Can research drive execution, prove it?

Ask the head of research at any major bank, and they will tell you that their insightful research is a core competence for the bank, and a reflection of their deep understanding of the markets, and a key differentiator and source of added value to clients, and leads to greater execution flows.

But, is that true, and just how can banks metricate the value of research in terms of leading to greater execution, and making the bank's own Single-Dealer Platform stickier?

The cost of research used to be ‘bundled’ into the ‘all in’ execution rate for institutional clients, who in return for top quality research, would execute trades through that bank. That’s all changed now, and in order to make more transparent the cost of research from the cost of execution, firms have unbundled the ‘soft dollar‘ costs of research in order to remove potential for conflicts of interest in terms of how and where buy side firms execute trades and their requirement for ‘best execution’, research has now become a major cost centre for banks.

The challenge for banks is to deliver to clients insightful research in such a way that it ‘naturally’ integrates into their trading workflows and provides a ‘call to action’, that leads to execution.

However, it’s important to bear in mind that in many cases, the consumers of research will not execute trades. For instance a fund manager will consume research, perhaps longer term thematic structural research as part of their decision-making process. However, once a strategy is defined, it will be actioned by a separate execution desk – making it hard to prove the effectiveness and linkage between research and execution.

The research portal/silo contains great content, however too often they end up becoming hard to navigate repositories of data, with a mixture of long-term thematic fundamental research combined with short-term technical and event-driven analysis and trade ideas. Clients and even internal sales people avoid the portal, preferring to receive email PDF summaries rather than going to hunt for what they want.

The execution platform on the other hand, tends to be just that execution. Delivering great liquidity to clients, across asset classes.

So, how should bank approach the integration of research with execution?

What won’t work is to simply merge the research and execution portal into a single offering – that will only lead to lower consumption of research, and possibly less execution on the platform.

The Key here is to integrate ‘thin slices’ of contextual and relevant research into the ‘flow’ of the execution platform, in such a way that it provides insight, intelligence and greater ‘decision support’ for possible trades that client is considering.

Integration of trade idea with execution: Use research to ‘tell your client something they didn’t know’, or better still show your client something they haven’t seen, perhaps new correlation they weren’t aware of, or insight into the bank’s order flow (especially in Emerging Markets) that will provide the client with greater insight into the timing of potential trades they need to execute. This doesn’t always need to be event-driven realtime, in some cases especially in the case of Emerging Markets, clients need greater insight around fundamentals perhaps economic data, links to correlated commodity markets that might drive the currency.

When thinking about corporate clients, who are typically hedging, banks might consider providing clients with insight in terms of comparing proposed hedge strategies with the bank’s own forward-looking view for a particular currency, or portfolio. Allowing the client to compare their proposed trade with the bank’s view on that currency pair.

It’s interesting to see an increasing number of banks creating their own real-time research/analysis services, fully integrated within their execution portals, such as:

The very successful Citi’s FXwire, which is managed by an ex trader and financial journalist

Anil Prasad, Global Head of Foreign Exchange and Local Markets at Citi. “Being at the centre of the global FX market, Citi generates an enormous amount of information every day that our clients find valuable. Our intention is to make CitiFX Wire the one-stop shop for the information needs of our clients.”

And Morgan Stanley’s Matrix  has a strap line which states:

With Morgan Stanley Matrix you get closer to the trader floor. Get informed opinions from market professionals who put their best ideas direct to your desktop…

And of course the UBS Neo strap line,

It starts with an idea

Interestingly today, Deutsche announced the hire of another ex-trader and former editor of EuroMoney’s FXNews as head of content management for their institutional client group.

Picture below shows trade idea, populating an FX trade ticket