call made by each throughout 2014.  The researchers are: Assay Research, CFRA, PN Finance, The Analyst and Voyant Advisors.

Assay Research, founded in 2003 by the former Director of Research and four senior analysts at CFRA. Assay is a US-based firm which uses predominantly forensic accounting methodologies to help investors find stocks to short. Each analyst is a CPA / CFA charter-holder covering specific sectors across Consumer, Retail, Healthcare, Industrial and TMT. The team aims to identify which companies are using aggressive accounting techniques to conceal any fundamental deterioration.

Swatch is a stock Assay Research had been writing on since April 2013 noting high levels of inventory with a deceleration in sales, weaker earnings quality from lower discretionary items, and a puzzling change in accounting standards switching from IFRS to Swiss GAAP. It was in 2014 that the Assay Swatch thesis began to play out as the stock fell 25% (CHF-denominated). The Assay analyst noted that the company’s overall DSI (days sales inventory) had increased by 18 days during the first half of 2014 which was the highest level in 3 years; this was whilst sales significantly decelerated to 2.4% versus 8.9% a year earlier.

CFRA, founded in 1994 with offices in New York and London, was the pioneering entity in the forensic accounting space. Today they have a team of over 20 analysts covering companies in North America, Europe and Asia and across multiple sectors.

Last year a particularly successful short was Petrofac, the UK-listed Energy corporate. CFRA first warned clients in May last year that 2014 consensus estimates were out of reach and that 2015 was likely to disappoint due to the margin risks associated with continued deterioration in working capital.  The company was added to their Biggest Concerns List later in May shortly before it issued a profit warning. The company issued another profit warning in November. CFRA’s research had highlighted: continuing increases in working capital, reflective of on-going project delays and execution issues; collection issues as management confirmed during its call; and concerns around the earnings risk associated with the IES (Integrated Energy Services) business from any production delays or project rephrasing. Petrofrac’s share price has fallen 50% since CFRA initiated coverage.

Paris-based PN Finance was founded by Paul Nagy, a former senior analyst at CFRA with consequent expertise in forensic accounting. He made some excellent short calls in 2014 including APR Energy, Indra Sistemas and most notably the technology company Quindell.

Paul wrote on Quindell in February 2014 and warned clients that the stock price valuation seemed very high relative to the cost of acquisitions. In addition, organic growth was not being included in management commentary, only reported growth, which was not adjusted for Quindell’s acquisition spree. Finally the cash investment in receivables increased materially largely due to accrued income. Paul frequently tried to speak to management about the issues he had identified but never received a response. It was two months after Paul’s research on Quindell that the ultra-mysterious Gotham City Research, a shorting-focused hedge fund seemingly similar to Muddy Waters, released a highly critical piece of research (almost 90 pages long) describing Quindell as Country Club built on Quicksand.  The company’s share price subsequently collapsed. Since Paul published his research the share price has fallen 80%.

London-based The Analyst was set up by Mark Hiley and Tom Whyman, two former Fidelity analysts. The team find high conviction long and short ideas mainly focusing on companies in Europe. When it comes to the shorting work, rather than focusing purely on accounting, they look for structural shorts through broken business models, management wrongdoing and competitive pressures. They ramped up their short recommendations last year given they were seeing an overvalued market, and made  a number of stellar calls including the UK supermarkets (Tesco – initiated in September 2013, and Sainsbury – August 2014), De La Rue (initiated in April 2014) and the most interesting, Let’s Gowex (initiated in April 2014).

Let’s Gowex was a Spanish-listed telecom services and wireless provider which filed for bankruptcy in July 2014 after the Chief Executive and Founder apologised to the markets for providing inaccurate financial reporting for the past four years.  This was another company that Gotham City Research had waded in to, but not before Mark Hiley initiated coverage on the stock.  He struggled to understand how and where the business made money.  Having reviewed the investor materials he found them highly promotional, particularly confusing and providing very little detail.  Part of the research process involved interviewing Let’s Gowex end users, all of whom had experienced poor service. Mark also tried the product himself but with very little success.

