Scott Winship, Emma Margetts and Alex Santos, co-founders of financial technology start-up Alpha Exchange, appear to be in the right place at the right time.
30 months ago, they started developing a platform and marketplace for investment research. But they soon realised that MiFID II was about to give this market a huge, new regulatory imperative.
Currently, large providers tend to bundle research, often with a package of other services, in one price. But the second Markets in Financial Instruments Directive (MiFID II), which comes into force in January 2018, will require them to unbundle and price research data parts separately.
Many firms say complying with this change will be onerous. By providing them with a technological toolkit for efficient compliance, Alpha Exchange has gained remarkable traction since it launched in September 2016.
Winship says between 50 and 100 of the largest buy-side institutions already use the platform and it is adding more constantly. About 150 research providers are also using it, and Alpha Exchange already has several thousand users in total.
Organising and optimising
Winship developed the idea while working as an analyst at Investec Asset Management. ‘In that role, I received nearly 1000 emails a day with investment research – all unstructured and mostly irrelevant,’ he says. ‘Hence the idea of an aggregation venue that would provide all content in an organised and intelligent manner across sources.
‘I also had the problem of ascertaining which research providers I had used and who to pay with little, if any, record keeping. There is a clear need for the platform, even without MiFID, because investment managers are increasingly scrutinising costs and return on investment for external research. Alpha Exchange helps them measure both and optimise research spend. Also, no platform aggregates all broker, independent and expert research in one environment where it is easy to search, view and pay for it.’
But as the implications of MiFID became clearer about 12 months ago, Winship and his colleagues also saw the opportunity for Alpha Exchange to ‘provide one easy toolkit for all participants’ MiFID II-compliant research solutions.’
‘MiFID says you have to price research; set a research budget; and understand and justify what you’re consuming,’ explains Winship. ‘Alpha Exchange provides the buy-side with all that data and tells them what research they have consumed across sources, plus analysts’ time they have used or events attended. It attaches prices to the research data and [tools to] calculate how much they should be paying using a suggested research provider vote.
‘An institution can now request, say, equity research on Japan, and five or ten options shoot out. They can then trial some if they want before buying.’
Alpha Exchange is now racing to bring in as many more buy-side participants as possible. ‘There is a pressing need for the solution,’ says Winship. ‘We can target 400 to 500 firms in the UK and Europe in the next 12 to 18 months. Preparedness for this on the buy and sell side is disastrous. People will miss the January deadline and will be scrambling for solutions next year.’
He says there are fewer barriers to take up on the buy side, as they need to see what research they consume. ‘The bigger barriers are on the sell side, which is reticent to price research publicly and break bundles,’ he says. ‘Their existing model could fall apart quickly as people start finding and buying research from niche providers.’
Alpha Exchange was among only ten firms selected out of thousands of applicants for the New York Techstars fintech accelerator programme. This scheme aims to invest in promising start-ups, and gives them tools, connections and a three-month boot camp.
There are other start-up marketplaces and Alpha Exchange inevitably faces stiff competition. But Winship says: ‘No-one provides an end-to-end solution where you can buy and track your research across platforms. The sophistication of our pricing tools and buy-side features also differentiate us. There are also players in data and analytics, and our difference again is in the end-to-end solution; setting research budgets and providing consumption data. Because we thought of this some time ago, we had time to get the technology right back in 2015, then accelerate it.’
However, it must keep innovating. ‘We have many more plans around research optimisation and improving the research experience,’ says Winship. ‘Our pricing tools and the data on the platform, for example, about how it rates, ranks and pays providers will become immensely valuable.’
His tip to any fintech start-up is use a process called minimum viable product (MVP). ‘Everything you start with is an assumption and almost always wrong,’ says Winship. ‘So MVP the hell out of your offering, which is building the least sophisticated thing possible first to minimise [testing] time and streamline the process.
‘Do not build big beasts of software and structures that get torn down because no-one wants them. Design in small increments, test assumptions and reiterate.’
The European Union (EU) MiFID II regulations, which come into effect in January 2018, will have a huge impact on the asset management industry. But many managers do not yet have the technological solutions to comply and thrive in the new regime and software providers expect a capacity crunch as investment houses rush to prepare. We look at some of the issues and opportunities.