CHALLENGE: As research and execution are unbundled and the buy side demands more alternative research, the sell side must continue to create new commission-sharing arrangements and sign up additional independent research providers to avoid disintermediation.
Where the Industry Is Now: Proprietary research continues to be an important feature in the sell-side services suite. Yet regulatory changes and guidance issued recently in the U.K. and U.S. around commission-sharing arrangements (CSAs) coupled with buy-side demands for independent research are leading some brokers to offer both in-house and external research channels, as well as a means to pay for that research independently of trade execution.
Most sell-side firms have CSA programs, and buy-side firms often participate in numerous CSAs with different brokers. Last February Goldman Sachs launched Hudson Street Services, which offers access to the resources of a small number of external research providers. Credit Suisse's ResearchExchange (Rx) commission-management program directs buy-side users to a third-party research portal. And Merrill Lynch announced on Oct. 30 an exclusive distribution agreement with independent research provider Global Media Intelligence.
Focus in 2008: In January Citi will launch its offering in the alternative research space. It features a database of more than 700 independent providers spanning asset classes, research sectors and geographies that clients can access through Citi's Web site, reports Frank Volino, the firm's head of Americas commission management services. And Citi is in ongoing discussions with additional independent research providers as well as research distribution platforms as it seeks to broaden the service, he adds. Hudson Street also expects to add a handful of other content partners to its service during the year.
Other bulge-bracket firms are likely to come up with their own offerings, if they haven't done so already, although each will pursue variations on the model as they try to create points of competitive differentiation. And while, for the most part, sell-side firms at present are looking to team with third-party providers whose research doesn't compete with existing in-house offerings, in the longer term, more brokers will be forced to carry competing research as they seek to add value. At the same time, the number of independent research providers will continue to grow as demand increases.
Industry Leaders: Goldman Sachs, Credit Suisse, Merrill Lynch and Citi are early movers, to name a few. In addition, BNY Jaywalk, part of the BNY ConvergEx Group, sources and evaluates independent research products and has a global network of providers. It also offers a repository of research reports. Likewise, Instinet has exclusive distribution agreements with select independent research firms through its Instinet Research Partners program.
Technology Providers: Different firms will utilize different technology platforms when it comes to research distribution. Some likely will develop their own distribution platforms, from which users can purchase research directly, rather than merely offering a database of leading providers. Internet-based technology will be the primary distribution vehicle.
Price Tag: In 2006, the alternative research industry generated about $1.8 billion in revenue, and that is predicted to grow to $2.5 billion by 2010, according to Integrity Research Associates, a Darien, Conn.-based research firm. The numbers could even be a bit conservative as more sell-side firms develop independent research platforms, and given the proliferation of CSAs.