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MIFID II - when is research browsed or consumed?

Heartwood Partners has been discussing the impacts of MIFID II with a number of buy and sell side contacts. One issue that is occupying a great deal of thought on both sides is what research fund managers will be forced to pay for and what will they actually pay for. I can't condense down all the issues but here is one that I have trouble reconciling: consuming vs Browsing.

The Book Shop conundrum Before I jump straight into the issue I want to set the scene using an analogy from the retail industry. Take the example of a consumer going into a shop. He is looking for a novel. He wanders around for 10 minutes and in this time picks up 3 books and reads the first couple of pages. All are good, but not quite what he is looking for. He leaves without buying. Nevertheless the sales person smiles and wishes him good day as they know he is likely to return in the future. The consumer hasn't paid for the sales person's time, the heating and lighting of the shop or the rent and rates. He may have slightly stretched the book's spine but no lasting damage has been done.

Browsing vs Consuming

Now lets relate this back to the fund management industry. The sell side has some clever(ish) analytics at its disposal. The latest standard of HTML, HTML 5, allows publishers to mark down how far through an article a reader has progressed. Some investment banks have used this data cache facility to better understand the readership habits of fund managers and browsing of their research is registered into a database. Lets assume I was researching a company. I downloaded a research article or looked it up on the investment bank's research database. The investment bank's data capture technology marks that interaction down as a positive hit for them, knowing that I have read the introduction page and chapter 1. From my side however the situation may not be so clear cut. Having read only 1/4 of the article or note I feel it's not for me - it could be poor analysis or maybe just I am looking for another angle such as trying to understand the cashflow dynamics rather than the P&L which the note concentrates on. Hence I give up. Have I 'consumed' the research or merely 'browsed' it?

Does taking action signify consumption?

Many people would say that if I take an action, then I have consumed the research. But what if I haven't traded because I own the shares and I felt the sell or bear case in the note I read was wrong. In this case I have also made a conscious decision to do nothing. But what if I genuinely thought the note was rubbish and gave up reading? It wasn't worth my time. I'll be seriously annoyed if someone tries to charge me for something I consider to be sub-standard. Maybe the best way is to have a button after the 1st page that says "by pressing this you are committing to 'consuming' the research?" The sell side model has been an all you can eat model for so long that the thought of pricing up individual research notes is a real anathema to it. Therefore little innovation has occurred in terms of the pricing model and how research is delivered.

Unfair fight Having worked at one of the world's largest Fund manager's and a smaller UK firm, I feel I am well positioned to comment that the buy-side's toolbox of analytics in what is consumed / browsed is poor in comparison to the sell side. That isn't to say they aren't good, rather the sell side has better tools. Yet they certainly aren't perfect. If you are a head of research in a fund management firm going into pricing discussions with your counterpart at an investment bank, I think you will be at a disadvantage. Do you know how much your firm has 'consumed' or merely 'browsed'? For me this is one area where the opportunity lies for budding FinTech entrepreneurs. Better analytics will make for better pricing discussions and will ensure the clients get a better deal.

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