London Expert Networks Challenging US Rivals

September 24th, 2014

London-based expert networks Cognolink and AlphaSights have been growing quickly, benefiting from a diverse client mix, geographic expansion, and limited impact from insider trading investigations.  Both firms are now proactively expanding their business, challenging US-based expert networks on their own turf.

Cognolink Ltd. is a London-based expert network founded in 2007 by Emmanuel Tahar, an ex-Bain consultant.  From the beginning, the firm has focused on a diverse client base, targeting management consultants and private equity along with hedge funds.  It also prioritized geographic expansion, establishing a US subsidiary in 2010, a Shanghai-based subsidiary in 2011, and subsidiaries in Hong Kong and India in 2012.

These strategies were rewarded in 2013 when the firm grew nearly 60%, from £8.7 million (US$14 million) to £13.9 million (US$22 million).  The firm is well established in the UK, where its business grew 74% in 2013 and is growing rapidly in the US and Asia (80%) albeit from a small base. Cognolink forecasts strong growth in 2014 “with profitability and cash inflows”.

Cognolink booked $6.7 million in revenues in the US in 2013, which represented almost a third of the company’s revenues, although it still has captured only a small portion of the overall US spend on expert networks.

AlphaSights Ltd. was founded in 2008 by two German entrepreneurs and, although not as large as Cognolink, has also been expanding geographically.  In addition to its London home office, it has offices in New York, Hong Kong and Dubai.

AlphaSights recently moved to new space in NY, promoting a hi-tech inspired atmosphere, not too far from Gerson Lehrman Group’s swank new offices near Grand Central.

AlphaSight’s New York Office

Neither Cognolink nor AlphaSights can rival GLG’s size or global footprint.  GLG’s revenues have once again topped $300 million, regaining past glory after declines triggered by insider trading prosecutions.  The London-based expert networks were largely immune from those pressures.  Now, having established solid bases in London, they are expanding outward.  Although dwarfed by GLG’s scale, they are aggressive competitors to all the US-based expert networks.

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Hedge Fund Caught Using Soft Dollars To Pay Twice For Fake Research

September 22nd, 2014

Earlier this month, the SEC charged a Minneapolis-based hedge fund with running a scam that diverted more than $1.0 million in “fake research” fees and expenses to illegally pay for staff salaries, country club dues, boarding school tuition and a Lexus.

Charging Investors Twice for Fake Research

A few weeks ago, the Securities and Exchange Commission charged that between 2008 and 2013, Minneapolis-based hedge fund Archer Advisors LLC, owner Steven R. Markusen, and employee Jay C. Cope bilked investors out of more than $1.0 million in phony research expenses and fees as the hedge fund’s deteriorating performance led to shrinking fund income.

According to the SEC’s complaint, Markusen and Cope’s scam actually charged fund investors twice for fake investment research expenses.  First, Markusen billed the funds directly for what he claimed were Archer’s out-of-pocket research expenses.

Markusen caused investors to repay Archer almost $500,000 in fake research expenses.  Of this total, Markusen directed the funds to reimburse Archer $100,000 for Cope’s salary payments by falsely characterizing them as “’research” expenses. The SEC alleges that Markusen spent these proceeds on personal luxury items like boarding school tuition, country club dues, and a Lexus.

However, this was not enough for Markusen and Cope.  Purportedly, Markusen also generated fake research invoices to direct Archer’s brokers to pay Cope’s $10,000 per month salary out of soft dollars for “research” he allegedly did as an independent consultant.  However, Cope did little or no research for Archer.  He was an Archer insider and officer whose main duties were helping Markusen find new investors and placing trades.  In total, Archer directed it’s brokers to pay Cope $450,000 in illicit “soft dollar” payments directly out of client assets rather than out of fee income earned from managing investor assets.  Cope paid Markusen a $1,000 monthly kickback from these soft dollar payments.

The SEC explained its charge against Markusen and Cope, “Soft dollars were supposed to be used to buy third-party investment research that benefited the funds.  Cope conducted no third-party research as an Archer officer whose main duties were placing trades and helping Markusen find new investors.”

