London-headquartered Substantive Research provides research and market data benchmarking to more than 100 global clients across Europe and North America.

Speaking about the deal, Mike Carrodus, founder and chief executive of Substantive Research, said: “Euronext’s acquisition of Substantive Research underlines our team’s hard work in creating a unique price benchmarking database in investment research and market data.  With the research market poised for yet more regulatory-driven changes, plus market data consumers grappling with increasing costs and pricing opacity, we are so excited to be able to accelerate our coverage and data depth with Commcise and Euronext’s insight and resources. 

“It feels great that we can now accelerate development into areas we know our clients need greater market transparency.”

Read more: In conversation with… Substantive Research’s Mike Carrodus

Substantive Research will be particularly beneficial for clients of Euronext’s subsidiary Commcise, which offers cloud-based, fully integrated commission management, research valuation, consumption tracking and payment solutions. 

With the integration of Substantive Research, these clients will be able to gain access to unique market benchmarks, enabling asset managers to demonstrate compliance with evolving regulation in a single, integrated technology solution.

Camille Beudin, head of diversified services, Euronext, said: “The acquisition of Substantive Research will accelerate the growth of our investor services business with leading research and market data benchmarking capabilities and cross-selling potential with Commcise, our commission management and research valuation solutions.” 

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In light of the final rules, the potential early-adopter group has doubled to 18.2%, up from 9.1% while the group of managers which are neutral and ‘waiting to see’ has grown slightly from 42% to 45%.

At the same time, 18.2% were found to be ‘sceptical and not engaged’, while 9.1% confirmed they were ‘not interested in moving’, regarding the unbundling rollback as “an unwelcome distraction, now that they finally have their post-Mifid II processes in place and working well,” said Substantive.

Changes made by the FCA in the final rules have eliminated some deal breakers for the more engaged firms keen to proceed.

Specifically, the FCA has removed key operational barriers which were hampering the potential take-up of greater flexibility in research funding.

The survey found ‘relaxation of the rules around strategy level budgets’ was the most important change for 60% of respondents, followed by 18.2% who highlighted ‘removing the requirement for buy-side firms to have separate written agreements with providers’.

Speaking to The TRADE, Mike Carrodus, chief executive of Substantive Research, explains: “Asset managers now have clarity in the UK, so from a regulatory perspective the focus moves onto the EU. Proposed research ‘joint payments’ language for the EU’s Listing Act seems more flexible and less prescriptive than the FCA’s consultation paper, but legal reviews are ongoing and there is uncertainty about how much added guidance is still to come.”

He further adds that the likelihood is for less of a regulatory clash between the US, the EU and the UK going forwards, however “how truly aligned they will be remains to be seen”.

The final FCA payment optionality rules for investment research were published in July and came into force on 1 August 2024.

Read more: FCA tables re-bundling to support more ‘flexible’ approach to research 

Notably, a number of senior executives on the buy-side are not keen to open up the fees discussion at the moment due to the current market situation representing such a challenging landscape for asset gathering and retention. 

Carrodus explained: “As these are new costs being reintroduced after 6 years of asset managers paying for them out of their own pockets, they anticipate pushback from clients and do not want to have to try and figure out what to do if a handful of clients object and opt out of paying while the rest acquiesce.

“Brokers and independent research providers may target a more lucrative future after years of price deflation, but we’ll only know if those hopes are well founded when the first canaries venture down the coalmine this winter!”

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Released on Friday, the watchdog’s new rule introduces a new payment option for research and follows an industry consultation period that began in April.

Under the new proposed payment option, the UK buy-side will be able to facilitate joint payments for third-party research and execution services, provided said firm meets requirements.

Read more – FCA tables re-bundling to support more ‘flexible’ approach to research

Today’s proposals stay very close to the proposal put forward in the consultation paper but do also include some minor changes on the back of industry feedback. 

“They [FCA] have made changes in a few areas which definitely increase the likelihood of the buy-side being tempted to try to get these costs off their own P&Ls and potentially become more open to consuming new research,” Substantive Research’s Mike Carrodus tells The TRADE. 

“For example, many interpreted the proposed rules in the CP as requiring “strategy level budgets” which would have been a dealbreaker for some asset managers – this has been clarified and removed. Allocating a budget down to individual teams is common practice, but for some asset managers who consume and repackage research insights centrally this would not have been an option.”

