Trade Ideas Programs Set to Expand According to TABB


Alpha capture business, already significant in Europe, is likely to increase further according to a new TABB report which expects more use by fundamental firms and beyond Europe.

TABB argues that alpha capture, in which brokers send high conviction trading ideas to quantitative funds, is being embraced by upper management at large brokerage firms, and these firms are working to institutionalize alpha capture throughout the business.

As we have reported previously [subscription required], new European Market Abuse Regulations (MAR) require salespeople and sales traders to disclose their 12-month stock recommendation histories, similar to research analysts.  This is forcing brokers to become more systematic in tracking sales activity.  If they have to document sales recommendations anyway, why not feed them into alpha capture programs?

The concept for alpha capture was pioneered by UK hedge fund Marshall Wace which directed the bulk of its trading commissions to brokerages providing the best-performing trade ideas.   Other quant funds have followed suit, such as Two Sigma which has a dozen staff focused on collecting alpha capture data from brokers.

TABB acknowledges that the majority of alpha capture clients are quant funds, but argues “there is significant room for growth by fundamental firms”.  A recent report [subscription required] by two market structure analysts (sponsored by an alpha capture platform provider) predicts that individual stock research will become less valuable as data becomes increasingly critical for fundamental firms embracing more quantitative techniques.

TABB Group estimates that alpha capture represents approximately 4.8% of the commission pie globally.  Over the next five years, TABB expects commission share to grow, driven by the expanding opportunities for alpha capture in new regions, as well as new clients.

TABB’s report, “The Evolving Role of Alpha Capture: Technology Matures and Opportunities Expand” was authored by analysts Valerie Bogard and Kerry Massaro.

Our Take

TABB has been a long-term bull on alpha capture.  In 2011, estimated the size of the pool earmarked for electronic trade ideas / alpha capture at $300 million to $500 million, with projected growth “in the range of 20% to 30% in incremental revenues globally for the next several years”.

Its current estimate of alpha capture revenue estimate of 4.8% of global commissions puts alpha capture commissions north of $1 billion globally, which is a surprisingly large number at first glance.  However, many quant funds have large alpha capture components, so the aggregate payments could sum to TABB’s estimate.

A decade ago, as quant funds were scaling their alpha capture programs, a number of third party platforms were launched seeking to facilitate the collection and distribution of trade ideas.  Only a few have survived, with TIM Group, Bloomberg and FactSet being the main third party alpha capture platforms left.  (Might we see a similar evolution of the dozen or so research distribution platforms out there?)

The reality for the third party platforms is that many of the quant funds and brokers use internal systems.  Nevertheless, with alpha capture representing a large and –according to TABB – growing share of commissions there is additional upside.  [See related commentary from TIM Group on the TABB report.]


About Author

Sandy Bragg is a principal at Integrity Research Associates. He has over thirty years experience as an investment research professional. Prior to joining Integrity in 2006, he was an Executive Managing Director at Standard & Poors, managing S&P’s equity research business and fund information properties. Sandy has an MBA from New York University and BA from Williams College. Email:

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