Brokers In Asia Back Plan To Build Research Repository

A group of Asia's largest securities firms have given their blessing to a research clearinghouse that will be owned and operated by a Hong Kong-based unit of Primark, the financial information conglomerate whose holdings include Datastream and earnings estimate provider I/B/E/S. The electronic warehouse, which is still under development, would serve as the exclusive conduit for all research documents published by participating brokers.

All the costs of building and maintaining the real-time database would be passed on to research redistributors in the form of access fees that could--and no doubt would--be passed on by them to research recipients. Under the terms Primark has offered thus far, sources say the cost to redistributors would be $25 per month for each position receiving the research with an annual minimum of $200,000.

Brokers would pay nothing save the cost of the telecoms line and would have final say over the access fees charged to redistributors. Both Bloomberg and Primark's own I/B/E/S are likely to be among the keenest distributors of the service.

Jardine Fleming, HG Asia and HSBC James Capel are among those endorsing the initiative, which could either revolutionize the business model for research distribution and redefine the concept of data ownership...or simply insert an unnecessary layer of costs into a model that already works pretty well. It all depends on who you talk to.

No matter who's talking, though, it's doubtful that the project can succeed without the participation of First Call and Reuters. These two vendors are currently among the best-positioned distributors to reach the brokers' target audience worldwide. And First Call and Reuters say they will not be taking research from this repository.

If Reuters and First Call stay away, any participating broker will lose a key outlet to its institutional customers--and few non-believing brokers are likely to convert. However, if the repository can build on its beginnings and persuade other major brokers to make it their exclusive conduit to distributors, Reuters and First Call may, in the end, be forced to come to the party.

Says Reuters business development manager Michael Peace: "We are not going to be subscribing to the [Primark] product." First Call's managing director for Asia Pacific, Andrew Miller says: "We have no plans to go to the warehouse."

"I'm hopeful they'll change their mind," says Primark vice president Ed Keon. "We plan to go after their business."

The initiative behind the controversy is called Research Exchange. Although it is still under development--no specs have been released to the distributors whom Primark hopes will link to it--the warehouse will employ the same TCP/IP and Informix database architecture that Hong Kong-based startup Bondtech had designed for its own Trapeze research distribution system. Primark purchased Bondtech and rights to Trapeze late last year (IMD, Jan. 29). Primark's I/B/E/S unit plans to market Trapeze. Bondtech's founder, Scott Rosen, is currently general manager of Primark's Research Exchange, but will be moving across to become a vice president at I/B/E/S once Primark recruits a new head for Research Exchange.

Primark's Keon says the vendor hopes to have Research Exchange operational within the next two to three months. Once live, it will collect participating brokers' research and serve as the sole conduit to redistributors such as Bloomberg, First Call's Research Direct, Multex, Reuters and Primark's own I/B/E/S with its Trapeze product.

The Research Exchange initiative grew out of BIG Asia, or Brokerage Information Group, a user group formed to develop a consensus on requirements for electronic research distribution systems (Dealing & Investment Systems, Aug. 14, 1995). At different times, the user group variously considered developing its own warehouse, handing all its research to one distributor exclusively in exchange for more control over product direction or simply suggesting guidelines for research distributors to follow. In the end, the group opted for a clearinghouse maintained by a third party and earlier this year accepted Primark's bid to be that third party.

However, not all the members of BIG Asia--or even all its charter members--currently plan to contribute to Primark's warehouse.

Apart from JF, HG Asia and James Capel, those that have signed the exclusive agreements with Primark are Asia Equity, Peregrine Securities, Standard Chartered Securities and Vickers Ballas, according to Primark officials. Baring, BZW and W.I. Carr were among the more active members of BIG Asia but don't appear on the list of what Primark officials call their "initial tranche of contributing brokers."

An official at one major Asian broker that had earlier been involved in BIG Asia but hasn't signed up with Primark spoke on condition of anonymity: "We are very happy to support the warehouse but have a problem with the exclusive arrangement, as we have others taking our research--one in particular which is already delivering our research to a significant number of our clients, but won't go to the warehouse. We would be forced to cease that relationship and we simply aren't prepared to do that."

As to whether Research Exchange would be willing to accept research on a non-exclusive basis, Keon says: "The terms of exclusivity will be determined by those founding exclusive brokers who have already stepped up and supported the concept." However, he adds that "should they decide that there is a broker whose research would significantly strengthen the warehouse but who would only join under a non-exclusive arrangement, we would of course wholly support them in that decision."