In order to generate sufficient soft dollar commissions to pay for Cope’s salary, the SEC contends that Markusen and Cope began to aggressively trade their fund, prompting commissions paid to the funds to jump more than 600% from approximately $5,200 in March 2013 to almost $36,000 in April 2013.

Portfolio Pumping Scheme

The SEC’s complaint also charges Markusen and Cope with conducting a separate scheme to manipulate the stock price of the funds’ largest holding in order to inflate the monthly returns reported to investors and conceal the true extent of the funds’ mounting investment losses.

According to the SEC, Markusen and Cope manipulated the price of the thinly-traded stock of CyberOptics Corp. (CYBE), which comprised over 75% of the funds’ portfolios.  Markusen and Cope, knowing that Archer was CYBE’s largest shareholder, used this position to materially impact the closing price of CYBE on the last trading day of the month.

Marusen and Cope accomplished this by placing multiple buy orders for CYBE seconds before the market closed on the last trading day of the month to artificially pump up the market value of CYBE, and therefore the overall value of the funds’ portfolios.  Those valuations were used to calculate the funds’ monthly returns that Archer reported to investors, and were used to calculate Archer’s monthly management fee.  The SEC alleges that this illicit “painting the tape” happened in at least 28 months between 2010 and 2013.

“Markusen and his firm had an obligation to manage investor money in the hedge funds fairly and honestly.  Instead, he and Cope exploited their control of the funds to engage in long-running schemes to misappropriate fund assets and artificially pump up the value of the poorly-performing funds,” says Robert J. Burson, associate director of the SEC’s Chicago Regional Office.

Integrity’s Take

Obviously, the SEC charges against hedge fund Archer Advisors, Steven Markusen, and Jay Cope, if true is an egregious example of a criminal scheme to enrich themselves at the expense of investors in the funds.  However, this case is also an unfortunate illustration of why “soft dollars” has gotten such a bad name among regulators, politicians, and journalists.  The rampant misuse of client assets in this case provides opponents of “soft dollars” an easy illustration of why they believe the use of client commissions to pay for investment research should be banned in order to protect investors from this type of illicit behavior.   It is truly sad how a few bad apples can spoil the whole bunch.

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Advisory Group Attacks Proposed Research Commission Ban

September 17th, 2014

An influential advisory group to European securities regulators has come out strongly opposed to a potential ban on paying for investment research with client commissions.  When combined with the universally negative comments submitted by other constituencies, the prevailing opinion is that European regulators will pull back from a ban on research commissions.

Advisory Council

The Securities and Markets Stakeholder Group (SMSG) is an advisory group appointed by the European Securities and Markets Authority (ESMA), the European-wide regulatory authority whose members are the financial markets regulators in each of the 28 member states.  The SMSG is comprised of academics, consumers and financial institutions representing various securities market constituencies.  It is a frequent commenter on ESMA’s technical standards and guidelines, and is considered an impartial viewpoint.

The SMSG has submitted a 29-page comment letter on ESMA’s 500 page draft MiFID II regulation which focuses on a few key issues, one of which being investment research.  In no uncertain terms, the SMSG opposes the ESMA draft language impacting research: “We strongly advise ESMA to reconsider their stance by deleting the paragraph relating to investment research.”

Quibbles with intent

Partly the SMSG’s opposition is based on technical grounds.  It believes that the original MiFID II language was intended to address concerns about inducements paid to retail financial advisors, and that the application of the language to institutional investment research is a stretch:

“The SMSG completely disagrees with the qualification of research as an inducement, and does not even see it as being a non-monetary benefit. It notes that the Level 1 text never considered investment research as an inducement and logically never directed either the Commission or ESMA to work in this direction. Research is not an inducement for the distributor, but an additional service that is aimed for the benefit of the client.”

Policy arguments

The SMSG also cites policy reasons for dropping the proposed language.  It argues that small cap stock coverage will decline, that smaller asset managers will be disadvantaged, and that a ban on research commissions will create an unlevel playing field for European asset managers relative to US asset managers since the SEC is unlikely to follow suit.

From what we are hearing, the SMSG issues are similar to views held by other European regulators.  As we noted in the past, the Autorité des Marchés Financiers (AMF), the French securities regulator has publicly expressed concerns about adopting changes that would reduce the volume of research, which a research commission ban would certainly do.  The AMF also worried about the impact of a ban on French asset manager profit margins, and that smaller asset managers would be less able to afford research than larger managers, putting them at a competitive disadvantage.

