SEC Sweeps Alpha Capture Platforms


New York – The U.S. Securities and Exchange Commission has conducted a series of ‘sweeps’ focusing on ‘alpha capture’ platforms, according to a panelist at the recent Investorside Members’ Day conference.  No regulatory actions have surfaced at this point, but the sweeps signal regulatory scrutiny of the topic of selective research disclosure.

After the Wall Street Journal ran a front page article highlighting Goldman Sach’s ‘trading huddles’ which shared trading ‘ideas’ with selected clients in August 2009, regulators began seeking instances where unpublished research opinions or trading ideas were disclosed to non-research employees or clients.

‘Alpha capture’ platforms solicit ‘best ideas’ from brokerage firms and independent research firms.  The platforms track the performance of each trading idea and how successful the sources of the ideas have been in the past.  The concept originated with London-based hedge fund Marshall Wace, and implemented by other hedge funds such as Two Sigma.  Alpha capture platforms have been commercialized by firms like YouDevise, First Coverage, and FactSet, which seek to scale the platforms to a broader set of asset manager clients.

According to Stephanie Nicolas, a partner at Wilmer Hale, the SEC has been conducted a series of sweeps of alpha capture platforms.  In remarks during a panel on regulatory issues at the Investorside Research Association Members’ Day conference, Nicolas indicated that the information requests apparently originated from the Enforcement division.  It is not clear whether any enforcement actions are being taken, or whether the focus has been on hedge funds such as Marshall Wace which have set up proprietary alpha capture systems or commercialized versions such as YouDevise and First Coverage.

Separately, we reported last month on a proposed merger of YouDevise and First Coverage.

The ‘best ideas’ of the alpha capture platforms are typically maintained by research salespeople rather than research analysts, at least for the brokerage firms.   So long as research salespeople do not receive access to research ideas before they are broadly distributed, this which is perfectly legitimate.

Regulatory concerns arise only if there is selective distribution of ‘best ideas’ to ‘best clients’, and not to all clients simultaneously.  However, to be a ‘best client’ you have to generate large commissions, and we doubt that YouDevise or First Coverage have attained the commission clout to make it into the trading huddle elite.



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