Forum hears of hurdles to independent research in Asia

The widespread adoption of independent research by buyside traders is hampered in Asia both by the lack of a regulatory push and the difficulty of pricing the research, a forum heard.

Richard Wallace, chief executive of IND-X, which sources independent research for institutional investors, said that while Asian managers investing globally still had a need for global research from investment banks, there is a global trend for buysides to favour independent information.

There are some 50 independent research houses in Asia now, a five-fold increase from just a decade ago, he told Asia’s Independent Research Summit 2013, a conference hosted last Thursday by Asia IRP in partnership with AsianInvestor and FinanceAsia.

While Wallace does not forecast the demise of sell-side research, he added: “Fund managers will [increasingly] say ‘I only want this particular analyst’s research’. So unless a brokerage unbundles [execution from research] and prices that, managers won’t do business with it.”

Emma Quinn, Asia-Pacific head of trading for AllianceBernstein, said her firm has long embraced the best execution principle – which requires unbundling to obtain best execution for clients.

This practice is commonplace in Europe on the back of regulation such as the Markets in Financial Instruments Directive (Mifid), which was introduced in 2007.

Imposition of these rules in Europe has encouraged the use of commission-sharing agreements (CSAs), which enable money managers to pay a broker separately for execution and ask them to allocate a portion of their commission to a separate research provider.

Quinn noted that the use of CSAs had enabled her team to reduce the number of brokers it trades with, since it now only trades with brokers that provide best execution.

But she acknowledged it was difficult for portfolio managers to price a piece of research from a bank, particularly as sell-side analysts and buyside traders often diverge on how much it should cost. “People need to be realistic about what they think their research is worth,” said Quinn.

She added she was hopeful the practice of unbundling could become widespread in Asia, but stressed this would only happen in countries once regulators make it compulsory for buy-side managers to achieve best execution. The push, she said, had to come from the regulators.

Jesse Lentchner, Asia-Pacific chief executive for agency-broker BTIG, spoke positively about the process of unbundling, saying it would be positive for the entire broking industry.

He reasoned it would drive specialisation by allowing independent research providers and agency brokers to compete with investment banks by promoting their own niche capabilities.

“Not every [broker] would have the scale to execute in every market in an efficient way, or the balance sheet [to take risk] and technology [to execute for their clients] in a proper way,” he said.

“But we’re seeing disaggregation of what the investment bank can do and what the independent [brokers] can do based on their niche. If clients want to have services that we cannot provide, we [can be honest about it] and tell them to get that service from the bulge-bracket firms.”

Traditionally, investment banks have provided services such as research, advisory and company management access bundled into one commission payment that buysides make for trading.

The use of CSAs has enabled agency-only brokers with no research capabilities to get trading commission from asset managers provided they can prove they offer best execution.