Other voices

As we have previously noted, there is broad opposition to the proposed ESMA language banning research commission payments. There are over 200 comment letters on the ESMA website comprising an estimated 10,000 pages of text, much of it focused on the inducements language and most of that negative.  If the ‘heft test’ has any sway with ESMA, it will amend the draft language.

Even the independent research community opposes the ESMA language.  EuroIRP, the European trade association for independents, called the draft language a “dangerous compromise” that is sweeping enough to severely impact the research market but not broad enough to prevent loopholes that investment banking research could exploit.  Investorside, the US trade association for independents, expressed similar concerns.

Our take

There is a widespread rumor that the draft ESMA language pertaining to investment research was in fact drafted the UK Financial Conduct Authority (FCA).  Apparently ESMA delegated sections of the draft rules to various constituent regulators, and supposedly the FCA was assigned the inducements section.

According to the rumor, other European regulators, notably the German and French regulators, feel that the FCA co-opted the inducements language to its own ends.  If true, the language is likely to be amended because voting on the final language is based on each country’s GDP, giving Germany and France the deciding votes.

However, even if the MiFID II language is ultimately de-fanged, the unbundling issue doesn’t go away.  The FCA is on the warpath on this issue, and its latest regulation passed in May is already having a big impact.  Although it clearly hoped that it could ride the coattails of MiFID II, the FCA has already demonstrated its willingness to act unilaterally.

The next step is for ESMA to publish a consultation paper which is expected between December 2014 and March 2015, which will contain the next version of inducements rules.  This issue  will remain on the front burner for the foreseeable future.

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Stymied Insider Trading Case Shifts from Congress to Hedge Funds

September 15th, 2014

Last week, the Wall Street Journal reported that federal investigators have shifted the focus of an ongoing insider trading case from whether Congressional staffers tipped off a research firm about a pending healthcare policy change to what various hedge funds knew about this change prior to trading on the note the research firm provided them.

Background of the Case

On April 1, 2013 at 3:42 p.m., Height Securities, a Washington DC-based research firm, sent an e-mail alert to more than 150 buy-side clients predicting that the Centers for Medicare and Medicaid Services (CMS) would reverse a previous decision reducing the reimbursement rate for private insurance plans.  At 4:22 p.m. that day, after the U.S. stock market closed, CMS sent a news release announcing that it would restore the previously announced spending cuts.

According to e-mails and documents made public as part of the investigation, a CMS official with prior knowledge of this decision, spoke with Brian Sutter, a top congressional health-care aide, in the days before the CMS decision was announced.

Mr. Sutter, later spoke on the phone about the CMS decision with Mark Hayes, a lobbyist at Greenberg Traurig, who had previously worked for Height Securities. At 3:12 pm on April 1st, Mr. Hayes sent an e-mail to Mr. Justin Simon, a Height Securities healthcare analyst, saying that credible sources told him CMS would reverse its planned funding cuts for private health insurers.

Initial Investigation

At first, the Securities and Exchange Commission started its investigation by looking into whether anyone in the government had illegally leaked word of the announcement to Height Securities.  This prompted federal investigators to initially focus on what CMS officials told congressional aids like Brian Sutter, what Sutter told lobbyist Mark Hayes, and what Hayes told Height Securities analyst Justin Simon.

Unfortunately for the feds, one of the keys to their investigation, Congressional staffer Brian Sutter, refused to comply with an SEC subpoena to provide detailed records in this matter.  In June, the SEC filed a federal lawsuit seeking to force Mr. Sutter to turn over his communications records to investigators.  A federal judge is expected to rule on this case shortly.

As a result of this roadblock, the FBI and the SEC has been unable to move their insider trading investigation forward.

Changing Focus of the Probe

According to a WSJ article published last week, the SEC has recently shifted its attention to the more than 20 phone calls, e-mails and instant messages it has discovered which were made between Height Securities and a select group of its hedge fund clients between the time the research firm sent its e-mail alert out and when the stock markets closed.