Voyant Advisors, founded in 2007 and based in San Diego, is made up of a team of 8 trained forensic accountants and CFA holders, who spend their time carrying out fundamental company-specific research in order to identify shorting opportunities. There are two separate products: the Domestic service focuses on US companies and the International service looks at non-US, mainly entities in Europe.

Voyant’s analysis noted at the beginning of last year that Adidas should be well placed to prosper from the World Cup which usually raises revenue by an average of 11%.  However, they were concerned with management’s estimates.  2013 had been a difficult year where there were multiple revenue guidance reductions yet the company still managed to report margin expansion by pulling revenues forward in its TaylorMade golf brand, reducing provisions for sales returns, allowances and warranties, and extending life of PP&E to reduce near-term depreciation expenses.  Voyant saw that TaylorMade was struggling to sustain growth and accelerated the launch of a new range of clubs, despite having launched a similar range only three quarters earlier.  Consequently, inventory increased 1,470 bps faster than peers and margins were put under severe pressure as the company engaged in promotional activity to sell excess inventory.  At the same time, the company continued to reduce provisions for returns while rival Nike was increasing allowances.  In July 2014 the company reduced its FY2014 revenue growth guidance.  Adidas’ share price has fallen 30% since Voyant’s initial report in January 2014.

As we head in to 2015, we eagerly await to see which corporate is next in the firing line for Gotham City Research. Hedge fund managers tuned in to high quality Independent Research Providers will be one step ahead in finding such shorting opportunities.

Marex Spectron is one of the world’s largest privately held brokers of financial instruments in the commodities sector and a leader in facilitating trade in physical energy products. It also offers broking services covering a broad range of financial products. Marex Spectron’s Independent Research & Commission Management business, working closely with the Cash Equities desk specialises in introducing high-quality IRPs to the buy-side and offering a facility to pay for such services through commissions / CSAs. As well as this introductory service, Marex Spectron manages research relationships including handling administrative aspects such as fee negotiations, invoicing, renewals and service T&Cs.  The team also analyses and reports on the regulatory environment and the changes affecting the research industry, particularly in light of the FCA’s / ESMA’s on-going review on dealing commissions.

If you would like information on any of the services mentioned above, please do get in touch with Edward Blad at Marex Spectron ( / +44 207 650 4486)

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Is “Operation Perfect Hedge” Unraveling?

February 2nd, 2015

Last week, U.S. prosecutors agreed to drop all charges against five men accused of insider trading ahead of IBM’s acquisition of SPSS due to a recent appeals court ruling which overturned two previous high profile insider trading convictions.  However, some experts believe that the new higher legal standard could lead to the unraveling of the government’s war on insider trading called “operation perfect hedge”.

Charges Dropped

On Thursday, U.S. prosecutors said they would drop charges against the five men accused of insider trading ahead of IBM Corp’s planned $1.2 bln acquisition of SPSS, Inc (click here for more on this case).  This unusual decision was made as a result of a ruling made in December when a three judge panel at the 2nd U.S. Circuit Court of Appeals reversed the insider trading convictions of hedge fund managers Todd Newman and Anthony Chiasson.

Prosecutor, Andrew Bauer said that as a result of the heightened legal standard established by the appeals court ruling, “we do not have the requisite evidence to establish one of the elements of the crime.”

This decision follows U.S. District Court Judge Andrew Carter’s recent move to toss out the guilty pleas of Trent Martin, Thomas Conradt, David Weishaus and Daryl Payton — citing the 2nd Circuit Court of Appeals’ ruling.  The fifth defendant in the case, Benjamin Durant originally pleaded not guilty and intended to go to trial.  Durant recently filed a motion requesting that Judge Carter dismiss the indictment against him after the Judge allowed the other four defendants to pull their pleas.

Government’s Response

However, the move by US prosecutors shouldn’t be seen as a surrender on this issue.  Federal prosecutors have asked for an “en banc” hearing, in which the entire 2nd Circuit Court of Appeals (and not just a 3 judge panel) would reconsider its December opinion.  If it doesn’t prevail with the appeals court, the DOJ could also appeal its case to the U.S. Supreme Court.

