In a move to augment its agency execution business, Investment Technology Group (ITG) is now offering an independent research product to its institutional clients.
ITG is now the exclusive distributor of Disclosure Insight, as a result of an undisclosed minority investment it made in the firm last week. The deal allows ITG to offer research to clients, helping them spend their commission dollars more efficiently. The deal also gives ITG’s clients more reason to trade with the firm.
ITG’s move follows a trend of other independent agency shops looking to stake a claim in the research game, in order to secure trading revenue with institutional clients. Execution-only firms, in some instances, have been hiring analysts to gain research votes, while others have been launching corporate access departments in order to curry favor with portfolio managers.
Disclosure Insight assesses risk at publicly traded companies and produces the D.I. Report. The report summarizes 100 different risk factors that could affect a company’s stock, such as undisclosed Securities and Exchange Commission activity; accounting/auditor problems, unusual capital markets events and stability of the board and the executive suite. A report covers the last five years of a company’s history.
"I think having information on SEC audits–the undisclosed activity–makes this a pretty good product,’ said Kevin Chapman, managing director, head of trading at Allianz Global Investors Capital. "This could fit into someone’s investing style or be a part of their screening process."
In order to get this data, especially such tidbits like undisclosed SEC activity, Disclosure Insight files Freedom of Information Act requests, approximately 2,500 per year, according to Jon Gavin, the firm’s chief executive officer. If the firm gets a response to the request, any new information is incorporated into the report.
Then, pending the official SEC response, the company can decide if a researched company poses any type of risk. When it does, Disclosure Insight incorporates the new information into a separate alert it sends to clients.
"The Disclosure Insight report compresses 50 hours of analysis and due diligence into a one- to two-page summary," Gavin said. "Our research can cut days off your due diligence process when looking at new companies."
Given the current market environment where compliance is king, Chapman said the background checking service would be useful to portfolio managers.
"The level of risk exposed by the service, whether if the risk is too high or low, could kick certain companies out from being invested in," Chapman said. "The data would likely be used in the early stages of analyzing a company."
And getting the best research at the best price is important to firms like Allianz Global Investors, where 85 percent of the 3.5 cents average commission rate it pays goes toward paying research. "It’s important to us to make sure we get the most we can out of the research and other services we’re using and paying the minimum for them. This savings filters right down to our clients."
As for ITG, Ian Domowitz, a managing director there, says the move into research was logical. That’s because portfolio managers are now shifting their investment strategies from alpha preservation to alpha generation, he said. Previously, ITG focused on providing cost analysis, which addressed portfolio manager’s alpha preservation strategies. Now with Disclosure Insight, ITG can now provide clients with alpha generating buy-sell-hold advice.
According to Domowitz, the research is a natural complement to ITG’s existing analytics and research tools for institutional investors, including economic forecasts, TCA and portfolio optimization programs.
"On the content side, we’ve been concentrated largely in the transaction space, providing post trade TCA–trade-cost analysis–and pre-trade analytics," Domowitz said. "However, we are looking to add content that is not necessary related to transaction research, but content specific to company fundamentals."
And more firms can be expected to follow ITG’s lead, said Cheryl Cargie, head trader at Ariel Investments, noting that other execution only-brokers and minority firms are beginning to offer third-party research.
"There are firms that can’t do business with brokers who don’t have research," Cargie said. "Execution-only shops are picking up research guys and are offering research services to get their business going."
The Disclosure Insight research will be available exclusively through ITG as part of an overall package of ITG services or a la carte. Pricing will be set on a client-by-client basis.