The hedge funds that are part of this investigation include Citadel, LLC; SAC Capital Advisors (now called Point72 Asset Management LP); Viking Global Investors LP; and Visium Asset Management LLC.

While most of the hedge funds involved declined to comment on the report, a spokesperson for Citadel said the firm’s communication with Height Securities was part of their compliance process, “verifying information contained in what we understood to be a broadly disseminated email.”

It is not unusual, nor is it illegal, for buy-side investors to communicate with research analysts about what is included in their reports – particularly if they intend to trade on the report.  This communication has increased in the past few years as buy-side firms have enhanced their compliance practices to make sure they don’t trade on illicit information.  However, investors could be held accountable for violating insider-trading rules if they knew the information in a research report was obtained illegally.

What the Government Must Prove

To successfully prove that investors are involved in insider-trading, the SEC must prove that they knowingly traded on material nonpublic information that was obtained from a source in violation of a duty of trust or confidence.

Consequently, the government is trying to determine exactly what Height Securities customers learned from the research firm in their discussions after they received the research note and before they decided to trade on this information.

Justin Shur, a former federal prosecutor now with MoloLamken LLP, explained the legal threshold that the government faces, “To pursue charges against the trader, the government would need to prove that he knew or had reason to know that the original tipper breached a duty by disclosing the information.  Thus, figuring out what the trader knew about the source of the information is critical for prosecutors.”

As a result, the government must prove that the hedge funds under investigation traded on the Height Securities research note only after knowing that Sutter had obtained this information from a CMS official and had shared the facts that CMS was planning to reverse its previous reimbursement decision in breach of a duty.

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Wall Street Layoffs Shrink While Hiring Remains Weak

September 10th, 2014

Layoffs at Wall Street firms shrunk in August as the summer doldrums put a temporary halt to cost cutting efforts seen recently at many banks.  Unfortunately, weak cash equity volumes also kept a lid on hiring in August as most Wall Street firms don’t see a compelling reason to add to their payrolls anytime soon.

August Challenger, Gray & Christmas Report

According to Challenger, Gray & Christmas’ monthly Job Cuts Report released last week, the financial services industry announced a 38% drop in planned layoffs during August of 974 jobs from 1,580 layoffs announced in the previous month.  The decline in planned layoffs in August was also 68% lower than the number of layoffs announced in August of 2013.

Another sign that the Wall Street employment picture is starting to improve is that on a year-to-date basis, Wall Street firms have announced 43% fewer layoffs in 2014, or 24,032 layoffs, compared to 41,942 job reductions announced during the same period in 2013.

However, the employment picture on Wall Street isn’t particularly robust.  The number of new positions expected to be hired at financial services firms also fell 58% to 500 new positions in August from 1,200 new hires announced in the prior month.  This drop in planned hiring is consistent with year-to-date hiring plans at Wall Street firms which are 25% lower so far in 2014 when compared to the same period in 2013.

Market Conditions Remain Weak

As we reported last week, revenue at the top ten investment banks slipped 5% in the first half of 2014 due to weakness in their currency, fixed income and equities businesses.  In fact, revenue from these large investment banks’ equity-trading businesses declined 4% year over year to $21.6 billion, driven mainly by decline in derivatives.

As a result of the weakness seen in revenues so far this year, a number of investment banks, including Barclays, Deutsche Bank and UBS have all focused on cost cutting as a way to address shrinking margins.  This has particularly taken the form of lay-offs and pay cuts.  According to UK consulting firm, Coalition, the ten largest investment banks have reduced front office jobs by 4%, job cuts in the battered FICC division have totaled 9%.

Demand For Young Workers Picks Up

Despite weak financial market conditions, one bright spot has emerged in the Wall Street jobs picture – and that is increased demand for younger workers.

For example, Bank of America has reportedly hired close to 40% more full-time analysts and associates this year than last.  J.P. Morgan Chase is aiming to hire 10% more junior bankers than last year. Goldman Sachs’ 2014 class of interns is almost 9% higher this summer than last summer, while Barclays’ hired 20% more interns this year than in 2013.

