LONDON — Three years ago young London-based Saffers Scott Winship and Emma Margetts left Investec Asset Management to follow their dream of disrupting the European investment research industry. The start-up has mushroomed and the duo, together with a third co-founder Alex Santos, are being run off their feet. Their business, Alpha Exchange, offers a solution to addressing fresh European regulations (Mifid II) overturning the way money managers access investment research. The old conflict-laden approach of stockbroking analysts providing free research in return for brokerage, ends in December. From January, research data and reports must be unbundled and priced independently. I caught up with Winship at the WeWork campus in Moorgate where the successful young entrepreneur explained why he and Margetts left their comfortable seats at a respected asset manager to create their market leading offering. A fascinating story with useful lessons for other Fintech revolutionaries from one who has made it. – Alec Hogg
I’m in London at a hub called WeWork with Scott Winship, who’s with Alpha Exchange, and we’ll find out more about that in a minute. This WeWork concept is very interesting.
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Yes, Alec, it’s awesome. Essentially, it’s a start-up business in its own right, a pretty well developed one. It’s got a multi-billion Dollar evaluation, and essentially what it allows start-ups to do is office space – they can scale up readily as the business grows or contracts. Essentially, you’re getting an office space on a per seat/per month basis.
And there’s lots of people here so, obviously, it’s pretty popular.
Yes, this one is full all the time so, there’s lots of hustle and bustle. Being in the city, full of Fintech players and I think there’re about 10 other ones within London. So, this is more Fintech. In Soho you get more creative, and so on and so forth.
Scott, you’ve been in the UK for 7 years now. You originally came to London with Investec Asset Management but you’ve made some interesting choices thereafter. What brought you here in the first place though?
It was really just experience, it was exposure. Being one of the hubs of financial services that’s something which has always fascinated me so, being in the asset management space and financial services (more generally) there’s no real, better place than being in London. It was the exposure from a career perspective but then also just worldly insights and travel and all of those good things.
At Investec Asset Management presumably you met your business partner?
Correct, yes so, Emma Margetts and myself, we worked together at Investec for a period of about 5 or 6 years, I was more focussed on the research analytical and the fund management side, and Emma was more focussed on strategic initiatives, marketing, brand, and so on.
I mention ‘business partner’ because here we have a couple of Saffers who started something called Alpha Exchange, which you’re going to tell us about in a moment, who were in the Financial Times of London last week so, the world knows that you exist. Reading their story, it doesn’t just exists but it’s thriving.
Yes so Alpha Exchange we set-up the back end of 2015, beginning of 2016, Emma and I came up with this idea some time ago, as these ideas evolve and develop, and wireframed and prototyped, and discussed with people. Then eventually set-out to go and build this. Emma and myself being more on the business development side, and Alex, our third co-founder, being our CTO, so all the technology background that was required to build this thing.
https://twitter.com/alpha_exchange/status/916225239373287424
So, what is this?
What Alpha Exchange essentially does is it’s a purpose built Mifid II platform and we can get into Mifid II in a second, but essentially what we’re doing is we are a one-stop aggregator shop for all external and research content. Now, why that’s particularly interesting is because of this regulation called Mifid II. Essentially what that does is it affects UK and European fund managers. Where research has historically flown fairly freely between sale-side and the buy-side it puts a whole bunch of regulation in place, which limits that freedom and that flow of information.
So in the old days stockbrokers would send you research reports in the hope that you were going to give them business by trading in the shares but that’s shown to have not been a perfect model.
Correct so there’re a number of issues with how that works and how the incentives stack-up between where you trade and where you receive research. So, what the regulator is trying to do here is unbundle the two. What they’re fundamentally saying is, ‘you need to treat clients as fairly as possible in both domains.’ So, you need to seek best execution when you trade so, you go and trade those Anglo shares with whoever is going to get you the best price, the best liquidity and all those things. Then by your research, from the research providers, who are best placed to give you the insight you need to make your trading decisions. That, in a nutshell, is essentially what’s happening.
It must be quite threatening for the old model where you had teams of researchers at all of the stockbrokers trying to compete with each other. Now, presumably, some of them are going to go hungry.
