The Changing Market for Investment Research: The Impact of Innovations in the Payment Mechanism on Market Structure and Information Flows

Abstract

The collapse of the dot.com bubble in 2000 revealed the stark conflicts of interest faced by financial analysts. Since that time the market for their services has undergone substantive change in institutional and legal arrangement on both sides of the Atlantic. UK changes have been prompted by the unbundling of brokerage commissions for executing trades from research payments. Our study examines the impact of this apparently subtle, but controversial and far-reaching, change to the market for information. Based on interviews with practitioners, surveys, examination of policy documents and engagement with professional bodies in specialist conferences we chart significant change in the market for information. By including payment flows we are able to build upon depictions made in existing theories of the market for information both before and after the 2006 introduction of a crucial change in the payment mechanism which has resulted in greater choice for the consumers of investment research (largely fund managers) who value diversity of research providers, independence from conflicts of interest and value for money. However, some practitioners are concerned that these changes will lead to lower levels of generally available investment research and could in turn reduce market efficiency.

Keywords: Financial analysts, market efficiency, incentives, conflicts of interest, information markets.

JEL Classification: G14, G18