There are a few reasons for this pick-up in hiring junior staff.  First, regular churn on Wall Street has depleted the ranks of junior analysts and associates as some have left to get higher degrees, others have left to join hedge funds or private equity firms, while others have left the business entirely.  Industry experts say that 30% to 40% of analysts at bulge bracket investment banks typically leave the street after a two year stint to move to the buy-side.

The second reason for the increased interest in hiring more junior staff is due to the strength seen in mergers and acquisition activity so far this year.  As is historically the case, Wall Street often over-hires when business picks up, only to over-fire when business slumps.

Impact for the Research Industry

So, what do these developments mean for the research industry?  We suspect that the continued weakness seen in most divisions, including cash equities, would lead one to conclude that most sell-side research departments will keep a lid on hiring.

We feel this even more strongly given the current uncertainty around what UK and European regulators will do regarding the topic of whether institutional investors will be allowed to continue using client commissions to pay for sell-side and independent research.  In our view, it is highly unlikely that many Wall Street firms will be hiring aggressively in their research divisions until they see what regulators decide regarding this issue.

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Position Paper Outlines Research Pricing

September 8th, 2014

The CFA Society of the UK has published a position paper which outlines approaches to valuing investment research.  The paper, which expands upon valuation techniques outlined UK regulators, seeks to help asset managers implement new regulatory guidelines.  Nevertheless, it is unclear how much asset managers will invest in procurement processes when the future of research procurement is in doubt.


The CFA Institute and the CFA Society of the UK co-sponsored a position paper authored by Frost Consulting entitled “Investment Research Valuation Approaches: A Framework and Guide for Investment Managers and Asset Owners.”  The paper, released last week, can be obtained by request via

The report was commissioned in response to new UK regulation which went into effect in July requiring asset managers in the UK to perform “fact-based analysis” to price research services.  The regulators proposed comparing unpriced bundled services to priced services such as independent research and/or estimating the cost to internally perform the service.  

The primary challenge facing asset managers is valuing unpriced investment bank research which has historically been bundled with execution payments.  In the past, payments to investment banks would increase as commission volumes increased, irrespective of whether the research was providing more value.  The UK Financial Conduct Authority is insisting that asset managers more proactively budget their research spending, as if the expense were coming out their own pockets rather than paid through client commissions.  [The FCA has also recently proposed eliminating altogether the ability to pay for research with client commissions.]

Top-down analysis

The CFA position paper offers a number of frameworks to help asset managers more intelligently ration their research usage.  Part of the analysis needs to be top-down considerations of how much research is truly needed.  One approach is to budget research consumption by sector and/or region.  If the asset manager or fund is most active in a defined set of sectors or regions, is waterfront coverage really essential?  The paper predicts that the purchase of waterfront coverage will be increasingly limited to fewer banks, a view we share.

Another important top-down consideration is which component products are important.  Investment bank research bundles a variety of services, including sales support, financial models, conferences and analyst access.  Are all products necessary from all providers used, or can the asset manager focus on those products of most value?  For example, the paper makes the point for analysts who use externally provided financial models the value of incremental models declines after the second or third model.  And for analysts who don’t use models why pay for them?

Broker voting

The paper highlights the limitations of the current broker vote process, which allocates commissions but doesn’t address the budgeting of research products.  Historically, a bank might reduce the services it provides the asset manager as a result of the commission levels allocated by a broker vote, but rarely have asset managers proactively reduced payments by limiting the services purchased.  Broker votes provide information about which services are used and/or valued internally, but they typically don’t provide budget discipline.


The CFA paper offers a few bottom-up valuation approaches, notably price benchmarking and cost analysis.  While the FCA encouraged comparisons to priced services such as independent research in its new guidelines, Frost Consulting has thoughtfully expanded the analysis to include other benchmarks such as outsourcing firms and management consultants.   Further, the analysis seeks to develop price benchmarks at the product level, including models, analyst access, etc.

Price benchmarks could also be developed at a sector or regional level primarily through comparisons with priced independent providers.  The purpose of developing price benchmarks is to use them in negotiating with investment banks to ensure that managers are not overpaying for bank research.

Cost-based analysis

In its guidelines, the FCA suggested that managers seek to estimate what it would cost them internally to perform the research service.  In the CFA paper, Frost Consulting seeks to develop a cost model for investment bank research.

