A New Frontier in Financial Technology

This is re-print of a piece that first appeared in Technology Viewpoint in IR Magazine edited by Michael Chojnacki from Closir.

There’s something different about Level39. Europe’s largest financial technology accelerator opened two years ago in the heart of London’s Canary Wharf with the explicit aim of supporting the next generation of technology start­ups. Most of the growing number of entrepreneurs on Level39 left their jobs in the City to try to solve industry problems their employers and competitors had little appetite to address, following the vast reduction in R&D and technology budgets post­ 2008.

Working in small, agile teams and freed from the internal approval process, the next generation are quickly rising to the challenge. This hasn’t escaped the attention of the large banks and sector players, who monitor the market closely, often looking to partner, invest in or buy from the new kids on the block.

Why should we care? Because the technology developed by entrepreneurs in places such as Level39 will play a fundamental role in shaping the IR industry during the next 10 years. It will dictate how shares are traded, cleared and settled. It will influence the composition of shareholder bases. It will govern how we develop and maintain relationships with investors and analysts. It will impact our access to information that helps us to make intelligent strategic decisions. The most relevant areas of innovation can be broadly categorised into six key themes:

• Fragmentation of Investment Research
• Technologies in the Capital Raising process
• Data Science and Analytics
• Democratisation of Corporate Access
• Development of Trading Technologies
• Evolution of Marketplaces and Support systems

Today we would like to address the first topic.

Fragmentation of Investment Research

Before setting up Stockviews, Tom Beevers spent nine years as a pan­ European portfolio manager at Newton, a London based investment manager with over $75bn in assets under management. Like many of his colleagues in the industry, he was a heavy consumer of research but became frustrated with the lack of variety of perspective. As a result he often found himself searching through online forums, blogs and social media for other viewpoints. Seeing an opportunity, he founded Stockviews, an online platform that collects equity research from independent analysts (anyone can write research on any stock) and rates each based on the performance of their past stock picks. This is potentially an interesting development for IR teams. It means that existing sell­side analysts may soon have to make room for the growing number of independent analysts whose views are followed and respected by thousands of followers. It certainly wouldn’t harm IR teams to keep the top­performing analysts on their radar and perhaps even engage in periodic dialogue with them. A fresh perspective can be helpful and innovative ideas like Stockviews are a good way for companies and investors to broaden their horizons.

Wisdom of Crowds

The growing trend towards group opinion platforms is testament to belief in the wisdom of crowds. In 2014 researchers from Purdue University, City University of Hong Kong and Georgia Institute of Technology published Wisdom of Crowds: The Value of Stock Opinions Transmitted Through Social Media. The authors analysed approximately 10,000 articles and comments on a popular social media platform for investors called Seeking Alpha. Its ability to predict stock returns and earnings surprises was much higher than expected, supporting the case for independent research. Others platforms which gather research, estimates, or opinions about listed companies include Estimize, SumZero and Value Investors Club.

Influencers of this trend

Another factor sell­side research teams have to contend with is the new wave of regulation governing payment for research and corporate access services. The proposed EU regulations are expected to severely limit the degree to which fund managers can pay for research out of trading commissions, thus resulting in fund managers having to pay for research out of their own P&L. With investors hesitant to pay out of their own pockets it becomes uneconomical for brokers to cover a long tail of mid and small­-cap stocks. Institutional investors are increasingly setting up their own in­-house research teams, further exacerbating the problem.

In light of the inherent conflict of interest in the current model, the key words behind the latest regulations are ‘accountability’ and ‘transparency’. New market players are increasingly utilising social technology as a tool to level the playing field and democratise the research process. But do social finance platforms have a role to play in the professional investor community? This question was posed at last summer’s annual CFA conference in Seattle. The strong consensus was that online crowdsourcing communities can be very useful, particularly to investors with less access to sell­side analyst reports or those looking for a different perspective. If technology driven platforms continue to make the investment process more efficient and inclusive, they will no doubt become a serious challenger to current industry standards.