This is a real fascinating space and how it evolves over the next few years is great to live through and watch because it’s fundamentally changing the whole research landscape. So, you’re quite right. You’ve got to ask yourself, let’s say hypothetically, there are 40 analysts that cover BHP Billiton, it’s a large number like that, do you need all 40 research analysts to be covering it? And do all 40 provide you with value add? The answer is probably no, and so you’re quite right. You’re going to start to see asset managers pick the research providers that really do add value in their workflow, in creating Alpha of some sorts, and using those to make their research decisions. That means there are going to be some who are going to be left on the wayside and that is one of the fallouts of this, is research providers will be under pressure to ensure that they’re still desired by all of the asset manager accounts.
It’s a triumph of talent in a way because if you are more talented then presumably, you’ll be the Pavarotti of the BHP Billiton research pile, and you’re the one who’s going to make most of the money because people are going to want to read what you are producing rather than the chap who hasn’t been that accurate.
Spot on and I think this is one of the positive outcomes of what is perceived as quite a negative impact on the whole space, and the positive being that it will whittle away some of the noise so, instead of perhaps 40 analysts analysing BHP, it might be 10 for instance but they’re 10 really good ones. They’re 10 really good ones who are writing really good content. By that I mean even a good analyst will write noise so, they’ll write what’s called in the industry as an ‘earnings preview note.’ So, BHP is going to report earnings tomorrow. They’ll write a preview note of what they think might happen tomorrow – that’s of limited value. Also, of limited value might be, I’m going to just drop you a voicemail about what I think might happen tomorrow – questionable value. So, some of those fringed services where it doesn’t really get to the heart of should I buy or sell the stock, might be reduced so, the noise gets reduced and so, you can actually focus on what really might move BHP Billiton share price.
So, Alpha Exchange is aggregating a little bit like a media company, I guess, in a way and you’ve got all these research reports and you’re in the middle, presumably shifting or like an exchange, with demand and supply, for research?
Quite right so, what it does is essentially, it marries old world of how aggregators have historically worked with new world Mifid II, and particular pricing. So, what I mean by that is historically the concept of entitlement so, I have entitlement to view this report so I can view it, that’s great. Now, what happens in the new world is where I’ve whittled down my research provider relationships. I’ve got, let’s say, 10 research provider relationships. I want to action that and view those on the platform, that’s fine, but what happens outside of those 10? What if I want to access provider 11, 12, or 13 and I want to get new insights on Anglo or BHP, (if we keep using those examples), from different people. From other interesting sources that I might not have known about or that I might have cut-off I want to get stuck into those. So, we provide not only a discovery mechanism to find those providers, to trial those providers but then the final step to also purchase research from those providers.
https://twitter.com/alpha_exchange/status/915869714144022529
How do you start in the selection process?
From the content perspective – my background (info management and being an analyst) you’ve got a good idea of who’s writing content, who the providers are, who’s got this Mifid II problem, which is another point and most research providers have this problem because most of them are going to be selling into Europe. Then to your point –  you also have a pretty good idea of is the content of high enough quality?
Doesn’t this also open the opportunities for people who haven’t worked for stockbroking firms on the sale side, who’ve perhaps been at universities but are very interested in expressing their opinions? Do they have a vehicle through you?
Yes, in some respects. You’ve got to be a little bit careful from a regulation standpoint of which asset classes people are covering? Are the recommendations on stocks – that gets into a regulatory framework where you do need to be regulated? But absolutely, it open ups analysts who might leave certain research provider houses and setup their own shop because of the movements that are happening. And wider insight that could be bought and sold on the platform definitely comes into the remit.
And as far as the asset managers are concerned do they pay a retainer or do they pay just for each individual piece of research that they buy?
That’s a really good question and this is evolving in the space as we see it today. So, the way we’ve approached this is there really are a large number of ways to buy and sell content. Our platform incorporates a number of different mechanisms to actually exchange content so, it’s exactly what you said. So, in the one instance you can purchase an individual report so, you can go on there and say, ‘hey, there’s a really good report on BHP (let’s keep the BHP example going).’ It’s a thousand bucks, I could action that and purchase that. That’s not everyone’s cup of tea because that could prove uneconomic if you keep going back and doing that on a number of occasions so, then that introduced the concept of, ‘hey, maybe we should have a subscription to this provider.’ With that construct you could say, ‘give me access to X, Y, Z research provider for a year – I want 2 seats and it’s going to cost me five grand,’ say. So, that’s another construct and then you can keep going down that path of maybe an analyst should price their time? Maybe that analyst has some events and maybe those should be priced, and you could purchase those sporadically, or maybe you should bundle all of those. There are a number of options and really, we give the control to the research provider. We don’t try and interfere in price any way. We say, ‘we’re just the exchange – we’ve got the tools, you package it however you want,’ given your diverse clients’ needs and requests and what,not. Then put that on the platform. Let people discover it and let people trial it and then ultimately, let’s hope that people buy it.