The model seeks to develop a cost for sector-level research by starting with the cost of the analyst and adding to it the cost of the analytic support team, IT, overhead and a profit margin.  The cost is then tiered based on the service levels.  The largest portion of cost is allocated to service levels involving full analytical support, with lesser amounts allocated to tiers offering partial or no analyst contact.  Finally the costs are allocated over an assumed number of clients for each tier.  Full regional coverage of a sector would imply multiples of the single-sector cost.

Asset owners

In its guidelines, the FCA envisioned asset managers competing on the effectiveness of their commission management process, even though asset owners have evidenced little interest in monitoring commission spending.  (This may help to explain the FCA’s recent move to the more radical stance of banning research commissions.)

Nevertheless, the position paper has an extensive appendix designed to help asset owners understand the issues around research valuation.  The paper posits that discipline around research procurement may ultimately develop the research equivalent to Trade Cost Analysis (TCA).


The CFA paper is a thoughtful amplification of the FCA guidelines for research budgeting.  By offering a variety of approaches, the report seeks to help asset managers cope with the complexity of valuing and budgeting unpriced investment banking research.

Unfortunately, asset managers are so confused about the regulatory environment it is unclear how carefully they will heed the advice provided by the paper.  Six weeks after implementing its new guidelines requiring more rigorous budgeting for research, the FCA announced it was supporting a total ban on research commissions.

A ban is by no means certain since it depends on the interpretation of MiFID II language, which is still in progress.   Even if MiFID II leads to a ban, the implementation would not be until 2017, and in the meantime UK asset managers would have to abide by current FCA rules.

Nevertheless, we have heard from numerous sources that many UK managers are so uncertain about the regulatory environment they are reluctant to take on new services including priced independent research.  Hopefully the CFA position paper will help managers to develop FCA-compliant procurement processes and procurement will resume.  In the meantime, it seems that priced independent research is the victim of the new FCA guidelines, not unpriced bank research.

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Lower FICC Revenue Hits Top 10 Investment Banks

September 4th, 2014

Revenue at the top ten investment banks slipped 5% in the first half of 2014 due to weakness in their currency, fixed income and equities businesses which were partially offset by strength in commodities and M&A activity, according to a new report released recently.

Primary Areas of Weakness

According to a report published last week by UK consulting firm, Coalition, weak FICC revenue hit the world’s 10 largest investment banks depressing their 1st half revenue 5% to $82.3 bln from $86.8 bln during the same period last year.

Revenue from these banks’ fixed income, currency and commodities divisions fell 13% during the first six months of the year, primarily as a result of a massive 35% drop in currency trading revenue during the first half.

In addition, revenue from these large investment banks’ equity-trading businesses declined 4% year over year to $21.6 billion, driven mainly by decline in derivatives.

Weakness in these banks’ FICC divisions was a result of several challenges – including extremely low volatility in the financial markets, as well as government regulations mandating higher capital levels against risky assets. The lower returns from these liquid capital accounts have effectively depressed banks’ earnings.

A Few Strong Divisions

Fortunately, the world’s ten largest investment banks saw increased revenue from a few divisions, including commodities and mergers and acquisitions.

For example, commodities revenue surged 21% in the first half of this year when compared to the same period last year.  This was a result of a pickup in U.S. power and gas trading which benefited from the prolonged cold winter last year.  In addition, renewed investor interest in commodities helped buoy revenues in this segment.

Investment banking revenue also posted a 21% year-over-year increase due to a rebound in M&A activity and a surge in IPOs so far in 2014.  M&A volumes reached their highest level in seven years during the six months ending June 30th, 2014, while equity capital markets activity rose 16% in the first half.

How The Banks Are Responding

As a result of the overall weakness seen in revenues so far this year, a number of investment banks, including Barclays, Deutsche Bank and UBS have all focused on cost cutting as a way to address shrinking margins.

This has particularly taken the form of lay-offs and pay cuts.  According to Coalition’s research, the ten largest investment banks have reduced front office jobs by 4%, job cuts in the battered FICC division have totaled 9%.

The continued weakness in revenues has prompted some banks to rethink their strategies.  Coalition explains that “…only a handful of market leaders remain committed to a ‘complete’ service’, while the other banks have refocused their strategies around client, product and regional strengths”.