The FCA’s new rules also mean firms will not have to disclose their top providers in terms of payment amount – something highlighted by participants in the consultation. Instead, they will have to provide information around the breakdown of types of provider in the budget. 

Also included in today’s new rules is a softening in how firms ensure separately identifiable research charges versus execution costs. The FCA is now only asking for firms to have arrangements in place that evidence how the separation is done more broadly. 

Despite some calling for it, the FCA has opted not to re-implement ‘full rebundling’.

“Full bundling would lead to opacity of prices paid for research services, challenge the ability to compare prices paid across research providers, and not preserve competition in the separate markets for research and trade execution,” said the watchdog in its findings.

“We believe that Mifid II introduced a level of discipline and transparency which exceeds that of fully bundled arrangements, and we want to retain the benefits that have been achieved.”

The new payment option is not mandatory. From 1 August onwards, the FCA has suggested that firms must ensure they comply with requirements if they wish to use the new option.

“The FCA has provided greater flexibility which will encourage many asset managers to now explore whether their client bases will accommodate a small additional cost to their annual fees in order to align with these changes,” added Carrodus. “However, the regulator is not apologising for Mifid II’s research rules, and has clearly ruled out any return to a fully bundled world. Now we have regulatory clarity, we will wait to see if a group of early adopter asset managers emerges to test the commercial dynamics of this transition!”

Read more – In conversation with… Substantive Research’s Mike Carrodus

Research was unbundled as part of Mifid II in 2018 due to various industry concerns surrounding spending on duplicative or low-quality research.

The FCA began consulting with the industry on potential rebundling options following the conclusion of HM Treasury’s Investment Research Review (IRR) which concluded that unbundling requirements had had “adverse impacts” on the provision of investment research in the UK and subsequently the UK economy.

The IRR also concluded that unbundling requirements were potentially reducing UK asset managers’ access to global investment research and that this was putting them at a competitive disadvantage against international peers.

European regulators have also been reassessing the payment for research landscape as of late following similar research into the impacts of Mifid II.

Following its own findings, the Bloc is also introducing new legislative adjustments to the Mifid II unbundling rules, also in the form of a new payment option, to bundle research payments with execution.

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As a proportion of assets managed, US budgets rose 15%, with European budgets up a more modestly by 4%.

Substantive Research noted that US research budgets are able to bounce back much more quickly, given their investment professionals have more money to spend on external research from brokers and independent providers. 

Elsewhere, the research body asserted that these figures show why politicians have been pressuring the UK and EU regulators to help European asset managers return these costs back to their end investor clients.

“US budgets as a proportion of assets under management have moved significantly – we knew that this market was stabilising, but what this data points to is a faster recovery in research resourcing for American investment professionals versus their European peers,” Mike Carrodus, chief executive of Susbstantive Research, told The TRADE.

“The US, of course, wasn’t covered by Mifid II, but the research industry globally has gone through a period of stark deflation – anything from 30 to 50% decrease in pricing and payments in the research market.”

In monetary terms, research budgets increased holistically by 2.2%. Carrodus highlighted that “though a modest rise, this fundamentally changes the dynamics of the research market”.

He added: “Within that figure, some providers are increasing pricing and driving greater consumption of meetings and calls with their sector analysts. We are back to a market of winners and losers, instead of almost all research providers experiencing price deflation year after year.”

The research found that brokers still dominate research budgets, with 85% of spend annually – despite this being a decrease of 1% year-on-year.

Tooling and analytics solutions grew from 4% to 5% year-on-year, which Substantive Research predicts will accelerate in the next budgeting cycle for 2025, given that interest is high and these vendors are climbing up the provider list. Independent Research Providers (IRPs) and Expert Networks remained the same year-on-year at 8% and 2%, respectively, of annual budgets on average. 

Elsewhere, concentration of research budgets to the top 10 brokers rose marginally from 54.8% to 54.9%, which Substantive Research noted was a key metric to monitor whether the FCA’s reforms have spurred greater competition as intended. 

“I think the FCA would say if you look at what’s happened since Mifid II, there has been the realisation that there was an oversupply of research in Europe and that much of the ensuing reduction in supply didn’t really hurt the investment process for many European asset manager,” Carrodus told The TRADE. 