The Research Exchange advisory board will have final say both over the exclusivity terms of contracts with contributing brokers and over the fees charged to research redistributors, Primark officials say. However, the board will likely leave it to the redistributors to decide how and how much they charge end recipients of research. Officials involved with the warehouse say they are not encouraging distributors to charge for the research documents--which have traditionally been provided to brokers' customers free of charge--but want them instead to add value to the process and charge for that added value.

Not surprisingly given its origins, the Research Exchange business model is considerably more broker-friendly than previous models. Brokers pay nothing towards the cost of getting their research into their customers' hands, save the communications line over which they deliver their electronic documents. Any redistributor willing to fork over the fees can carry the research--unless an individual securities firm chooses to cut a given vendor out of the picture, in which case the repository will prevent that firm's research from making its way to that vendor's system.

The fact that the Research Exchange will be open to all should help level the playing field and lower barriers of entry to the research distribution market, say both some of the participating brokers and Primark officials. That in turn should increase pricing competition, improve service and spur distributors to innovate and add value to the process.

Although distributors generally squirm at the sight of any intermediary appearing between them and their contributions, in this case the matter is complicated by the fact that this "intermediary" is owned and operated by one of their would-be competitors.

Primark officials say now that Research Exchange has secured contracts with its first round of brokers, the company will set up a discrete corporate structure and management team to handle the Research Exchange business, to be separate from the I/B/E/S unit that will market Trapeze. Once that's done, I/B/E/S would be treated as any other customer of the warehouse, they say.

"In my view, the warehouse is an additional and unnecessary intermediary in the process," says First Call's Miller.

Both Reuters and First Call's Research Direct are offering to let brokers use their authoring systems to direct research documents to Primark or other distributors' networks, along the lines of the Binco box, Caplin server and other devices designed to take electronic contributions and deliver them to multiple vendors' networks for redistribution.

"We have the infrastructure in place already to collect brokers' research and deliver it to their institutional customers either over the Research Direct network or through third parties, such as Multex and Trapeze, using our authoring system," Miller says. There's no extra charge for the use of Research Direct's facility to contribute to other distributors' networks, he adds.

"A number of brokers are already sending their PDF files through Research Direct's authoring system to third parties," Miller says. Primark's Trapeze is among those receiving research in this manner, he says, at no extra charge to the broker or to Primark.

Primark counters that by effectively spreading across multiple contributors the cost of collecting the research from each broker and maintaining a central database, the end result of Research Exchange will be to lower the costs of research collection and storage for all distributors and therefore ultimately for consumers.

As to the fee Research Exchange will seek, Primark officials say the $200,000 annual minimum figure and $25 per position monthly are in the ballpark they have discussed. However, they caution that all agreements would be subject to final approval by an advisory board comprised of four brokers and three Primark executives.

At that rate, Research Direct would be liable to pay approximately $1.5 million a year for the privilege of carrying the participating brokers' research to its universe of installed positions, which totaled just short of 5,000 according to the vendor's published reports. Apart from the size of that bill, the per-position fee scheme clashes with First Call's Research Direct's existing pricing structure. The vendor currently bills a flat fee of anywhere from $2,000 to $4,000 a month for unlimited usage, a structure designed to encourage customers to widen readership of the research to as many desks as possible.

For other distributors such as Bloomberg, whose business is clearly more diversified than First Call's, an annual minimum $200,000 fee would mean the vendor would need to find at least 666 positions willing to pay the $25 per position for Research Exchange data in order to cover the warehouse's fees. Although Bloomberg is typically loathe to pay contributors anything, it does frequently carry add-on services where it can pass the fee on directly to customers. Unlike its rivals, Bloomberg does not generally take a cut off the revenues it collects on behalf of such optional service providers.

Primark's Rosen says the minimum fee is designed simply to ensure that the vendor recovers enough of the costs of building and maintaining the database to break even. Says Keon: "Sure, we would hope to make money from the business in the long term. But our goal for now is to recover our costs."

Nevertheless, one particularly harsh detractor compares Primark's effort to a startup seeking to forcibly raise venture capital from its would-be rivals, in order to build the infrastructure it needs to compete with them.

Although First Call's core Morning Notes distribution business was long based on exclusive agreements with contributing brokers, who actually paid First Call to carry their research, that pattern was broken with the newer Research Direct. In large part, it was the pressure of increasing competition from others looking to enter the research distribution business--including Bloomberg and Multex--that loosened First Call's earlier stranglehold on brokers' research. That fact lends some weight to an argument made by some brokers and by Primark that a repository available to all is necessary to keep competition healthier than it would be if one distributor were able to gain a dominant position.

In the end, though, no matter how far the Research Exchange manages to progress from here, it's clear that the competitive environment that is being nurtured by BIG Asia's venture has already changed the terms of electronic research distribution in Asia.