Street Smarts: The Widening Capital Markets Content Spectrum

November 1, 2016

The Widening Content Spectrum series that explores the rise of research, email distribution and the future of Wall Street. Street Smarts insights are written by Blair Livingston, Chief Executive Officer and Founder, Street Contxt.


Written Research – The Foundation of the Content Spectrum

In institutional finance, content and commentary are often correlated with the Research department. Research was the birth-place of written commentary on the Street. The content spectrum consisted of two products: formal written research and the conversations that were held in person or over the phone. The content spectrum was based on fundamental research, which was rooted in rigorous and extensive modeling and analysis.


Origins of Research

Street Contxt and Equity ResearchWritten research was primarily used as a marketing tool for new deals. First, an investment bank would meet with a company who was not yet public or wanted to raise more money The ability of the firm to raise and secure capital was reviewed, and if all went well, a road show would follow. However, once the roadshow was underway, there was the issue of investor education – many potential investors were not familiar with the industry, sector or company. Institutional investors would only invest in companies that they could understand. To solve this issue, research was produced to educate potential investors and entice them to participate in the deal.

After a company went public, research  continued to educate institutional investors by notifying them of any potential material changes.  Material changes were influenced by  major press releases or quarterly earnings. Research was responsible for digesting information during these milestones and providing analysis back to shareholders.  The coverage included the company’s and their holdings’ outlook. Corporate clients value research coverage because it helps keep the Street stay updated on their business, and understand their business model – which keeps current shareholders informed, and attracts potential new shareholders.

Of course, the research teams worked within a larger firm, which consisted of many functional groups – and these firms traditionally had clear separations of responsibilities – mainly around research (creation), sales (distribution), and trading (execution/payment).

Research teams wrote the content and commentary, which provided insight and analysis, and answered incoming questions. Sales was the distribution arm of the firm, making sure the right research got to the right client, at the right time. Salespeople historically covered a limited number of clients – so that they could understand their interests, and cater to them. Trading was responsible for handling the resulting order flow, and being the cash register that paid for the research.

Each individual within a brokerage had their role, and each had their value add along the supply chain. However, as technology began to have a heavy impact on Wall Street, that all changed – and the major catalyst was the rise of electronic execution.

Differentiation Advantage

As execution became electronic and certain tasks of various roles became automated, there was a requirement to make up the lost value. New individuals on the sell side – from sales traders, to position traders, to strategists and sales people – also began producing commentary. Salespeople added color to the firm’s traditional research commentary with their own views. Traders put out market commentary and analysis – having an opinion or viewpoint that differentiated them from others based on their deep understanding from an execution point of view.  What started out as a differentiator in these roles has now become table stakes. Today, everyone needs to have a view – and the originality, scope, and depth of that view is what separates those who excel from those who fall behind.


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Widening Content Spectrum

Street Contxt Research DistributionEveryone on the sell side has their own view, which is largely influenced by their role. Traders are very close to the markets – they know about activity, what the current pressures are on a security, who’s buying, and who’s selling, and when a good time to do either is. Salespeople know what the hot topics of the day are, and what keeps their clients up at night. Strategists are putting out shorter pieces of information with a different time horizon which is usually shorter than traditional research, and collecting feedback to iterate. Research analysts have a deep, fundamental view, and have been close to the company, and know what questions investors are asking. There are additional roles who have additional viewpoints, perspectives, and thought processes – all of which have a different level of value to different clients.

As a result of the additional viewpoints, the content spectrum is widening.

What are the dimensions of the content spectrum? In our view, content has two parameters: potential audience, and potential value. Traditionally, the content spectrum consisted of two extremes. The traditional research report was on one end of the spectrum. It was less impactful but had a potentially massive audience. On the other end, a conversation over the phone or in person with the analyst was very impactful and personalized, but held a very small audience, at times of only one.  

The traditional spectrum had new elements added in-between those two extremes as a result of additional content producers adding their commentary. Between the extensive written research report, and the dialogue, there are an increasing number of variations and types of content available, all with a different viewpoint, different medium, and different context.

Email Distribution

The problem for the industry is that the communication mediums of choice haven’t evolved with the content spectrum to address the addition of more content. Unlike formal equity research, almost all commentary today is delivered directly to clients over email, as this has been the only method for quickly disseminating content.  

Using email distribution has created new problems for both brokerages and their clients. Brokerages have three major issues: they don’t know which clients are reading their research and commentary, they don’t understand commentary performance metrics about authors, and there is no unified method of collecting and managing the different types of content.