“The question here is flexibility and the ability to access a variety of different types of research input. There’s going to be even more flexibility now in the US, but it’s still significant that things have stabilised in the UK and Europe just before new optionality rules come into effect in both markets. It’s going to be interesting to see whether this latest trend is just a lag for Europe, or whether this difference in resourcing across regions is going to be even more stark in future.” 

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Things are definitely evolving and all the noise creates more discussion. In terms of initial impact we took a first look and the main thing was that there were no major stumbling blocks in the consultation paper, no real sting in the tail. For asset managers there is nothing operationally, or from a regulatory perspective, that will act as a real dealbreaker, however there are some things that asset managers will either need clarifying or will have to make a call on in terms of interpretation.  

There are a couple of specific areas that many on the buy-side have found unhelpful, including how granular the reporting and disclosure requirements would have to become. Right now you can already charge clients for your research costs using an operationally burdensome Research Payment Account (RPA) arrangement which puts most firms off, so it’s key that this new structure is seen as a simpler option. 

These freedoms soften the burden to an extent. Asset managers will move onto the commercial conversations with their client base about whether they will allow these costs to be returned to them, and change will hinge on whether managers feel confident that there’s not going to be any sort of negative competitive consequences.  

What are the expected speed bumps following this news? 

It links to pre and post reporting, and how that fits into regulatory alignment – across the US and UK. There are a lot of American firms who use research and pay as they go, as opposed to setting a budget. Many just pay using the commission sharing arrangements (CSA) and then assess – they’re not setting a clear, delineated research budget at the beginning of the year, and others that do set a budget often set it at a firm-wide level which may not be sufficiently detailed.

It also depends on a firm’s structure internally, such as whether they share research around the firm which can create issues within this new structure. For those who already have the systems in place in terms of budgets and metrics, they will feel like this is less of a challenge. However, for others, they’ll have to set up steering groups and take more time. There’s a clear spectrum of varying responses to the consultation paper from our survey group. 

Is there a common denominator between the parties that are quite pro-rebundling? 

I think it’s easier to understand the eagerness from those who are just trying to have consistency across different regions and jurisdictions, it’s an authentic narrative that shows a preference for global alignment and the ability to mirror the regulatory alignment with your own global process. Outside of those use cases the positivity for these new freedoms is not so clear cut. 

The review led by Rachel Kent outlined that returning research costs to end investors could be commensurate with their best interests, and could contribute to better performance and allocation of capital. But whether asset owners buy into this is another question. 

In addition, for firms which do not have business in multiple geographies, the importance of global cohesiveness and aligning with that shift loses gravitas, and it’s unsurprising that some firms that are UK-only are less keen. It’s a nuanced conversation, and following this consultation paper, end investors will have two key questions – what do I get for the extra money that I’m being charged? and how do I know it is an appropriate use of tightening budgets?  

Read more: FCA tables re-bundling to support more ‘flexible’ approach to research 

In the first instance, they’re not going to be guaranteed alpha, but these new freedoms could add a flexibility and structure that allows for optionality in getting different research inputs to contribute to investment decisions. This could be in the interests of the asset owner. In terms of spending budget wisely and focusing on value, that’s the intention of the FCA’s guardrails and constraints. It’s extremely interesting for us at Substantive Research that price benchmarking is one of the suggestions to come from the Kent review.

It’s important to note that price benchmarking is not necessarily about always driving the cost of research down. Even if this payment optionality trend didn’t take off, our data already shows that research budgets and research payments have stabilised somewhat. But what benchmarking of this kind does is illustrate to firms where they are over or underspending versus peers, so for example if they want to reward a provider 20% or 30% more than peers, they can do so from a position of knowledge which they can report confidently to clients.  

Now that the US and the UK are more closely aligned, what’s the current state of play across the rest of Europe?  

I’m not an expert on EU processes but we now have some of the new language to assess, and it appears that there is more openness to actual rebundling from the EU bloc. However, also included are mentions about separate research agreements, assessing the value of research and understanding how much firms are paying, which indicates an element of CSA.  

So on the one hand, you’ve got language that leans positively towards rebundling, but then there are other factors, for example one intriguing part of the EU rhetoric which says that in essence end investor clients should be able to ask firms for details about their managers’ policies on research, if indeed they have them. But if your asset manager decides not to have that information collated, then they might not have to deliver it. It’s a potential loophole in theory. 