2014 Full Year Forecast

Despite, the 5% decline seen in the first half of the year, Coalition expects a slight uptick in the second half of 2014, leading to a modest 2% revenue decline to $150.7 bln in overall revenue for the top ten investment banks for the whole year.

Coalition estimates that FICC revenues will post a 9% decline to $67.4 billion in 2014 from $73.9 billion seen in 2013.  Equities trading revenue is projected to slip 2% in 2014 to $40.3 billion.  Investment banking revenue, on the other hand, is expected to rise 13% in 2014.

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A Perspective on the Varied Responses to a Potential Ban

September 2nd, 2014

The following is a guest article summarizing reactions to the UK Financial Conduct Authority’s discussion paper calling for a ban on research commissions authored by Chris Turnbull, co-founder of Edinburgh-based Electronic Research Interchange (ERIC), an online marketplace for investment research.

Investment banks, brokers, independent research providers and asset managers all have different research agendas. For most, the research business model isn’t broken and shouldn’t be tampered with. The issue that is being overlooked by some, however, is that the UK regulators gave the industry free reign to self-regulate as long ago as 2006, and to all intents and purposes the industry has carried on down a path of self-interest, albeit with the opinion that the best interests of the end investor were being protected.

The industry adapted quickly to changes in trading technology with algorithms and internalisation showing that trades could be executed at a lower cost and more efficiently. This sped up the first wave of unbundling. It was apparent to all that execution could not justifiably be linked to research service. For the most part asset managers complied but there did remain some asset managers who carried on with dated processes. The water may have been muddied by the fact that fund managers with operations in various jurisdictions had different regulatory edicts to follow.

So we are now at a point where the industry can see that change is going to happen. The UK Financial Conduct Authority are not for turning and that coupled with the European Securities and Markets Authority’s stance as MiFID II approaches only  suggests that all should prepare for a brave new world rather than trying to stand in the way of the steamroller.

Business models across the industry are varied. Each asset manager has a different approach to research. Some are heavily reliant on, and pay a great deal for research and some able to take their research spend on to their own balance sheet.

Having spoken to a number of different interested parties, we can see that the arguments on all sides hold merit.

Some investment banks/brokers are well placed to proceed with menu pricing while others have concerns around their ability to price their product correctly.  There are some research providers that are explicitly pricing their research on their own websites at an individual report level however.

It’s a fine balance of keeping everyone happy. For those that currently ‘rebundle’, analysts may become more aware of how valuable their time is. Management will no doubt make them aware however that the infrastructure around them helps add to that value.

Investment banks and brokers take an approach of producing more research than is probably required but this helps provide fund managers with many different sources of research which  can lead to that stellar idea, generating performance for the end client. If an asset manager must pay for the research before it is consumed then such a moment might be missed.

Asset managers appreciate this. They do not see this point as an opportunity to drastically cut their research commission, rather they see this as a time to properly value and measure the commission consumed and reward it accordingly.

Some independent research providers (IRPs) have made the point that their asset manager clients are unsure of the future and have slowed payments. Asset managers fearful of research becoming a cost to the business rather than a cost to the client are clearly starting to monitor closely what they are paying for and why.  IRPs are used to having to scrap for every bit of commission they get, keeping costs to a minimum with the focus on the research, so lean times will not cast a shadow on their resolve. Becoming independent shows a belief in their product. The issue is getting the message across to asset managers in numbers.

The views of asset managers appear disparate but one side effect mentioned will be an ‘upscaling’ of the trading desk at firms where less resource has been pushed in that direction in the past. In some asset management firms, the influence of the fund manager on where to trade remains an implicit if not explicit factor. With fund managers ambivalent about where they trade, will there be a sharper focus on execution costs?

Chris Turnbull manages the Electronic Research Interchange (ERIC) which is a free marketplace where the sellers and buyers of substantive research meet. As services for investment managers are unbundled from broking commissions ERIC provides a transparent marketplace where these services can be sold and purchased.  Chris was previously an Investment Director at Standard Life Investments  and has worked latterly at Instinet and at ICAP BlockCross.