Client consumption, or understanding who is engaging with what, is the first and foremost issue. In order for brokerages to get paid, they need to provide value to their clients. It was easier to measure value when the content spectrum only involved written research and high touch services. As content delivery became electronic and the entire firm started contributing various content types across sales, trading, strategists, and research, it has become more difficult for brokerages to monitor client consumption in order to quantify commissions.  

Competitive Edge for Wall Street Brokers

Street Contxt Future of Research DistributionTo compete in the next era of Wall Street, brokerages will need sophisticated measurements in place to capture client consumption across all sources, including telephone calls, events, or electronically distributed content.

In addition, brokerages need to measure the impact of each individual within their firm based on the intellectual capital they are producing and distributing. Management teams need to understand which content producers are having the strongest impact with which clients. This information will be used to drive advancement and compensation.

Finally, as more and more of a brokerages resources are directly or indirectly spent on ‘content production’, brokerages need to become more sophisticated about how they manage those resources on an ongoing basis. This means capturing all content produced within the firm – across every content producer type, and every asset class – and making it easily available to all individuals within the firm, so that they can personally digest it, make it available to clients, or use it to create new derivative content.


Challenges Experienced by Buy Side Clients

As more content producers continue to enter the market, the more content is being produced for institutional finance. The exponential growth of available content and commentary produces issues, including: the ability to manage and discover new content, collaboration and consumption, and commission allocation based on consumption.

The difficulty in discovering and consuming new content and commentary is only growing. It is increasingly difficult to keep track of who is writing content on what, and how the landscape is changing. Historically, asset managers would receive a few dozen emails, but it’s now common to receive thousands of emails on a daily basis.

The buy side finds themselves caught in a catch-22; they don’t want to miss any impactful commentary, so they subscribe to everything. However, by subscribing to everything, they are overwhelmed, and inherently miss the very thing they were trying to catch as a result.

There is an additional missed opportunity to connect with content producers that asset managers aren’t even aware of. As the markets have become more global, clients have had to expand their views as to what content and geographies are relevant to them.

Once a firm finds all the commentary they want to consume, how do clients share great content internally, in order to drive alpha across the firm? How do they keep track of their favorite content sources and authors? Current solution can not be found in email.  

As the world has become more connected, more clients are reading content on mobile. A study conducted by Street Contxt across 140,000 unique contacts and 16,000 unique firms, found that almost 30% of all readership during the week happens on a mobile device, and that number skyrockets to 90% during the weekend. Although content is being increasingly consumed through a mobile device, it was authored on, and designed for, a desktop. This leads to user experience issues for clients where they cannot read, digest, and act on the information that their brokers and content providers are sending to them as the consumption medium is broken.

Additionally, it is increasingly difficult for clients to measure the value that  their brokers are providing in an email first environment. As the number of commentary providers grows, value add commentary no longer only comes from research – it could come from anywhere within the brokerage. Buy side clients are looking for new ways to measure all commentary and resources that they find of value from a brokerage, not just the traditional subset.

As the amount of commentary grows and the ability to manage that influx diminishes;  the probability of missing a piece of market-moving commentary that will have a  material impact on their holdings exponentially increases.

The content spectrum is widening, and it is impacting both sides of the Street. As execution became electronic, and content distribution begins to follow the same path, the sell side has begun to augment their value add by sharing their unique perspective with clients. As a result, issues arise as the brokerages struggle to understand client consumption, understand internal effectiveness, and manage this new intellectual asset. Meanwhile, clients struggle to manage the deluge of content and commentary, seek to discover new and relevant content producers, and quantify each brokerages value add based on these new content types.

The content spectrum is widening – now the industry needs to adapt.


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Additional Resources:

research-150-128RISE OF TRADING AND EQUITY RESEARCH

In addition to trading execution Investment Banks and Brokerages offer thematic and specific research across asset class, sector, and security in order to both educate potential customers and drive business with existing customers. Discover how equity research helped expand investment banking from trading execution to include a personalized client experience.

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THE CONTENT ADVANTAGE, ADDING CONTEXT TO TRADING EXECUTION

As execution became less valuable to the client, brokers sought to differentiate themselves by the additional analysis and ‘colour’ they provided in addition to their traditional trading role.

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SPEED LIMIT OF THE DATA ADVANTAGE5-Image-Resize-150-150

Data access was the original parameter of optimization for Wall Street. Now, investors are overwhelmed and under equipped to utilize the new availability of data, and the complexity of that data – resulting in a new parameter of optimization: content and analysis access.

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