Research Goes to Primary School


New York – The results of a recent Cogent Consulting LLC Survey supports the view that the research industry is tilting away from traditional report-based information and towards information closer to the source. This includes management access, expert networks, Access to analysts, Trading ideas and custom research (primary research, such as channel checks and survey work).

With the business model for traditional sell-side research under fire, buy-side institutions have revised their requirements to include only real value-added information for making specific stock and portfolio decisions. Primary research can potentially provide a much better investment decision set for two reasons: 1) the information is directly from those closest to the sector or company and; 2) the information may not be widely available in the market. As well, the buy-side is increasing its own internal research capabilities through hiring analysts.

Sell-side institutions too have revised their approaches, with some beefing up their traditional research model:

  • some are adding additional services to increase the attractiveness of transacting with that particular broker, and
  • some are developing research platforms to help distribute and track research expenditure and add value to the platform

While the Business Wire article is focused of the research industry (see link below), the main focus of the sell-side is really to maintain or increase execution though their trading desks. It is clear that the overall U.S. commission pool is shrinking and that the prime broker will need to do more to capture trade flow and commissions.

One example of this is the “hedge fund hotel” concept that has being developed. By some estimates, hedge funds account for about 30% of the transactions of the brokerage community. As such, one way to increase trade flow in the future is to foster and incubate hedge funds within the auspices of the prime broker. Incubation could include supplying nascent hedge funds with office space, computer systems, market data, etc. with the understanding that the hedge funds will trade through the broker. Once (if) the hedge fund gets traction, the commission flow that it generates will hopefully be stable and substantial.

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