At the heart of the problem for federal prosecutors is that the appellate court found that prosecutors must prove that someone accused of insider trading needs to know that the source of their tip received an actual benefit in exchange for the information.  The appeals court also narrowed what constitutes a benefit, saying that it cannot only be friendship.

US prosecutors are hoping that they can convince the appeals court to change or narrow its original opinion, or barring that can prevail before the Supreme Court.  If prosecutors are able to achieve either of these outcomes, they reserve the right to refile charges later against the IBM five.

Impact of this Decision

The IBM case marks the first time U.S. prosecutors have dropped insider trading charges in the wake of the Second Circuit Court of Appeals’ decision.  However, more importantly, the legal strategy used by the defendants to get their charges dropped could provide a road map for others challenging the government.

Apparently, a number of defendants who have either pleaded guilty to insider trading over the past five years, or who have been found guilty during trial have asked whether their cases might also be reversed.  Legal experts say the precedent established by the appeals court’s ruling threatens to overturn a number of other convictions, including the high profile conviction of former SAC Capital portfolio manager Michael Steinberg.

Clearly, this most recent IBM insider trading case is important to U.S. prosecutors as it could be evidence that the tide has finally turned against the government in its “war on insider trading” and that its “Operation Perfect Hedge” is beginning to unravel.

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Quantifying and Anticipating the Effects of Winter Weather on Retailers

January 28th, 2015

Weather affects everyone, every day. From the clothes we wear to the food we buy, weather influences our behaviors, decisions, and purchases in countless ways. And, what drives consumers to purchase specific goods or services varies depending on many factors, including location and time of year. Although day-to-day weather conditions greatly affect consumer demand, game-changers like winter snow storms and extreme cold significantly influence consumer buying behavior and hinder store traffic.

The following article has been written by Planalytics, Inc. (, a leading provider of weather analytics and planning insights for retailers, consumer goods suppliers, restaurants, and consumer service companies. Through advanced weather analysis technologies, planning and optimization solutions and industry-specific expertise, Planalytics helps companies assess and measure weather-driven impacts and effectively manage the never-ending variability of climate.  Planalytics service for institutional investors, Financial Insights, currently tracks close to 80 U.S. based public retailers and restaurants.

Juno’s Impact on Retailers

This week, major media outlets forecasted that the Northeast would receive a record amount of snow, but the storm ended up moving further east resulting in lower amounts in most areas. Although the significance of the storm dwindled, the simple forecast of a blizzard in the media affected consumer demand and in turn retailers across the region. Most major retailers had between 25% and 50% of their stores in the path of this storm. A few notable retailers with high store concentration (% of total store base that were impacted by snowfall this week) in the path of the storm were:

  • BJ’s – 79% of stores
  • Five Below – 77%
  • Bon-Ton – 62%

Most of the national retailers and restaurants covered by Planalytics’ Financial Insights research service saw 30-45% of their locations hit by significant snow in the northeast event this week.

Every storm produces winners and losers among retailers. Sectors that won throughout this storm were home centers, online retailers, and grocery/convenience stores. The losers were restaurant chains and mall-based retailers, such as apparel and department stores. However, since the storm hit early in the week and not during a key retail holiday period, the impact was minimized. Quick service restaurants were the most negatively impacted as these types of purchases were completely lost and will not be made up.

Winter 2014 versus 2013

Looking broadly at retailers’ Q4 (Nov.-Jan.), consumers have not had to make many need-based purchases. Through December, most major markets (NYC, Boston, Philadelphia, Chicago, Detroit) have snowfall below normal and below last year’s totals.  Season to date, demand for snow removal, ice melt, and snow throwers has been down -5% to -10% versus last year across the United States, and even more in the Northeast and Midwest.

November 2014 proved positive for retailers as it was colder and drier than last year. Cold temperatures drove demand for seasonal purchases, and the dry conditions supported store traffic. A Nor’easter the week of Thanksgiving disrupted travel plans for many, but cleared just in time for the Black Friday weekend, benefiting traffic into stores.