This aside, the EU will have fewer guardrails but a similar approach to whatever final form the FCA’s new rules take. In the end, I suspect the EU research market will get to a very similar place, which is a CSA-led process, plus more specific terminology for optionality on how to pay for research, but with a greater disclosure burden. Longer term, I think the US will mimic Europe and the UK in those requirements for greater disclosure in exchange for continuing research payment optionality. 

For the moment conversations are almost entirely internal, but there are some outlier firms who are more keen to test the waters on this with their clients. There may be an early adopter group this autumn making changes, and all eyes will be on them to see how they get on!

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In the wake of the FCA’s research payment optionality, the report delved into how the current landscape is shaping strategies moving forward and asserted that either adoption or avoidance of new freedoms in the space is set to affect firms’ competitive positioning.

Speaking to The TRADE, Mike Carrodus, chief executive of Substantive Research, said: “This Consultation Paper from the FCA doesn’t have any total deal breakers, but there is comprehensive disclosure here that may slow down some of the firms who were keen to move early. 

“[…] The experiences of the early adopter group at the end of this year will be key, and also if any of the largest firms are in there – all eyes will be on them to gauge how much complaining and pushback there’s been from end investor clients.”

Read more: FCA eyes first half of 2024 for revisions to UK research rules after Mansion House announcement

Carrodus explained: “The buy-side reaction to the FCA’s consultation paper is a three-way split, between those that want to transition to a client-funded research budget rapidly, those that will never do it unless they are literally the last P&L research payers left, and finally a large cohort that would be interested in reducing their own costs in a challenging market, but would like to watch this play out for a while.” 

The majority of buy-side respondents confirming no change to their processes demonstrates that firms are keenly aware that the research procurement process is already rigorous and comprehensive at present and taking advantage of new regulatory changes will add to this burden, asserted the research body. 

The findings demonstrated that 55.9% of asset managers believe that recent updates to Mifid II unbundling rules remove operational barriers to charging clients for research. As a result, end-clients can once again be charged for the investment research they consume. 

Looking ahead, asset managers are of conflicting perspectives as to what the next couple of years hold in store for research funding across the market. 

While 17.6 % of respondents see the majority of budgets moving to client funded over the next two years, 35.3% believe that existing P&L firms make no changes, and 47.1% expect an approach of broadly equal mix of client-funded and P&L-funded.

The report noted that currently, 85% of those surveyed operate on the P&L research funding model.

“[The FCA’s consultation paper] supports a scenario where the early adopter group this year is small, with a much bigger herd engaging in the spring/summer of 2025 with a view to moving their 2026 budgets to a client-funded approach,” Carrodus told The TRADE. 

While the majority of respondents expect change, it more of an evolution than a rapid, large-scale move in the market, according to Substantive Research.   

Read more: New research finds some buy-side firms paying 26 times more than others for index data as FCA investigation continues

Speaking to what should be front of mind for asset managers, Carrodus suggested that what the buy-side required right now is a ‘code’. 

Specifically, “a set of standards that firms feel that they can sign up to. There will be different interpretations of the current wording of the FCA paper, and uncertainty on issues like what constitutes a ‘Strategy Level Budget’ and associated levels of disclosure.  The buy-side will want detailed frameworks to compare against, which the FCA can verify, ultimately providing more comfort to asset owners.” 

Read more: FCA tables re-bundling to support more ‘flexible’ approach to research

Substantive Research’s survey includes insight from 35 of the largest asset managers globally, including a majority 69% UK firms, 19% hailing from North America, and 12% from the EU.

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Despite vendors claiming that price surges are in line across peers, significant cost pressures remain for market data consumers as the increases continue to be applied to the entire market in a so-called “endless cycle”.

As a result, both the buy- and sell-side are playing a game of “catch up” with no end in sight, the whitepaper notes, as by the time a consumer’s discounts are removed over a multi-year agreement, vendors have raised the ‘standard’ price again, and by a lot, sparking another negotiation.

Substantive Research found that major vendors’ prices rose by up to 50% for the same use cases in several instances, with the rise put down to ‘changes in pricing structure’, while 65% of surveyed firms surveyed reported communications from vendors that they had previously been significantly discounted and are now compelled to pay more in order to align with their peers.

Speaking to The TRADE, Mike Carrodus, chief executive of Substantive Research, explains: “When vendors say they need to bring market data customers ‘in-line’ with what other peers are paying, they may well have some firms paying at those higher levels but that doesn’t mean there’s a consistent market price that the data customer is lagging behind […] there can be no single definition of “peers” as that calculation will differ alongside the differing pricing drivers per provider, per product and per license.” 

