Last week, following a number of meetings in New York and London, we identified a number of ways that various investment banks are enhancing and differentiating their research products in a post MiFID II environment.
Commercializing Innovations a By-product of MiFID II
Historically, sell-side investment banks have found it difficult to get paid for innovating with their research products due to bundled commission payments. Buy-side clients have often not wanted to pay more for new research products, feeling they were paying enough for sell-side research due to the volume of executions they directed to them. However, this doesn’t mean that firms haven’t tried to innovate.
Over the past few decades, investment banks have provided clients with access to special channel check and other survey data; one-on-one calls or meetings with experts; forensic accounting research; quantitative research, and custom research projects. Unfortunately, most banks couldn’t commercialize these research enhancements for the reason discussed above.
Interestingly, over the years a number of boutique firms have successfully sprung up to offer these specialized research services, charging buy-side clients hard dollars, soft dollars, or in some cases bundled commissions to pay for them. This has given rise to a robust independent research industry – particularly in the US.
With the implementation of MiFID II, times have changed as EU regulators have mandated that asset managers pay for the research they receive. These rule changes have enabled investment banks to charge discreet prices for product innovations. However, the nascent marketplace for research created by MiFID II has also forced investment banks to actively try to differentiate their research offerings in order to maximize buy-side payments for their research services.
In recent years, a number of IRPs and investment banks have adopted various types of technology to lower the cost of producing research, as well as enhancing their research offerings.
In 2018, German bank Commerzbank announced that it was working with FinTech firm Retresco to leverage artificial intelligence to automatically write basic analyst notes. Morgan Stanley is also reportedly trying to use machine-learning software to draft maintenance research, which analysts would review and add their own brief commentary.
Alternative data firm Prattle and UBS have adopted NLP and machine learning to quickly analyze corporate and analyst sentiment evident in earnings calls and other corporate communications. Consequently, clients can receive machine produced analysis much quicker and cheaper than having human analysts produce this insight.
Morgan Stanley has begun offering “machine-read analyst sentiment” (MRAS), a data set derived from 40,000 of the firm’s analyst reports. The bank released a report indicating that the sentiment scores were most valuable when analysts’ views contrasted with market sentiment.
Integrating Alternative Data
One popular sell-side innovation strategy to differentiate their research offerings includes the collection and integration of alternative data into their product.
UBS, one of the earliest and biggest investors in alternative data, spun out Evidence Lab from its research unit, implementing an enterprise subscription fee for access to its data and analysis. It is interesting to note that in the past few years buy-side clients have cited UBS’ integration of alternative data as one reason its sell-side research is so highly regarded.
US investment bank, Cowen & Co. was the first bank to set up a distinct alternative data unit (UBS followed soon after), making it the first to proactively market access to geospatial measurements of crude oil inventories and Cowen’s proprietary consumer surveys as a standalone subscription service through its new Kyber Data Science subsidiary.
Bank of America Merrill Lynch launched its own alternative data unit, BAML Data Analytics, in November 2018 to develop proprietary surveys, indicators, and trackers. Initial data sources included social media, custom surveys and third-party data sets. The unit reports into the head of BofA Merrill Lynch Global Research, Candace Browning, and collaborates with the firm’s analysts, supporting their research.
RBC Capital Markets’ also launched its own data science and alternative data group called RBC Elements. One of the group’s first initiatives was establishing a relationship with geospatial data firm Orbital Insights to leverage its consumer and energy data.
Other sell-side firms including Barclays, JP Morgan and Citigroup have also started investing in and launched their own alternative data initiatives in an effort to enhance their research offerings.
In 2017, independent research boutique Consumer Edge Research launched its own alternative data unit called CE Insight. The firm partnered with Prosper Insights and Analytics to market US and Chinese consumer data, rolled out its own credit/debit card transaction product, and partnered with Advan Research to add geolocation data to its credit card transaction data for over 200 companies.
Guidepoint Global LLC, the second largest US-based expert network, launched a new alternative data product line branded Guidepoint Qsight. Guidepoint remains the only expert network to embrace alternative data.
Some sell-side firms have chosen to differentiate their research products by focusing on specific areas their peers have given less attention to. For example, many regional or boutique investment banks have decided to focus on providing research coverage of mid and small cap companies, while others focus on specific geographic regions (Emerging Asia or Emerging Europe).
One type of coverage that investment banks have traditionally dominated is providing ESG research. However, as investors have shown an increased interest in ESG issues, a few investment banks have decided to commit even further resources to provide unique ESG coverage. One such bank is HSBC, who in 2018 announced that ESG had become a key bank priority. This follows a move in 2015, when the bank added social and governance coverage to its climate change analysis, enabling the bank to rank first in the 2016 Extel Rankings for Integrated Climate Change analysis; second for SRI & sustainability; and third for corporate governance research.
Another way some investment banks have chosen to differentiate their research offering in a post MiFID II world is by focusing on covering stocks that few others cover. One such bank is US investment bank Jefferies Group.
While the bank provides research coverage on more than 2,000 companies globally, over 300 of these stocks are uncovered by other global investment banks. Consequently, buy-side clients interested in investing in these companies need to interact with Jefferies to receive access to its research.
The extensive changes brought on by MiFID II have altered the global research landscape in profound ways. One of the most interesting aspects of this change has been how MiFID II has made innovation of the research product commercially viable for the sell-side, as well as encouraging firms to focus on clearly differentiating their research offerings.
While we have identified a number of ways investment banks are currently innovating and differentiating their research products, the big question is what approach should a firm take? Ultimately, the answer depends on a few factors including, 1) what does your client value most; 2) what expertise and/or skill set does your firm have; 3) what kind of resources does the firm have to meet the changing demands of your buy-side clients; and, 4) what market gaps exist which will enable you to create a truly differentiated research product.