Forefront Communications

Integrity Research: A Look Behind the Curtain: Revenue Attribution in Equity Research

Analyst Hub

Forefront Communications

Forefront Communications

The following is a guest article by Mike Kronenberg, co-founder and CEO of Analyst Hub and Analyst Hub Securities, a compliance-driven research platform which has launched and partnered with twenty-three independent research firms.  

The way banks and brokers assign value to equity research has never made sense.

Categorizing clients based on the percentage of their order flow that is traded with the firm, the sell side encourages its clients to increase their trading volume with the promise of additional research and more robust corporate access.

The problem with this method is that the frequent fluctuation of trading commissions prohibits assigning a concrete monetary value to a firm’s research capabilities – valuing their analysts and corporate access as a changing percentage. Instead of the dynamic pricing that supply and demand set for most commodities, research and corporate access are used by the sell side primarily as a bargaining tool to encourage more trading rather than to establish it as the profit center it should be.

In addition, the very fact of research only being bundled with corporate access and sold alongside the 1,000-pound gorilla of trading services makes it impossible to establish its true value or attribute revenue to the product. The sell side is a buffet, offering a variety of services and content, and you’re obligated to buy it all, no matter which parts you want to consume.

Two recent events, however, have exposed the madness to this method: the advent of MiFID II and the arrival of the COVID-19 pandemic. Together, these earthquakes have the potential to rewrite the rules of research as they shine a light on the true costs and benefits to the buy side, and on why the old way of pricing things never made sense.

Analysts or Bargaining Chips?

Under the traditional scenario, analysts have become bargaining chips instead of being seen as the expert advisors – and profit centers – that they can be. As a cog in the machine at a sell-side firm, they are left to produce exorbitant amounts of research that may never see the light of day, and because they aren’t part of a direct transaction, they and their firms are left without an understanding of what their target audience is interested in and is willing to pay for. Analysts are meant to be decision influencers; they are close to the ground and have intimate knowledge of their covered companies, operating in virtually all sectors that the buy side needs to make informed decisions.

From the days of the Buttonwood Tree through to the age of the algorithm, investors have relied on sound intelligence to inform their decisions. But in the prevailing structure, with research demoted to an add-on to the real money maker of trading commissions, establishing a separate valuation for research is essentially impossible for the sell side. With their critical insights being devalued, analysts themselves have been left in the dark when assessing the value of their work.

To read the full article, click here.

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