Each year Thomson Reuters Extel asks fund managers to complete their survey of the investment industry. Part of the survey examines the value that they place on the different investment services provided by their brokers. This year was the second year that Extel have included an ‘electronic alpha capture’ category.

Firstly, the survey showed that the share of buy-side commissions paid for trade ideas now represents a 15% share of overall equity research and advisory commissions. This is an increase on last year’s 13.5% and makes trade ideas the third most important service that a typical brokerage offers for their institutional clients.

While trade ideas themselves have been around for a while in the form of emails and telephone calls, electronic alpha capture is the modern incarnation, involving a more systematic approach and typically a dedicated platform. One of the more compelling results form the Extel survey is that the majority of clients utilising alpha capture, are the highest payers of commission overall. Over half of respondents were in the two highest-paying brackets, as defined by Extel.  This shows the importance of alpha capture to large fund managers and here at TIM Group we estimate 30%-40% of trade idea commissions are now linked to electronic alpha capture. It is the larger, more active funds who receive the greatest benefit from alpha capture in terms of efficiency and identifying trading opportunities, so these results are not surprising.

Finally the survey also showed that 60% of sell-side firms saw alpha capture increasing in importance to them over the next year.  Similarly, 55% thought that their buy-side clients would increase the proportion of commissions they allocate to alpha capture.  This shows that numerous benefits of alpha capture are being acknowledged within the industry.  Fund managers are recognising that it facilitates access to more frequent information on a broader range of stocks than research reports, and from a wide variety of brokers, with varying specialisms.  It is more objective and transparent than phone calls or unstructured emails and brokers can be held to account for what they say. Above all the performance data actually proves there is a lot of investment value in the ideas brokers are creating.

Steve Kelly, Managing Director of Extel, recently commented: “electronic alpha capture services are increasingly valued by asset managers and we have seen solid growth in voting in this category.  The votes are led by the major sell-side houses, and we anticipate even higher participation in 2014, as alpha capture  becomes integral to every broker’s offering to their buy-side clients.”