August 22, 2007

No Universal Technology Platform

While brokers are building their own alternative research platforms in terms of product, they seem to be taking an arms-length approach when it comes to the underlying technology.

According to iSupply's Lidow, there is not going to be a universal delivery platform because "the nature of the research that's delivered by various people on the platform can be so different. That would be an impossible task." However, using secure online delivery, personalized data sets can be downloaded to each client, he says.

But some brokers do not want to be viewed as redistributors of independent research. For instance, Credit Suisse's Rx directs clients to a third party's research portal where they can view and source the independent research. "That is all outsourced. We don't want to manage content," explains Credit Suisse's Choe, who declines to name the third party for competitive reasons. Instead, "We are positioning ourselves as more neutral on research to the buy side."

Credit Suisse is using its Story Board service, a real-time instant messaging system that gives traders color on the names they're trading within AES, to notify clients when new research reports come out, according to Choe. The firm is expanding Story Board -- which was developed within AES -- to also include color beyond its own research, he says. For example, if a client is trading Motorola, Story Board is able to look into this third-party feed to pull up the research on Motorola, Choe explains. "It beefs up our product to the buy side so they don't feel they're missing anything," he says.

The End of Sell-Side Research?

In the end, TowerGroup's Shawrawat says, sell-side firms are becoming advisers to their buy-side clients on what they should do with research. They are becoming "relationship managers," helping the buy side to decide its research strategy. Sell-side firms are telling the buy side, "Why don't you sign a commission management agreement with me and I'll be your adviser, and I'll introduce you to all these other people you need to talk to," Shawrawat explains.

As buy-side research habits evolve, brokers may have no choice but to adopt this more-open approach to alternative research. "The behavior of the buy-side equity analyst is substantially different than in the last 10 years," says Merrill Lynch's Lynch. "Ten years ago if they were going to research a stock, they would probably turn to a major service, such as Bloomberg, Thomson or Reuters. Now they turn to the Internet."

After analysts gain as much education as they can from the desktop, they make some calls, and they strive to become industry experts in the management, the product cycles and trends, Lynch continues. Then they dig deeper by going to the primary research. Even the sell-side analysts are consumers of independent research, Lynch points out. "The tools at your fingertips are substantially different," he says.

Still, Lynch believes, sell-side research has its place. He refutes as myth the assumption "that nobody pays for research and that independent research is the end of sell-side research," explaining that, "We have scale and scope in research, and clients tell us this." While Lynch agrees that clients are going to source their research in-house, "We don't think that proprietary research is a zero-sum game. We think that they're complementary."

But looking to the future, TowerGroup's Shawrawat says brokers are realizing they can't lock their clients into proprietary research, and that the separate branding of Hudson Street by Goldman sends that message. "To an extent, Hudson Street might cannibalize Goldman's research," Shawrawat says. By aligning with all these independent firms and taking stakes in them, to some extent Goldman is exploring other options. Further, "It's better to cannibalize their own source of revenues than have someone else cannibalize it," the analyst notes.

Meanwhile, Goldman's Hudson Street is continuing to add products to its portfolio, including overseas content providers. "I don't see us going beyond 10 [content partners] by the end of 2007, but I do see getting to between 12 and 15 by the end of 2008," the firm's Sanders says.


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Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in ...