Investment banks automating their research process could save up to 30% on maintenance costs and improve operating margins in their research business by 300 bps, CRISIL Global Research & Analytics (GR&A) said in a report.
Sell-side research has been facing unprecedented disruption driven by unbundling regulations, the rise of financial technology companies, and a structural decline in high-touch trading revenues.
In the medium term, the Markets in Financial Instruments-II, or MiFID-II, regulations would lead to a decline in buy-side research budgets and in the number of banks from which research is purchased, CRISIL GR&A said in the report titled “Investment research faces technological disruption, profitability pressures”.
Says V Srinivasan, President, CRISIL GR&A: “Cash equity revenue pools have declined 3% annually in the past five years, leading to lower research revenue allocations. Research revenue could decline further over the medium term due to multiple disruptive trends. Sell-side firms will explore opportunities offered by technological advancements to reduce costs and differentiate research.”
Research unbundling and technology also opens up the possibility of alternative research providers competing with the sell-side – something that was not possible till now because they needed to offer trading execution, too.
“Automating structured research tasks and producing differentiated research offers banks the best chance to counter and conquer the imminent disruption. We believe the time spent on structured research tasks can be reduced from 45% to 20-25% through intelligent automation on a conservative basis. Sell-side research could improve margins by ~300 basis points, assuming ~23% reduction in research costs, opening up the potential for differentiated research,” Srinivasan added.
Going forward, research analysts will focus only on alpha-generating ideas, industry and theme based insights, aided by cognitive automation, leaving structured and low-value tasks largely to machines.
CRISIL GR&A is seeing increasing traction from its existing and prospective clients to adopt tech-based solutions that will embed intelligence into core research functions. To address this requirement CRISIL GR&A is launching its innovative technology platform called SMART, which is powered by intelligent automation and enables analysts to emulate tasks and optimize decision making.
SMART enables analysts to perform model updates with 100% data accuracy and 2x speed, get access to a model- ready data for 3,000+ companies and 50+ industry datasets, save up to 35% of the effort in publishing earnings reports and 60% reduction in collation time of news updates.