New York, NY – According to London-based “alpha capture” system vendor youDevise Ltd, buy-side investors are now paying brokers and other third-party research providers in excess of $500 million per year in equity commissions for targeted “trade ideas”. This represents annual growth of close to 50% per year since 2006.
Historically, mutual funds, hedge funds, and pension funds paid brokers bundled equity commissions to compensate them for trade execution, as well as to reward them for their equity research reports, calls with their analysts, access to conferences and other meetings with company management, and other advisory services provided by their brokers.
In the past few years a growing number of institutional investors have been tracking the investment ideas provided by their institutional salespeople, and rewarding those salespeople and their respective brokerage firms with commission payments based on the quantitative performance of those ideas.
While some investors have built these tools internally (like Marshall Wace), third-party “alpha capture” systems have made it possible for a wide range of buy-side investors to track and reward brokers for the most profitable trade ideas they provide. Some of these systems include youDevise’s “Trade Idea Monitor”, FactSet’s “Alpha Network”, and First Coverage’s “The Community”.
Based on youDevise’s Trade Idea Monitor, they received 43,278 new open and closed ideas during the month of June 2009, with the percentage of new short ideas at 34.1% versus 37.6% in May 2009 and 39.0% in June 2008. June 2009’s short percentage is the lowest since January 2008’s 36.0%. As of July 9, 2009, the short percentage has risen to 36.97%. Total open and closed ideas at June 30, 2009 were 621,339, up 5% from the preceding month and up 162% year over year.
The following is the full text of a Press Release recently published by youDevise which discusses their estimate of the global trade ideas market in more details.
youDevise Estimates Market for Equity Trade Ideas Generates More Than $500 Million Annually
The global market for equity trade ideas in terms of commission paid has surpassed $500 million and has been growing at a 50% compound annual rate since 2006, when it totaled $220 million, according to a survey conducted by financial technology vendor youDevise Limited.
youDevise estimates that its Trade Idea Monitor (TIM) distributes and evaluates ideas that generate about $300 million, or 60% of these commissions, with the balance of the market divided between proprietary and other third party vendor platforms.
“Trade ideas are one of the only growing commission segments and are now a meaningful part of commissions paid to brokerage firms for services other than trade execution,” said Colin Berthoud, founding partner of youDevise and co-developer of the TIM.
The data was derived from the TIM’s 511 clients, consisting of more than 350 institutional brokerage firms and 150 hedge and quant funds and more traditional investment managers, including many of the largest investment banking and money management firms in the world.
Institutional brokers use the TIM (also known as an alpha capture system) to send trade ideas to their clients, who, in turn, use it to manage and evaluate idea performance. Trade ideas synthesize all of a brokerage firm’s knowledge and research about a stock into a buy or sell recommendation tailored specifically for the client to whom it is sent.
Mr. Berthoud said the TIM’s rapid growth is being driven by its ability to measure the actual alpha generated by each idea. More than 65% of TIM idea contributors beat their regional index in 2008. This contrasts with traditional buy side opinion surveys for measuring the qualitative value of brokerage research.
“Trade ideas are the hard edge of what institutional brokers are telling their clients,” said Mr. Berthoud. “As a result, alpha capture systems are moving from being a specialized product to a must-have tool for generating better returns for the buy side and more commissions for the sell side. This has contributed to 50% compound growth in our client base over the past 24 months.”
youDevise also released TIM statistics for June 2009. New open and closed ideas totaled 43,278, with the percentage of new short ideas at 34.1% versus 37.6% in May 2009 and 39.0% in June 2008. June 2009’s short percentage is the lowest since January 2008’s 36.0%. As of July 9, 2009, the short percentage has risen to 36.97%. Total open and closed ideas at June 30, 2009 were 621,339, up 5% from the preceding month and up 162% year over year.
About youDevise Limited: youDevise Limited (www.youDevise.com) provides easy to use web-based technology that is transforming institutional financial markets worldwide.
Colin Berthoud, Founding Partner
+44 (20) 7826-4302
Anreder & Company
Michael Shallo, 212-532-3232