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Quantifying the Future

Investment recommendations go digital

A new research paper from Market Structure Partners, sponsored by TIM Group

Technology and regulation are revolutionising the relationship between the buy and sell-sides, creating a ‘digitally led’ engagement model which will radically alter the consumption and provision of investment recommendations.

Co-authors Niki Beattie, Managing Director at Market Structure Partners, and Rebecca Healey, an industry research analyst, interviewed participants on the buy and sell-sides, as well as international regulatory bodies, to understand the trends shaping the changing buy and sell side relationships and how investment recommendations will be delivered in the future.

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Author Niki Beattie discusses the main findings from the research

Research summary: Investment recommendations go digital
Active Investment Management is under pressure and has been losing out to technology driven investment styles. The initial beneficiary of this shift was passive management but quantitative management is growing. Active managers are taking notice and a new style of quasi-active models is emerging, requiring entirely new tools and techniques and expanded data sets.
  • 61% of those interviewed are already reacting to aggregate market sentiment rather than individual research recommendations
  • 69% of respondents thought that the best quality recommendations in small and mid-cap now come from local and regional specialists
  • Our research revealed 56% of those interviewed are now paying fees for other third party data sets

This creates different demands on the sell-side and quantitative managers are leading the way in redefining the service requirements. The industry is moving away from an emphasis on individual research recommendations towards cumulative data streams from a diverse set of multiple sources. This provides a faster, continuous view of market sentiment.

As the amount of available data increases, the ability of humans to process it is declining and the sell-side is finding it more difficult to be heard. The traditional buy and sell side relationships based on written research and conversations are unsustainable.
  • More than half the interviewees now delete or ignore over 50% of the emails and phone calls they receive from their brokers
  • 44% of those interviewed already have automated processes in place to manage incoming information from brokers
  • 66% of the firms interviewed valued broker research either to a small degree or not at all

Sell-side firms must recognize that, while demand for access to investment recommendations remains strong, the delivery and consumption of these recommendations is undergoing radical transformation. There are clear opportunities for firms that embrace a digital model.