Specifically, the removal of discounts accounted for 67% of price rises in ratings, 36% of price rises in data terminals, 41% of price rises in indexes, and 20% of price rises in data feeds, according to the whitepaper. For data feeds, the remaining 80% was put down to ‘changes in use cases’.

The Financial Conduct Authority (FCA) has previously shared its opinion that the wholesale data market is not working, with trading markets concentrated on too few firms – limiting choice and thus making switching suppliers difficult for market participants. 

Read more: Competition in wholesale data market is not working, first phase of FCA investigation finds

With this in mind, the FCA launched a wholesale market data study last March, delving into the transparency and consistency, or lack thereof, of pricing reported by consumers throughout the financial industry in order to address concerns raised by both the buy- and sell-side.

The findings cover: Market data feeds, providers of indexes, credit ratings data, and terminals.

Specifically looking at the buy-side perspective, Carrodus says that this FCA review should particularly look into how to ensure pricing is more closely tied to cost rather than value, explaining: “While they wouldn’t insist necessarily on published ratecards for all products, a transparent, accessible framework for providers’ pricing policies would be welcomed […] Many would suggest a focus on the strict confidentiality clauses, which have ensured that no one can discuss their provider relationships with peers, and many clients have said these have enabled the opacity in prices to continue.

“[…] Clients and industry stakeholders have been impressed with the resources allocated by the FCA to this study – it has been comprehensive and has asked the right questions. But the market is also realistic about how much the regulator can achieve when many of these pricing dynamics are fundamentally driven by lack of alternatives.”

The FCA previously has recently conducted a series of consultations, and gathered evidence, around the topic with an announcement regarding its chosen actions expected on 1 March 2024. 

The regulator previously asserted that “there are reasonable grounds for suspecting that some features of the benchmarks, credit ratings data and Market Data Vendor (MDV) services markets prevent, restrict or distort competition”. Specifically, the FCA claimed that the process of procuring data, specifically the way it is sold, is too complex.

Similarly, the European Union has also conducted a major probe into market data in recent years, concluded by the introduction of reasonable commercial bias. 

Read more: Market data prices rising ‘faster than ever’ despite FCA investigation, new data finds

The idea of “playing catch up” amid continuous unclear justifications from vendors has led to market frustrations as the cycle seemingly appears to be set to continue in perpetuity – with continuing rising prices meaning that firms can never catch up.

Findings from Substantive Research last October showed that the average price increase for an unchanged customer use case at ratings agencies was 12% – not including year-on-year inflation increases within a multiyear contract.

For index providers, the average price increase for an unchanged customer use case was 13% also not including year-on-year inflation increases within a multiyear contract, while some outlier providers are repricing clients by 600%.

In addition, a March 2023 report from the research body found that some providers are charging certain buy-side firms 26 times more than others for similar index products and services. 

Read more: Understanding how to utilise data is essential for improving workflows

The Substantive Research whitepaper includes insight from 40 buy-side firms and 20 sell-side firms from across Europe and North America.

Carrodus highlighted the key takeaway from the research findings: “[…] the market is hoping for significant changes to the way this market is run, anything less and consumers of market data will have to make fundamental changes to their data budgeting and procurement processes. 

“A key dynamic we’ve uncovered is that by the time a consumer’s discounts are removed over a multi-year agreement, vendors have raised the ‘standard’ price again, and by a lot, sparking another negotiation. This means that firms procuring market data never catch up with what vendors say they should be paying.”

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UK bundling rules are likely to be repealed mid next year, with Europe to follow. Discussions will centre around who pays for research rather than on re-bundling. Although some specialists may see an opportunity here. The question remains as to whether this will have a material impact on SME liquidity. Despite the Swedish Presidency pushing through changes in June, including a single volume cap for dark trading, limitations on SIs and the outlines for a consolidated tape, we’re unlikely to see any major impact next year, perhaps with the exception of the removal of the 4% single venue cap on dark trading, which could be lifted in the early part of the new year. 

