Mark Hynes - thoughts on corporate disclosure

Opinions on changing rules, changing best practices, and their effect on investor relations officers.

Thursday, November 22, 2007

Sell side research – changes underway.

Research that has been the traditional preserve of the larger investment banks is facing a huge sea change from regulators, boutiques, and an increasing link to trade recommendations.

IOSCO, the collective for the world’s securities regulators, has this week published its latest thinking on how soft commissions among investors should work. It points to the differing rules applicable in different countries, and the potential conflict of interest among those providing and using the research. It concludes that regulators need to decide on their own regimes, but given who the research was done by, some degree of coordination in regulation is likely.

This report comes at a time when there are emerging trends among ‘boutique’ research firms. Japaninvest, an independent research house, has launched an execution service that it hopes will help smaller boutiques compete with the big investment banks.

The company, listed in Tokyo, has invited other independent research providers to join IND-X, which went live recently. With few asset management houses willing to pay directly for research, boutique research providers rely on devices such as commission sharing arrangements for their income.

These allow asset managers to pay an investment bank to execute a trade, but to say that a proportion of the money should be passed to third parties that have provided them with the most valuable research. However some independent houses have to wait to receive monies due to them.

And the investment banks have responded by launching their own joint venture – Trade Ideas Ltd – which bundles their research together and provides clear trading recommendations. Others have taken stakes in research boutiques.

Meanwhile, asset managers themselves are adding to their own research capabilities. The Grassroots system uncovers new trends by on-the-street research.

Another trend is in research boutiques focussing less on short term financial performance, and more on what one of them calls “extrafinancial” matters. Enhanced Analytics Initiative promises to divert 5 percent of their institutions' brokerage commissions to pay for research in everything from how companies treat their employees and govern themselves to their exposure to political and environmental risks.

What of the IRO and how they respond to this changing world? Clearly, finding out who can influence the company’s share price through publishing research and trade recommendations just got a whole lot harder.


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