Equity research drives the trading bus – but how exactly?
That’s a question that has gone unanswered until now, as Convergex’s Westminster group has now taken a more in-depth look as to how research, and how it is paid for, ties into trading.
ConvergEx’s joint survey with Westminster, CSA & Research Usage Survey queried financial industry participants how they use research in their investment decisions, and how they would react if regulations under consideration in Europe were undertaken to limit the use of commission sharing arrangements (CSAs).
Westminster co-president Tim O’Halloran, who authored the study, found that 88 percent of European and 93 percent of North American financial professionals want the same or lower levels of regulation for commission sharing arrangements.
“When 9 out of 10 people tell you that things are fine the way they are, it’s a clarion call for leaving well enough alone,” said O’Halloran. “Managers need to retain the discretion to decide how their research is sourced and paid for and more regulation will not help this process.”
Forty-three percent in Europe said they would like to see less regulation than at current levels, versus 31 percent in North America.
Overall, the survey results reveal an investment community that obtains a broad spectrum of research from a variety of sources, believes that commission sharing arrangements (CSAs) add to transparency and improve execution, and are skeptical that greater regulation can improve the current process. The survey was conducted from May 6 to May 8, 2015, and addressed the research and regulatory regimes of both North America (United States and Canada) and Europe.
Also, two-thirds (67 percent) of all buyside respondents said they would use less research if they were required to pay cash to obtain the information, an arrangement currently under consideration in Europe as the European Commission, through the European Securities and Markets Authority, works to finalize the pan-European regulations of MiFID II.
Thirdly, 65 percent of respondents said that CSAs provide more transparency than bundled proprietary research, and 58 percent said CSAs help in achieving best execution.
The survey also discovered that an overwhelming 88% said that investment managers and their staff are best placed to determine how research is sourced and paid for, with just 4 percent identifying regulators as best-placed.
“Our respondents clearly recognize that good research and best execution often come from separate places, and that CSAs provide the flexibility to access the best of both worlds,” said O’Halloran. “Investors say that research, paid for through CSAs, better informs their decisions, provides appropriate transparency, and aids in best execution. Yet, if regulations are put in place that force them to use cash, they resoundingly say they will use less research.”
The ConvergEx – Westminster CSA & Research Usage Survey was performed by ConvergEx via an anonymous online survey of financial industry participants, resulting in 278 respondents.Respondents included buy-side firms (asset managers, hedge funds, pension plans), sell-side firms (banks, broker-dealers), trading venues, service providers and other financial industry participants.