How has it evolved so far?
Phenomenally, rapidly and phenomenally well. It’s really just the right time for this type of business so, we set it up at the right time, came to market at the right time. When asset managers are looking for a solution for a platform, which can control their content needs. There’re a bunch of other things I haven’t mentioned that the platform does around. You’ve actually got to control what type of research your analyst can see for the first time so, there’s a whole part of the regulation, which talks to unsolicited research. So, as you know, this industry is all too used to the notion of ‘let’s just spam the analyst with content and let’s hope something sticks, and we’ll get remunerated down the line. That can’t happen anymore so, you can only, (as an asset manager) you can only receive content if you are paying that provider, which is a huge risk so, again, a platform such as our allows you to control what your analyst can see at the end of the day.
New on BI ETF: European ETF Could Triple to $2T+ in Five Years as MiFID II Clears Barriers to Growth.. pic.twitter.com/k3chVyiCY9
— Eric Balchunas (@EricBalchunas) October 12, 2017
So, what’s going to happen to the guys who manage portfolios today? Your old colleagues at Investec Asset Management, are they going to still employ their own analysts and then use Alpha Exchange and the analysts that you have here on an ad hoc basis? How do you see that evolving?
Yes, that’s a great question and so, big asset management houses who have the fire power to employ large, internal resource teams are going to probably do quite well out of this. One of the unintended consequences is your small to mid-sized asset managers who are in a sticky situation because perhaps they can’t have huge internal resources. They also now need to bear the cost of this external research, right? That’s something we haven’t spoken about. It’s one of the key decisions an asset manager has to make around Mifid is, ‘do I charge my clients for this external research component?’ Or do I bring it in-house, onto my own P&L and actually take the hit? Now, the last 3 weeks has been fascinating. That latter option, I’m going to take the hit – for a long only asset manager is the way this whole industry has moved. That’s why its an unintended negative consequence for a smaller asset manager, you probably seem to have to take the hit on the P&L for this research charge.
You don’t have a big research team, it’s tricky. But to go back to your original question, what large houses or what a house would do is that you’ve just got to start being more discerning around what research you need. So, it goes back to that original point, which is what really adds value? Who are those houses? Let’s get access to that research and then the process keeps going so, then it’s ‘let’s track what I’ve consumed from them (again, that’s a requirement) – what is the qualitative and quantitative output of that? So, is it good? Do I rate that highly and then the whole process is a feedback loop so, based on that, then let’s review what we do next year? Do I need a bit more of this or a bit less of that so, the whole research process will evolve quite drastically over the next 12 to 18 months?
And pricing? Is there a uniform price or change?
So, the model on our platform is the research provider is in charge of pricing and will charge whatever they need to, to the buy-side, and our model is we take a commission on that research sale that goes through our platform. For some of the other tools that I’ve just touched on, plus a few others for the buy-side, there’s an associated fee that we charge to the buy-side or the per user, per month-type basis.
Do they charge differently though? Would one research house be happy to sell a piece of research for say, £10 and another one at £1,000?
Would they be happy – maybe? Can they do that – no? So that’s another one of the implications of the regulations is that there needs to be consistency along price so, no longer can you have hugely different pricing. It’s got to be, we think, on a per license or a per seat-type basis. So, you want 5 seats to research on equities for a year – that’s going to be this price. Now, sure, you could have scale benefits there so, as the seats go over perhaps 100 there’s some benefits associated with that. But that’s the structure that we think pricing will look to follow.
But individual pieces of research are they not available, at a price-point that might work for the research house?
Individual pieces of research they can sell at a particular price-point, yes.
What are they selling it at?
It vastly varies so, you could have and again, it’s going to vary by quality of provider and it’s going to vary by what the report is. So, where it’s like a flash note, an earnings preview type thing that might be $10 or $20 or something. Where it’s a full-blown initiation piece on a new stock and it’s a 50 or 60-page report – that can be over $1,000 per report.
