Unbundling is Changing the Entire Nature of Investment Research across the US Financial Markets Ecosystem, Says TABB Group in IET 2019 Study, Part V
Larger asset managers expect a consistent global research procurement process, ensuring fair charges and treatment no matter their geography
NEW YORK &, LONDON, September 6, 2019 – Eighteen months after European regulators implemented MiFID II, the Markets in Financial Instruments Directive II, given the transition from bundled research to full unbundling in Europe, TABB Group interviewed 92 head traders at U.S. institutional investment firms to examine how unbundling has affected the buy side and their businesses.
“Not only did we find that unbundling has impacted U.S. money managers, it’s in the process of changing the whole nature of investment research across the US financial markets ecosystem,” says Larry Tabb, TABB Group founder and research chair, who co-authored “US Institutional Equity Trading 2019 Unbundling: How Charging for Content Is Reshaping Asset Management,” a 29-page study with 29 exhibits, with Campbell Peters, equities research analyst, and director of outreach Elyse Gerard. It is the fifth of a six-part, interview-based annual benchmark research study, TABB’s fifteenth.
Larger buy-side firms are increasingly embracing unbundling. It enables them to better manage their business, provide greater clarity around what research managers need, the cost of that information and the service models it entails, and allows buy-side traders to focus their attention on sending their orders to the most effective execution desks, instead of allocating those trades to research brokers based on their investment ideas, even if their trading desks are not truly effective.
“That’s a tall order,” says Peters. “While unbundling helps larger funds, not all have embraced it. Mid- and smaller-size firms with fewer AuM and less substantial commission wallets now have to pick their providers, negotiate a value for their chosen research provider and hope they have a large enough budget to fund their investment strategies.” This hurts smaller managers and effectively consolidates the market for active investment services, pushing investors toward passive strategies, concentrating investment services business into fewer and larger firms.
A sampling of key findings from IET Part V includes:
- Larger funds are unbundling more than mid-sized and smaller funds; only 33% of larger funds remain bundled as are 45% of mid-sized and 67% of smaller funds.
- Unbundling has a mixed to positive impact on the buy-side; only 26% of funds say unbundling has negatively impacted their business, while 43% believe it has a positive effect.
- Allocation of commissions between execution and services is shifting: smaller firms pay 48% of commissions for services; larger funds, 36%.
- Despite research budget declines, 77% of funds still receive research necessary to run their business; 12% disagree.
- Although 38% of service-based commissions are allocated to research, funds are earmarking a significant portion of their commission dollars to buy market data terminals, corporate access, independent research, conferences and connectivity.
- Outside of market data terminals, 17% of funds plan to increase use of broker research in 2019 vs. only 9% expanding use of independent research.
- Over 90% of larger funds want the SEC to either extend the Securities and Exchange Commission No-Action Letter on paying for research with hard dollars. or enable more leeway in paying hard dollars to brokers for their research, compared with 60% of mid-sized funds and 75% of smaller funds.
“While we don’t believe that the ability to acquire investment research will be an existential threat to the fund management business,” says Tabb, “unbundling will dramatically change how investment research is procured, funded and serviced as it reshapes the character and capabilities of not only the U.S. asset management industry, but its brokers and service providers as well.”
Changes implemented by the European securities regulators are definitely having a global impact on how investment managers procure and pay for research, he adds. “While these changes do not legally impact U.S. asset managers, we learned larger organizations not only want a consistent global research procurement process – they want to ensure they’re being charged and treated consistently and fairly, whether they’re located in Bruges, Boston, Belarus or Beijing.
Part V, “US Institutional Equity Trading 2019 Unbundling,” is available for download by TABB equities clients and pre-qualified media at https://research.tabbgroup.com/search/grid, where clients can also find the first four US Institutional Equity Trading benchmark reports:
- Part I: US Institutional Equity Trading 2019 Liquidity: Blocks, Algos, Analytics, and Impact
- Part II: US Institutional Equity Trading 2019 Trends: Is Active Management an Endangered Species?
- Part III: US Institutional Equity Trading 2019: Broker League Tables
- Part IV: US Institutional Equity Trading 2019 Market Structure: A Buy-Side Perspective
For more information or to purchase one or all of the IET 2019 study reports, write to [email protected].
About TABB Group
With offices in New York and London, TABB Group is the international research and consulting firm focused exclusively on capital markets, based on the interview-based, “first-person knowledge” research methodology developed by Larry Tabb. For more information, visit www.tabbgroup.com. # #