Technology viewpoint: tech for research
There’s something different about Level39. Europe’s largest financial technology accelerator opened two years ago in the heart of London’s Canary Wharf with the explicit aim of supporting the next generation of technology start-ups.
Most of the growing number of entrepreneurs on Level39 left their jobs in the City to try to solve industry problems their employers and competitors had little appetite to address, following the vast reduction in R&D and technology budgets post-2008. Working in small, agile teams and freed from the internal approval process, the next generation is quickly rising to the challenge. This hasn’t escaped the attention of the large banks and sector players, who monitor the market closely, often looking to partner, invest in or buy from the new kids on the block.
Why should we care? Because the technology developed by entrepreneurs in places such as Level39 will play a fundamental role in shaping the IR industry over the next 10 years. It will dictate how shares are traded, cleared and settled. It will influence the composition of shareholder bases. It will govern how we develop and maintain relationships with investors and analysts. It will affect our access to information that helps us to make intelligent strategic decisions.
One such example is StockViews. Founder Tom Beevers spent nine years as a pan-European portfolio manager at Newton Investment Management, a London-based investment manager with more than $75 bn in assets under management. Like many of his colleagues in the industry, he was a heavy consumer of research but became frustrated with the lack of variety of perspective. As a result, he often found himself searching through online forums, blogs and social media for other viewpoints. Seeing an opportunity, he founded StockViews, an online platform that collects equity research from independent analysts and rates each based on the performance of their past stock picks.
This is potentially an interesting development for IR teams. It means existing sell-side analysts may soon have to make room for the growing number of independent analysts whose views are followed and respected by thousands. It certainly wouldn’t harm IR teams to keep the top-performing analysts on their radar and perhaps even engage in periodic dialogue with them.
Wisdom of the crowd
The growing trend toward group opinion platforms is testament to belief in the wisdom of crowds. In 2014 researchers from Purdue University, City University of Hong Kong and Georgia Institute of Technology published Wisdom of crowds: the value of stock opinions transmitted through social media. Analyzing approximately 10,000 articles and comments on Seeking Alpha, the authors find its ability to predict stock returns and earnings surprises is much higher than expected, supporting the case for independent research. Seeking Alpha isn’t alone, however. Other platforms that gather research, estimates or opinions about listed companies include Estimize, SumZero and Value Investors Club.
Another factor sell-side research teams have to contend with is the new wave of regulation governing payment for research and corporate access services. The proposed EU regulations, for example, are expected to severely limit the degree to which fund managers can pay for research out of trading commissions, thus resulting in fund managers having to pay for research out of their own P&L.
With investors hesitant to pay out of their own pockets, it becomes uneconomical for brokers to cover a long tail of mid and small-cap stocks. Institutional investors are increasingly setting up their own in-house research teams, further exacerbating the problem.
In light of the inherent conflict of interest in the current model, the key words behind the latest regulations are ‘accountability’ and ‘transparency’. New market players are increasingly using social technology as a tool to level the playing field and democratize the research process.
But do social finance platforms have a role to play in the professional investor community?
This question was posed at last summer’s annual CFA Institute conference in Seattle. The strong consensus was that online crowdsourcing communities can be very useful, particularly to investors with less access to sell-side analyst reports or those looking for a different perspective. If technology-driven platforms continue to make the investment process more efficient and inclusive, they will no doubt become serious challengers to current industry standards.
Michael Chojnacki is CEO of London-based IR technology platform Closir and was previously a vice president at BNY Mellon where he was responsible for IR advisory for the firm’s issuer and institutional investor clients across Europe, the Middle East and Africa. He is also co-founder of the Middle East Investor Relations Society