The transition to T+1 in the US and the impact this has on the UK and Europe is an obvious theme. Improved post-trade efficiencies and initial regulatory leniency will hopefully make this an easier pill to swallow but funding costs and liquidity impacts are yet to be realised. Changes to UK trade reporting requirements will provide a clearer insight into how much business is done away from the public markets, which may court some regulatory attention. The introduction of a new Designated Reporter Regime will also likely be a key focus although some firms will likely want to continue to report as SI or via the off-book on exchange channel. 

Hayley McDowell, European market structure consultant, RBC Capital Markets 

The buy-side face a dilemma as the UK (and likely the EU) prepare to offer greater flexibility on payments for research. While a full re-bundling is unlikely, we may see an explosion of CSAs as firms look to align their research payment processes globally. As the choice to remain unbundled will be permitted, it might be a slow process for asset managers to make any material changes unless we see larger buy-side firms take the lead on this development. Despite the ongoing uncertainty for participants, 2024 promises to be another eventful year for Pan-European market structure.

Elsewhere, sourcing alternative liquidity will remain a key focus given the continued decline of order book liquidity in 2023. As off-book trading and internalisation grow, concerns about the potential impact on price formation could come to the fore for market participants. With new dark venues preparing to launch early next year, incumbent venues could lose market share in this space. 
 
T+1 will continue to be top of mind as the US and Canada migrate to a shorter settlement cycle in May. As the UK and EU ponder a similar move, reducing market hours could come back into focus, especially given the strained liquidity environment. The LSE’s previous consultation on reducing market hours a few years ago was well received by market participants and it’s unlikely this stance has changed drastically since then. 

Mike Carrodus, chief executive officer, Substantive Research  

Next year will bring more uncertainty for investment research, with a potential ‘rebundling’ of investment research costs with execution costs under Mifid II, and it will be a year of reckoning for market data. The recommendations from Rachel Kent’s UK Investment Research Review are now with the FCA. We’ll see the FCA’s Consultation Paper in February or March 2024, with the final UK rules coming at the end of June. But what rebundling might look like in practice is uncertain – everything depends on how end investors react to being asked to take on asset managers’ research costs once again.  

Also next year, the FCA will reach its conclusion after looking into opaque and inconsistent pricing models and barriers to entry in the wholesale market data market. This is addressing some long-held frustrations on both the buy- and sell-side, regarding these ‘have-to-have’ data products, such as indices, credit ratings and pricing and reference data.  AI will help fund managers sift through their research and data inputs much more efficiently, but will a new deluge of AI-enabled research content make finding what we want actually harder?

The post The TRADE predictions series 2024: Rules around research appeared first on The TRADE.

Following years of canvassing from market participants, the UK’s Financial Conduct Authority launched a three-pronged investigation into competition and cost in the data markets in January 2022.

However, in spite of this ongoing probe into the data sphere, market data pricing has continued to rise “faster than ever” and far faster than the rate of inflation, new data by Substantive Research has found.

According to the firm’s most recent findings, the average price increase for an unchanged customer use case at ratings agencies is 12% – not including year-on-year inflation increases within a multiyear contract. For index providers, the average price increase for an unchanged customer use case is 13% also not including year-on-year inflation increases within a multiyear contract.

Some outlier providers are repricing clients by 600%, added Substantive Research.

Mike Carrodus

“This provider power is creating a dynamic in which asset managers and banks are on an unsustainable path – it will become economically un-viable,” Substantive Research’s founder and chief executive officer, Mike Carrodus, told The TRADE.

“The backdrop of the regulatory scrutiny is not affecting the propensity of the most powerful providers to increase costs for identical use cases. There’s a lack of standardisation that people hide behind. This is a tough time. They [the buy- and sell-side] feel quite handcuffed to these providers. Pricing power is being exercised and this is an issue because there are tough choices being made across organisations at the moment.”

Read more – New research finds some buy-side firms paying 26 times more than others for index data as FCA investigation continues

The new data follows a similar study by Substantive Research in March, finding that some providers are charging certain buy-side firms 26 times more than others for similar index products and services.

The FCA’s data probe

The March findings followed the FCA’s conclusion of the first phase of its investigation in the same month, finding that competition in the wholesale data market is in fact not working. The UK watchdog confirmed in its findings that some trading markets are concentrated on too few firms, limiting choice for institutions and making switching suppliers difficult. 

It also found that the process of procuring data – in particular the way it is sold – is too complex, again having the effect of limiting choices for investors when sourcing this essential data.

