As we start Q3, it seems like the idea of a ‘quiet summer’ is now a thing of the past in capital markets. The industry keeps moving ahead at an accelerating pace, and getting more and more interesting. I feel privileged to have the position I do, and see these changes happening from a front row seat (and get the chance to share my 2 cents on what they mean!)

If you’ve read my past notes, back on June 14th I mentioned that we’re going to see more consolidation in capital markets technology. A lot of the ‘new models’ that were going to be enabled by MiFID II and other regulatory changes are now falling down. I specifically called out all the ‘independent research marketplaces’:

Recently, Liquidnet announced it purchased ResearchExchange from the UK. I expect we’re going to see a lot more acquihires in this space as some of the larger players look to take a swing at the marketplace model in a cheap way (I personally doubt they will see any more success, but we’ll see!)

Fundamentally, I just don’t think that’s how the buy-side buys research – on an article by article, or page by page basis. Research is how you market the writer’s mind (for analyst access), and how you tell a company’s story (for banking and deals). Yes, there is value, but most of it is behind the report. That, plus you don’t know how valuable a report is going to be until after you read it – so how can you pay before?

Now, an interesting alternative model is emerging. For all of those who remember, there have been repeated attempts over the last 20+ years to drive “corporate sponsored research” – the idea is that a company can pay an independent firm to write research about them if they are under covered. The model never really took off (there were major concerns about conflicts of interest), but it’s paved the way for something else which has largely gone unnoticed but might just be starting to emerge: “exchange sponsored research”

Just last week, the Singapore Stock Exchange (SGX) announced a strategic investment in SmartKarma, one of the big ‘research marketplace’ players, but based in Asia. SK’s model is slightly different than the others out there – instead of being a marketplace for existing research providers, they went to the other end of the market – individual research providers. On a ‘Netflix style’ model (flat monthly fee) a subscriber gets access to most or all of the providers. Their monthly fee is then allocated based on their readership allocation.

Now don’t get me wrong, I think their fundamental business model is broken for a number of reasons (it’s not how the buy side buys, it creates a new destination (no one wants to leave Outlook), etc.) but it’s interesting to see that they’ve found someone who the model does work for: Exchanges.

Exchanges have been getting more and more aggressive about pursuing alternative revenue streams. They’ve already pushed hard into the corporate services – such as hosting their IR website, distributing quarterly releases, etc. (NASDAQ is a big player here). Now they’re starting to explore corporate access and event management (they already know the corporates). Now, it looks like they’re starting to explore research publishing and distribution. A quote from the article by SGX themselves:

Exchanges the world over are trying to diversify their services and exploring ways to bring more value to their companies.

Let me pose a final question: if a Brokerage provides research coverage as part of their banking services, is it that strange for an Exchange to provide research coverage as part of their listing services?

You can read the press release here:

https://finance.yahoo.com/news/smartkarma-announces-strategic-investment-sgx-003000064.html

Also, after we heard a lot about the buy side starting their own corporate access initiative (reported by the WSJ) it seems that some of the firms mentioned are trying to calm the waters. I look at it as the old baseball analogy of ‘trying to steal second with your foot on first’ – there’s a little bit of “yeah, we’re supporting this initiative to bring corporate access in house with our peers, but we also don’t want to be cut out of the sell side corporate access circuit” – the full quote from T Rowe specifically is:

‘Recent press reports have suggested that big investment firms, including T Rowe Price, plan to discontinue the long-standing practice of [using] Wall Street firms for access to companies in which we invest. In fact, T Rowe Price continues to find value in the access to corporate leaders that Wall Street has facilitated over many years.

‘To best meet our investors’ needs and better serve our clients, we are supplementing that practice by joining with other major asset management firms to plan separate corporate access events that will provide a unique and tailored research experience for our company’s investors. As a fundamental investment research firm, in-depth meetings with company management teams continue to be integral to our investment process and to our ability to make informed investment decisions on behalf of our clients.’

You can read the full article here: https://www.irmagazine.com/corporate-access/t-rowe-price-commits-using-banks-corporate-access

Lots of change is underway, and it looks like it’s going to be a busy summer!
– Blair Livingston, CEO, Street Contxt