Well, there’s a whole new market that’s coming to bear here. This is in the UK and in Europe, how many buy-side clients have signed up with you?
So, we’ve got, in terms of users, buy-side users a few thousand on the platform using it. In terms of clients, enterprise clients using the solution that we’ve sold it to, that’s in the 10s of combined enterprise entities.
And as far as the producers of the research are concerned do you only accept certain types of people? Do you have quite a difficult selection process there?
Yes, again, it goes back to the background of what is good research, who should be on the platform so, there are some controls around that? We accept any asset class so, whether it’s equities or fixed income or whatever it is, we’d love to have it on the platform. So, there’s no requirement from that standpoint but there is in terms of, do you meet the regulation if you’re writing that type of research, and those kinds of things so, there are some controls around who can put research up, for sure.
How did you get into all of this because there you were, sitting in London, living the dream, working for Investec Asset Management? Earning a good salary and in a fantastic line of work, why the change?
I’ve always wanted to start my own business. That’s one of the things I’ve always wanted to do and sitting in this fantastic job that you’ve mentioned absolutely, you’re right. I did love my job, I still love it. I still have my own stock portfolio so, I keep track of everything. I really do love investments but because this is something I’ve always wanted to do I think I would have been frustrated with myself, if I looked back and say, ‘I didn’t go and do this.’ What could it have been and what was it really like challenging myself to something which has been very rewarding and very difficult? That was the one aspect – I always wanted to do something like this.
The second one is I’ve always loved technology so, I started off as a commodity investor but actually, the last several years I’ve been looking at a lot of high quality companies, and tech is a big component of that so, I’ve looked at a lot of IT stocks, software companies, and really loved that more and more, and I wanted to get stuck into that whole space a little bit more. So, it’s the business, it’s the tech, it’s my domain expertise so, I know this space, which is super helpful. Plus, this regulation came along – I had to give it a bash.
How do you go from idea, which is a good one clearly, to execution and the raising of funds? Is it easier being based in London than say if you were sitting in CT?
Yes, it’s definitely easier being here. This is one of the Fintech capitals of the world. You’ve got a lot of capital here, a lot of start-up capital, albeit less than the States. There certainly is a lot of optionality around raising funds in the UK and in Europe. It doesn’t make it easy though so, from going from idea to this point has been a number of years in the making. It’s what’s that first idea, it’s then testing that idea, and trying to bash it down and see if it really makes sense. If it’s really solving a problem, right? At the end of the day that’s what all businesses are about, you’re solving some kind of problem and can you get someone to buy into that vision? That’s really what the first several months of this whole thing is, is this going to work? Is this something that will solve a problem? Will someone buy this? Then going from there you’ve then got to build and visualise this whole thing. So, wireframes, how do those look? How does it feel? If I click this button what happens? So, all of those actions, which are so natural when you’re on a platform – taken from scratch is a lot of build and a lot of effort.
Just looked at the detailed costs disclosure requirements under #MiFIDII ~ going to look punchy for IFAs outsourcing to DFMs via platforms
— Alan Smith (@AlanJLSmith) October 12, 2017
And the funding?
So, the funding – we were very lucky to be selected for an accelerator so, we got onto the Tech Star’s Accelerator Program and this was in the summer of last year, and this accelerator… So, Tech Star (let’s take a step-back), is one of the Fintech accelerators in the world and this one was in combination with Barclays so, it couldn’t have been better. A financial services partner with a large, sale’s side division so, one of the big banks producing content. So, not only were we on a great accelerator with a great backer, being Barclays – that was basically, a 3-month boot camp where we were shipped off to New York. We essentially launched the business there so, Alex, myself, and Emma all flew over there. Launched the business, you get a lot of mentoring, a lot of help, a lot of assistance and then capital too so, not only capital from Tech Star, as a venture capital fund, but also intros into other avenues of raising funding.
Whereto from here?
So much to do, I guess. We’re at the tail end of 2017, and by enlarge the industry is behind the curve in terms of getting ready for Mifid II. There’s a lot to do with what we have and what’s coming in terms of the pipeline, in terms of demos, in terms of onboarding clients, both on the buy side and the sales side so, I think we’re going to be pretty head down in a lot of those initiatives for the next 12 to 18 months.
