This week, OpenExchange announced that they would be acquiring Nucleus 195. For those of you who don’t know Nucleus 195, the platform was launched in 2018 by former Auerbach Grayson executives, hoping to capitalize on the unbundling that came with MiFID II. They weren’t the only ones who thought that was the future for the markets: dozens of other platforms launched as research would now have to be ‘purchased’ and a ‘netflix of research’ was the analogy of the day (we even ran some experiments around the idea at Street Contxt, but shut the idea down quickly once we realized how infeasible it was, for the reasons listed below).
They were also a close competitor to RSRCHXchange in Europe, who was bought last year by Liquidnet. Nucleus is one of the last (if not the last?) Research Marketplaces standing, and with its acquisition, I believe we can call the experiment over, and Research Marketplace officially ‘dead.’
Why did they fail though? Wasn’t this essentially the legislated future with MiFID II rules? Isn’t it a better client experience? Doesn’t it provide price transparency?
All of those questions have good answers.
First, let’s talk about the client (buy side) experience. As a client, the last thing you want is another portal/location to go and find content that isn’t your inbox. You already have an extraordinary amount of content being fed directly to you via email (I’m talking about thousands of emails a day), why would you need (or want) yet another location to go and find content? The best comparable here is broker portals.
Brokers (including the largest firms in the world) already have a hard time getting clients to access their portal (its single source information, requires another login/username, etc), and those brokers have existing relationships, plus a much larger variety of content (not just reports, but events, analyst calls, etc.). If the largest brokerages in the world are facing those challenges, what chance does a ‘portal’ that has a limited variety of content sources and a limited scope of content, where you have to explicitly purchase everything, stand?
Second, the purchasing process was backwards. These research marketplaces required clients to ‘buy’ reports before consuming/reading them. That makes it hard, as you won’t know how valuable a particular report is until you actually read it.
Third, unbundling might not have been as micro as anyone predicted. Pundits thought it would get down to paying on a per report (and sometimes on a per page) basis, but that seems like it will never happen. Most purchases in the world are aggregated, and it seems like capital markets will be similar. After all, you don’t buy a car one valve or screw at a time – you’re paying for the finished product. Research will likely be just as holistic: you’re not buying a report, you’re paying for holistic access to the analyst for calls, meetings, flow, corporate access, etc.
Fourth, the economics are terrible in these businesses. One more time, let me say they are terrible. While there is no data on Nucleus, there is data on RSRCHXchange: over the fifteen-month period from October 2018 through December 2019, RSRCHXchange’s revenues totaled £23,109 ($31,469), according to Companies House filings. On the expense side, operating losses were £1,966,342 ($2,677,662) for the fifteen-month period ending December 2019.
The model was to take a percentage of sales as a commission. That is one time, transactional revenue. Spending almost $3 million over a period to generate $30K in revenue is terrible.
Finally, no portal can ever compete with Outlook. The email inbox is already the destination for all push content, so the idea that a client is going to go pull content is already rare, and the idea that they go to a platform where they have to pay for everything puts research marketplaces at the bottom of the list. Essentially they are going after clients who would have to go through their inbox, then Bloomberg, then to all the broker portals, then, and only then, they might eventually get to a marketplace.
I will provide one caveat: there are some research marketplaces that are thriving by selling to other segments. There are platforms selling street research to corporates, and there is likely an equivalent or larger opportunity to sell research to retail investors (assuming you can reach some scale that makes the compliance/administrative work economical). There are audiences that marketplaces may work for, but the buy side likely isn’t one.
So, Research Marketplaces are likely dead. Spurred on by MiFID II, the model has been tried (again), and failed (again). A combination of poor experience, broken pricing/economics, and competition with existing platforms (i.e. email) doomed them from the start.
But have no fear, I’m sure someone will give it a try again in 3-5 years. Maybe just in time for MiFID III?