December brought mild conditions from coast to coast, with all 5 weeks trending warmer than last year at a national level, and this aided holiday spending.  Snowfall was 66% below last year and 57% below normal for December

Reflecting on Q4 of 2013, the winter saw numerous significant winter events along with extreme cold and the polar vortex. A strong system hit the Eastern states during the run-up to Thanksgiving, but cleared in time for Black Friday shopping. Two winter storms in December impacted major cities along the I-95 corridor; January had 3 significant storms in the East, and many retailers cited the extreme cold and snow storms as the reasons for disappointing sales and earnings.


Weather strongly influences consumer behavior and is a major cause of volatility in sales and earnings for retailers, restaurants and other consumer-driven businesses. Institutional investors use various data and research services like Planalytics to better understand and anticipate upside and downside surprises in monthly/quarterly comp sales, as well as quarterly earnings.

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Indie Firms Outperform Investment Banks For 3 Years Ending 2014

January 26th, 2015

The stock recommendations of Independent research firms outperformed bulge bracket, regional and boutique investment banks for the three years ending 2014, according to performance information collected by Investars, a research evaluation and commission management provider.

Investars collected performance data on 143 research providers for the period from January 1, 2012 through December 31, 2014.  The universe includes 9 bulge bracket banks, 88 mid-sized and small investment banks, and 46 independent research firms.

A positive period

On average each category of provider had positive returns for the period, during which the S&P 500 had an average annual return of 20.4%.  The overall buy recommendation performance of bulge firms and independents outperformed the S&P 500, while mid-size and small investment banks slightly underperformed.

Performance of Stock Recommendations for the period from 1-1-12 through 12-31-14

3 YR BUY Performance 3 YR BUY/SELL Performance No. of Buys No. of Sells Ratio of Buys/Sells 3 YR Maximum Drawdown
Large Investment Banks 20.8% 3.5% 757 210 3.6x -13.5%
Mid-size and Small Investment Banks 19.3% 4.5% 207 19 10.7x -20.0%
Independent Research Firms 22.3% 7.2% 1411 1289 1.1x -16.5%

Source: Investars

Investars calculates the performance for buys and sells by estimating a return based on each buy and sell recommendation during the period, ignoring returns associated with hold recommendations.  Independents had the best overall buy/sell performance, followed by the mid-size and small investment banks and the bulge firms.

Bulge firms had the lowest maximum drawdowns for the period, which are the largest percentage losses recommended stocks would have experienced during the 3 year time horizon.


Independent research firms had the broadest coverage averaging over 1400 buy recommendations over the last year, but this reflected quantitatively derived stock recommendations rather than analyst coverage.

For independents, the number of sells almost equaled the number of buy recommendations.  For bulge bracket firms, buys outnumbered sells by almost four times and for smaller investment banks by nearly 11 times.  On average smaller investment banks made fewer than 20 sell recommendations compared to over 200 buy recommendations.

Top performing firms

The firm with the top performing buy recommendations for the three years ending 2014 was BWS Financial, followed by Leerink Swan, Northcoast Research, Zacks Investment Research and a firm which is confidential.  With the exception of Leerink Swan, the top performing firms were independents.

Firms with Top Performing Buy Recommendations for the period from 1-1-12 through 12-31-14

3 YR BUY Performance 3 YR BUY/SELL Performance No. of Buys No. of Sells Ratio of Buys/Sells 3 YR Maximum Drawdown
BWS Financial 33.5% 20.6% 31 5 6.2x -19.0%
Leerink Swann 32.9% -5.1% 180 2 90x -18.3%
[Private Firm]
30.7% 15.3% 4146 4443 0.9x -9.5%
Northcoast Research 30.6% 31.3% 60 8 7.5x -9.9%
Zacks Investment Research
29.7% 21.1% 1721 1447 1.2x -11.0%

Source: Investars

Northcoast Research and the private firm had the lowest risk profiles as measured by three year maximum drawdown.  BWS Financial, Leerink Swann and Northcoast Research recommendations are primarily driven by analysts whereas Zacks Investment Research and the private firm base their recommendations on quantitative models.

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