Looking back home to your colleagues in CT, who perhaps went to school and university with you, who are also going into this field. What have you learnt because you’re kind of on the beach now, if you like. You don’t need a lifebelt anymore. You’ve got a business that you’re executing, you’ve got lots of clients. You’re heading very rapidly in an ascent but many others are still trying to get out of the water. What are the big learnings that you’ve had that you can share?
The learnings, I guess, are that you’re going to be pretty ill prepared for almost anything you take on. No matter how good your degree is or whatever you choose to do and specialise in the action of starting a business is unlike anything. I did a business science in finance, which in theory should prepare you more than anything else to start a business. Nothing could probably be further from the truth. Sure, I knew how to do the accounting.
What university?
UCT, and I did a CFA and that definitely doesn’t help you but the point being is that I think you’ve got to go through…If it’s a business you want to start, it’s got to be all of those things I spoke about around what problem am I solving okay, let’s test that assumption. In the industry, in the start-up world, the MVP (minimum viable product) is a keyword so, ‘what’s the smallest thing I can build to test my assumption that this is a business that could work some time?’ So, it’s that whole process of continual iteration of here it is, let’s try and knock it down. ‘Oh, it still stands.’ There might be something there so then let’s iterate, let’s build, let’s improve. That whole process, getting to that point as soon as you can and as fast as possible, I think is absolutely key if you’re building out this business and you want to follow that path of lots of iteration, of getting it out there, of testing it, and seeing if it works.
Long hours? Did you guys have to work really hard or did it flow?
Yes, long hours for sure. I was used to that from the finance base and the investment world. That’s part and parcel of the game. What the additional burden is it’s your company so, it’s the stress, it’s the constant thinking about the whole business and how it’s evolving, everything just matters that much more – every deal and every pitch, you really feel that.
So, where’s next? Would SA have an interest? Would the US perhaps be an opportunity?
Yes, this is a great question and this again, is all evolving in the whole research space. What we’ve seen is, while the problem is UK and European based, from a Mifid standpoint, there’s definitely global contagion. So, that’s been felt first and foremost, probably in the States where you’ve got large fund management houses, like the BlackRocks, the Fidelities, and the Capitals of this world who’ve got global operations so they are. A European arm of theirs is impacted here. Now, Mifid is an absolute nightmare from an operational standpoint so, what we’re slowly seeing is those big firms, not those ones in particular (I’m not naming names) but generally, global asset managers adopting one policy. So, they will implement the stricter standard, which is Mifid, which means that we’ll take the research charge onto our own account, and so on and so forth. By the way, Mifid is also not just research. It’s a whole bunch of other regulations that impact trading workflows and what not. So, those decisions are being implemented across the board.
What that means is, yes, the global contagion is slowly moving towards the States and by default, I guess, Asia and other places. What it means for SA and other places is you might start finding that your research providers, where previously there was a relatively easy flow of content – that becomes a trickier conversation where there are definite minimums you need to fulfil before you’re going to get the research. If you’re not, then quite possibly you might be directed towards a platform like ours. Where there are these interesting pricing constructs around, ‘hey, you can purchase research on individual pieces,’ or you could get smaller parts of our package. Maybe you just want one piece of equity construct that a firm produces. You could purchase that on ours, perhaps. There’s lots of potential in the SA space (A) because not everyone has Bloomberg so not everyone has got access to all of this research. You could use a portal like ours to access your internal research content. If you need research, or access all of your external content but also gain access to other pieces of content that you’ve previously not been allowed to because you didn’t maybe reach trading minimums and all of those things, and now you can pay piecemeal for those.
Just to close off with. Does it open up an opportunity say, for investment analysts in SA, if more and more are going independent in other parts of the world? Is that likely to be a trend?
Yes, I think so. I guess it’s that last point where we are seeing analysts breaking away from large investment houses. The model there is you’ve got a large breadth of coverage, and potentially there are some star analysts, which might be carrying other analysts that are there just to fill out the breadth perhaps. So, what some of those analysts, those really good ones, are doing are acknowledging the fact that there’s value in what they do and breaking away so, yes that could be an instance. In SA there could be an analyst here or anywhere, it doesn’t really matter. What’s exciting about the platform is it provides you with an avenue to advertise your services, to be discovered and then monetise on that.
Scott Winship is one of the co-founders of Alpha Exchange.
