Electronic providers of independent-research reports are gearing up to cash in on the global settlement. BNY Jaywalk, a wholly owned subsidiary of Bank of New York (BNY), has launched a new product based on its existing technology platform that will enable the 10-major broker dealers involved in settlement to select the best-performing research by choosing their own metrics.
The product, dubbed The Independent Research Meritocracy, allows broker dealers to conduct customized searches of the BNY Jaywalk database.
"The way that the Meritocracy works is that only the best performing research reports will be put next to the sell-side firm's research," explains John D. Meserve, president of BNY Jaywalk. "You're only going to receive compensation for when you have the best-performing research," adds Meserve.
A wholly owned subsidiary of Bank of New York (BNY) that was acquired in 2002, Jaywalk consists of 65 independent equity research providers.
"That's how we got into the business of aggregating, rating and putting performance measurement ratings on independent research," says Meserve.
In addition, BNY Jaywalk contracted with Investars, a third-party performance-measurement-company, to rank all of the independent analyst's buy/sell ratings and monitor the return on a 365-day rolling basis, adds Meserve.
Broker/dealers can either use the platform themselves or ask BNY Jaywalk to do the searching for them, which BNY does as part of its consulting business. Ultimately, the person using the technology platform could be an independent consultant assigned to each settling firm.
Under terms of the global settlement, an independent consultant (monitor), chosen by regulators, will have final authority to procure the independent research from independent providers.
As part of the $1.4 billion global settlement reached with regulators in December of 2002, ten brokerage firms are required to spend $435 million on furnishing independent research to individual investors.Anthony Sabino, Associate Professor Business, at St. John's University's Peter J. Tobin Business School, says a few questions persist.
"How will brokerage firms choose which research to buy?" asks Sabino. "Who is to say they will only buy what research they like, while opting not to buy research critical of stocks they are selling?," adds the professor, who questions what safeguards are in place to monitor integrity and quality of research.
Meserve says, "That's the idea of the independent consultant, that they are separate and distinct. You could have a situation where Merrill stock would be a strong buy and independent research would say it's a strong sell," and both reports would be placed side by side, he says.
The monitor "will set the metrics and we'll set up to accommodate them from an operational perspective," says Meserve.
According to Joel Greenberg, Partner and Co-chair of the Corporate & Finance Department of Kaye Scholer LLP, the BNY Jaywalk technology may go further than is necessary. "The settlement simply requires that the brokerage firm obtain and offer at least three independent sources of research. There is no requirement that they survey the available universe of research," says Greenberg.
"What the brokerage firms have under the settlement is an obligation to provide independent research to their customers. This is certainly one way of doing it, (but) it is certainly not the only way," says Greenberg, who says the firms "don't necessarily need a packager." They are sophisticated institutions and they could do this themselves by contracting with the independent houses directly. "On the other hand, this is not a process they're going to make money on. They're forced to do it," he says.
But Meserve contends, "A lot of technology and operational issues (that) have to be addressed" in order to comply with the global settlement.
Settling brokers are required by the Securities and Exchange Commission (SEC) to post the research on a Web site and provide physical delivery if requested. They also must provide the analyst on trade confirmations.
Meanwhile. BNY is not the only contender for this business. "I assume people know that $435 million is available. Other neutral suppliers of independent research are expected to jump into the market, including Standard & Poor's and Moodys as well as distributors such as Yahoo and Multex, now owned by Reuters."
"I assume that people know that $435 million is available. I think that a number of people can look to find a way to make money while helping these firms comply," says Greenberg. 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 the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio