Online competitors take on global banks in securities research shake-up

HONG KONG (Reuters) - A period of severe turmoil is facing the securities research industry as a regulatory overhaul threatens the way investment research is done.

Online portals, in particular, are set to gain market share at the expense of major “bulge bracket” investment banks, reaching a forecasted market share of $1.4 billion or 15 percent of the global investment research industry spend by 2020 - from less than 1 percent last year.

“The global investment research market is on the cusp of major disruption,” said Benjamin Quinlan, CEO of Hong Kong-based Quinlan & Associates and author of a report on the challenges facing the research sector.

Forcing the change are new rules, known as Markets in Financial Instruments Directive, or MiFID II, due to take effect in January 2018 aiming to make European securities markets more transparent.

A key aspect of these rules is that investment banks must charge fund managers an explicit fee for research rather than bundling the cost into trading commissions charged to clients, as at present.

Though banks have scrambled to reorganize their research functions by focusing on top-tier clients to minimize costs, rolling out proprietary portals, or adopting a model where clients pay for research depending on what they need, analysts say the sheer volume produced on a daily basis means the research effort has a long way to go before becoming efficient.


For example, about 40,000 research reports are produced every week by the world’s top 15 global investment banks, of which less than 1 percent are actually read by investors, according to Quinlan.

More than 30 analysts cover HSBC HSBA.L0005.HK on a regular basis, though only 11 of them have a rating of three stars or above even though it is a key factor of consideration by many global fund managers.

Though the immediate impact of the Mifid II rules will be in Europe - a recent Greenwich Study predicts a cut of $100 million by European money managers in their research budgets over the next 12 months - Asia and the United States will be affected too.

In recent months, global investment banks such as Standard Chartered STAN.L, CLSA, Jefferies and Barclays BARC.L among others have retrenched staff or completely pulled back from equity research and sales businesses in some markets.

At Credit Suisse's CSGN.S annual Asian investment conference, Chief Executive Tidjane Thiam said on Tuesday the bank will continue with restructuring in the Asian equities business, which will result in some more reduction in headcount.

“The (equities) platform has to be of the size that’s commensurate with the demand today not with the demand in five years or 10 years,” Thiam said.

Recently, some independent research platforms such as Smartkarma's tie-up with Societe Generale SOGN.PA have been getting attention in Asia. But their business model is still aimed at filling existing gaps rather than snatching market share.

“Both managers and brokers will need to think long and hard about how they engage with the new market place,” Quinlan said.

Reporting by Saikat Chatterjee; Additional reporting by Sumeet Chatterjee; Editing by Eric Meijer and Richard Borsuk