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Evalueserve Acquires Data Consultancy

August 27th, 2014

Evalueserve, a leading Indian KPO firm, has acquired Germany-based data consultancy Beyond Data GmbH, for an undisclosed amount.   The acquisition positions Evalueserve for big data projects with clients.

Beyond Data was founded in 2008 and specializes in developing and operating  business intelligence solutions, data management, data warehousing, and other IT functions.  Evalueserve intends to use Beyond Data to develop cloud based business intelligence platforms in the marketing intelligence, procurement, and pharmaceutical  domains, which are the hottest big data sectors.

BeyondData will remain separately branded and its headquarters will remain in Rheinbach, near Cologne.  Its current management structure will remain unchanged.
Our take
The acquisition is a savvy move by Evalueserve allowing it to participate in the growing wave of big data applications, as retail firms mine their own marketing data and find ways to monetize the data by licensing portions to the financial sector.
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iSentium Launches Sentiment Search Engine on Bloomberg

August 25th, 2014

Last week, social media analytics vendor, iSentium, announced the launch of its completely revamped iSENSE application on the Bloomberg terminal to enable investment professionals to access real-time market sentiment from Twitter.

New iSense Release

In October 2013, Bloomberg initially released the iSense application on its market data terminal developed by the social media analytics company, iSentium. The iSense app generated sentiment signals that are predictive of short and medium term price movements for over 2,500 US stocks.  Users of the initial iSense app could view a stock chart with an overlay of bullish and bearish sentiment indicators.

However, last week, iSentium released its newest version of the iSense App which transforms over 50 million Twitter messages per hour into a real-time sentiment time series which can be viewed as a histogram alongside market prices.  The new iSense App is effectively a sentiment search engine which provides investors with a quick way to judge the potential market impact of a tweet, a news article, or other buzz discussed on social media.

iSentium Chairman and CEO Gautham Sastri explained his company’s mission, “The amount of content today is of galactic proportion.  The rate that people transmit information about themselves is exploding. The most valuable signals are the ones covered with the maximum amount of noise. Events don’t generate alpha, it’s the background of buzz that needs to be mined.”

Background on iSentium

Founded in 2008, Miami-based iSentium, LLC is a social media analytics provider which has developed an internet sentiment signal extraction system that continuously ingests market-related Twitter messages and generates sentiment signals that are predictive of short and medium term price movements of stocks, ETFs, commodities, and indices.

iSentium’s proprietary language-processing technology analyzes Tweets or other short messages with an extremely high degree of accuracy at rates exceeding 50 million messages per hour.  iSentium provides access to its technology via an API, web-based application, or Bloomberg App to hedge funds, financial institutions, and other professional traders.

Since its initial launch on Bloomberg, iSentium has gained considerable traction with financial services clients, with over 60 institutions either paying for or testing iSentium’s iSense platform.

Recent Company Breakthoughs

Besides its recent new launch, iSentium has experienced a number of breakthroughs in its business.  A few of these include:

Patents: In the past few years, iSentium has applied for and received a variety of patents around their technology processes.  One of the broadest patents they have received is for the extraction of sentiment data from social media messages for publicly traded assets.

Venture Investment: In December 2013, iSentium closed a $1.3 mln investment round from a group of venture investors, including a few former Wall Street executives.

Expanding Staff: Since raising capital, iSentium has been adding depth to its management team by hiring a Director of Sales and Senior Vice President of Linguisitics.  Rumor has it that the firm is near to landing an experienced Wall Street veteran to bolster its management ranks.

Integrity’s Take

As we have mentioned recently, Wall Street’s interest in crowd sourcing, big data, and social media analytics has been growing at a rapid clip over the past eighteen months.  We have heard from both data and analytics firms and from buy-side customers that this increased interest has started to translate into real business.

However, iSentium plays in a crowded space with competition coming from a number of firms like Social Market Analytics, Market Prophit, Eagle Alpha, and Social Alpha, to name just a few.  Fortunately, iSentium’s unique technology (as reflected by their patents), their growing management depth, and their visibility on Bloomberg have all enabled the firm to gain traction in a crowded field.  Consequently, we suspect that if iSentium can continue on its current course, it is positioned to be one of successful providers in the social media analytics business.

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