The FCA subsequently launched a new wholesale data market study under the Enterprise Act, inviting any persons wishing to make representations on the subject – most importantly on whether the subject should be submitted as a market investigation reference under the Act to the Competition Markets Authority – by 30 March. The regulator is expected to publish the findings and its chosen action by 1 March 2024.

Read more – Competition in wholesale data market is not working, first phase of FCA investigation finds

“Consumers of market data, on both the buy- and sell-side, are eagerly awaiting the results of this study which could have global ramifications, early next year,” said Substantive Research in a statement.

It is the second major probe into market data in recent years after the European Union also conducted a similar study which was concluded by the introduction of reasonable commercial bias.

The solution

The FCA’s study references six sections including barriers to entry, network effects, vertical integration, suppliers’ commercial practices, behaviour of data users and incentives of innovation.

For Carrodus, the core areas of concern are barriers to entry and suppliers’ commercial practices. Among the solutions aired in the last year is the concept of standardisation or the use of list pricing to reduce the disparity in fees charged to clients.

However, according to Carrodus, the current power dynamic within the data market has become dysfunctional to the point that firms – in particular smaller ones – fear higher prices in the event that providers decide to standardise across their client base.

“Clients believe standardisation could lead to higher prices. That doesn’t sound like a healthy functioning market. The words ‘list price’ exist in this market but it doesn’t actually exist. Our data shows that often in market data the amount of discounting that happens can be reasonably consistent. What’s not consistent is the original list price,” he said.

“Regulators say a transparent pricing model would be helpful. It doesn’t have to be perfectly adhered to. But market is missing any anchor whatsoever due to the lack of list prices. There’s only so much they [regulators] can do. Unless the dynamics were created by them and they can unwind them. But they haven’t in most cases – it’s brand power.”

On its current path, the increases to market data pricing will likely further concentrate flows into larger players able to shoulder the costs, accelerating existing consolidation taking place within most corners of the markets.

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As a result, in 2023, asset managers are consuming increasingly more from their core bulge bracket providers as they aim to be cost efficient and manage budgets in what has turned out to be a challenging market environment for active managers. 

Speaking to The TRADE, Mike Carrodus, chief executive of Substantive Research, explained: “The challenge is that whilst these proposed freedoms may well help the market evolve over the longer term, right now asset managers are in a ‘watch and wait’ mode which will hinder any potential short-term benefits.”

As well as budgets for investment research decreasing, a trend of concentrating in the largest, bulge-bracket providers, continues according to Substantive Research, with payments to the top ten brokers in the average research budget increasing by 0.7% since 2022 – now at 54.6%.

Carrodus further told The TRADE: “Our data shows why HM Treasury was keen to address the situation – the market works well if you are a large asset manager or a bulge bracket broker, but times are very tough for those who are further down the food chain.” 

The newest findings highlighted the current state of broker research pricing, supply and market share, looking at the state of play in light of the UK’s recent Investment Research Review.

The study explained that the review had “inspired hopes that “rebundling” of research and execution next year could reverse the post-Mifid II decline in research budgets and encourage greater coverage of small and medium-sized enterprises (SMEs)”. 

However, investment research budgets have slipped despite this, according to the study, with the average research budget having fallen 6.5%.

Read more: Substantive Research launches research dashboard for asset managers

Speaking in an announcement, Carrodus suggested that were they able to do so without any adverse consequences, asset managers would opt to take away the cost factor when it came to external research, and thus remove any downward pressure on their budgets.

He added: “But the ability to rebundle trading and research will fundamentally depend on commercial dynamics, not regulatory ones, and it remains to be seen whether the appetite exists amongst the buy side to open this conversation up with clients in the current tough market environment.”

Looking forward, the study explained that eyes are looking towards the UK Financial Conduct Authority’s (FCA) consultation paper which will highlight proposed changes, with the potential for both buy and sell to seriously revise their processes and negotiate price and access under a new framework. 

Read more: FCA eyes first half of 2024 for revisions to UK research rules after Mansion House announcement

Carrodus said: “Brokers encouraged by imminent regulatory changes may be surprised at how tough negotiations are this autumn – asset managers aren’t changing processes until they get much more clarity, and in the meantime, budgets are once again under pressure.” 

Elsewhere, the survey addressed the impact of M&A on research pricing since Mifid II. It found that acquired brokers pricing decreases an average of 6% in the year following an acquisition, while independent research providers only seeing a 1.8% decrease under the same parameters.

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