New Startups Aim to Be the EBays for Market Researchby
Online research marketplaces emerge ahead of MiFID II rules
Marketplaces may be a $2.4 billion opportunity by 2025
Shopping for stock market insights is poised to become as seamless as buying a purse on eBay Inc.
Or so hopes a slew of startups. As asset managers prepare for new European rules that will put more distance between analysts and investment banks, online research marketplaces are emerging as a way to price and sell investment ideas. The so-called ORMs may be looking at a $2.4 billion opportunity by 2025, making up 30 percent of global research spending, according to Quinlan & Associates’ Benjamin Quinlan.
“While still in their infancy, we see ORMs becoming the dominant platforms for content sourcing and distribution in years to come,” Quinlan wrote in a report, drawing parallels with shopping website EBay and travel site Expedia Inc. Growth will be driven by the increasing influence of independent research, as well as buy-side demands for a one-stop shop for content, Quinlan said.
Bloomberg LP, the parent of Bloomberg News, distributes analyst reports and competes with other research aggregators.
Many of the new purveyors plan to run analyst reports through electronic auctions, by now a time-tested tool on the Internet for price discovery. If banks figure out their own proprietary portals, the startups might be in trouble. But for now, they’re betting that the need for a streamlined approach to buying, selling and managing research will pay off.
“It’s EBay, it’s getting stuff up on the site,” said Russell Napier, a former CLSA strategist who in 2014 co-founded a research marketplace called ERIC, where analysts post their work and decide whether to sell for a firm price or await private bids.“The quality is up to the market. The market will decide and will pay the price or not pay the price.”
The trick is that selling research online is different from selling other stuff. If you’re trying to find buyers for a purse, for instance, nothing prevents you from showing the product to everyone. With analyst reports, you can’t. A seller wants to convey that her ideas are new and worth paying for, but not give away the ideas themselves.
On Napier’s site, which has 116 research providers and 1,130 buy-side customers and takes a 5 percent cut on sales, someone considering a purchase is given a summary teaser for each report that can be as short or long as the seller wants. Analysts may also give out free samples, to establish themselves with clients. The platform takes no opinion on the quality of the research itself, other than to bar reports aimed at retail investors.
What’s it Worth?
Other ORMs are developing software to measure how much analyst ideas are worth. Paris-based Alphametry, which has 509 members, charges for a range of tools which aim to help clients assess the value of analysts’ work, manage their research consumption and ensure compliance with MiFID rules. London-based Alpha Exchange, meanwhile, runs a two-pronged approach, charging commissions on deals as well as selling a range of tools for asset managers.
“Selling research is not just about sticking a price on a document” and the key question for clients is how to value it, Alpha Exchange co-founder Scott Winship said in an interview, noting that many asset managers prefer to subscribe to tailored packages instead of paying per report. A number of large investment banks provide research on the platform, Winship said. He declined to name the banks.
Purveyors of the matching services sense a gold rush in the new rules known as MiFID II, which will stop fund managers from paying for research via trading commissions.
One way the outsourced model may have an edge is by dovetailing with MiFID’s goal of assigning a concrete value to advice, a task that is next to impossible when brokerages exchange it for trading business.
Another competitor in the burgeoning market is Street Contxt, which uses machine-learning and data-driven metrics to push relevant content to buyers and to help analysts understand what sells. The firm, which was founded in 2012, got an investment from Steven Cohen’s Point72 Ventures earlier this year and makes money by charging a membership fee to clients as well as taking a cut on deals. The company also counts 8VC’s Joe Lonsdale, a co-founder of Palantir Technologies Inc., as an investor.
“Content is now about who’s the smartest person writing on something,” CEO Blair Livingston said in an interview. “What content goes to what person is better done by a machine than a person.”
Research on some marketplaces is even more tightly controlled. StockViews only has 10 equity analysts on board so far and co-founder Tom Beevers described the business model as more akin to Netflix Inc. than EBay. Subscribers pay an annual fee of 20,000 pounds for access to all of the research on the site -- with extra charges for phone calls with analysts, who undergo a “rigorous selection process.”
StockViews compensates analysts based on two criteria: the quality of their work as measured by client feedback; and the performance of their stock picks.
As the January deadline for the implementation of MiFID regulations approaches, research marketplaces and other startups seeking to cash in may see both more interest in their services and more competition from large banks developing their own platforms. Big banks and clients are still tussling over the cost and delivery of research, with everything from all-inclusive packages to phone-style “pay as you go” approaches under discussion.
“Not too many folks we talk to are that well prepared” for MiFID, with most of the buy side looking for solutions and analysts looking for ways to price and distribute research, Alpha Exchange’s Winship said. “We think we can be part of the solution.”