18 May 2012

Where is the Financial Research eXchange?

It’s a sunny summer day in the Canary Wharf's financial and media district in London. People are having a lunch break; they are jogging, chatting with each other about money and business, or simply hanging around and doing some quick shopping. A stranger is stopping one person after another and gently asking:
“Excuse me, where is the Financial Research eXchange?”
“Financial... What?” they get confused.
“The Financial Research eXchange, the market for the financial knowledge, you know.”
They don’t know. So they reply: “I have no goddamn idea what you're talking about.”
Then they get back to work and forget about the stranger. In the late afternoon someone becomes bored about copy-editing another version of the PowerPoint slides for the next day sales pitch, and “googles” for the Financial Research eXchange. He finds... the FRXmarket.com.
It’s August 2012...

One of the simple basic truths in investing and in business sounds: “You have to know what you are doing.”

The problem is that there is no such thing as the real financial knowledge market right now. There is no fair market price for the independent professional analysis, no good place to buy it directly from the analyst, or to sell it to someone who actually needs it for her/his investment or business decisions.

What we have instead is the “free analysis” (note quotation marks), which is neither free nor is it an honest analysis. (Remember: He who pays the bill orders the music.) The providers of such “free stuff” are far too often some sort of sales agents from the large well established institutions. Research in this case is put into the service of the conflicting interests. Alternatively, the analysis may be (at least seemingly) independent; unfortunately it’s then far too often not professional, but provided by the “tipsters” or simply superficial.

Long I was wondering about the wasting of analytical capabilities: why do all major public and private sector organisations (the IMF, central banks, government agencies, news agencies, large banks, rating agencies etc.) have their very own research squads, even though all of these squads are basically analysing the same thing, the economy. Cannot the financial and economic knowledge be re-used? But well, the above provides at least some explanation... Smart people know that they cannot rely on what is available for free. Plus of course, they may need analyses that would support their own aims and arguments.

The economics of this is pretty simple (see the illustration on Figure 1 below): an independent analyst immediately finds it very difficult to sell his or her research for a fair price simply because there is no established market for this. What does one’s rational thinking suggest now? Do something for which you’d get paid for. Most often, this means working for large institutions that then take the analyses, “repackage” or present them as they need, and distribute the “end products” under their own well-known labels or brands. Of course, such analyses are then complemented by two or three pages of every sort of disclaimers and disclosures the basic idea of which is to say that “We are not responsible for anything contained in this paper.”

Is there a solution for this? I think the solution is rather obvious from the above Figure 1: the layer of middlemen, the monopoly of the large institutions in the top, needs to be cut off. This would not only eliminate the “censors” of the original analyses, but also bring down the cost of the high quality research for the end users, as well as enable fair and transparent pay for the analysts. In other words, let the people create the financial knowledge market by themselves; let the price of the independent professional financial research and analysis be defined by the demand and supply.

For this we need to:
1) understand and talk about the above discussed problem;
2) a marketplace or platform where the buyers and sellers of the financial & economic knowledge could meet and complete transactions (let’s call it the Financial Research eXchange, or the FRX in short); and
3) willingness to try out new solutions.

Figure 2 provides an illustration of the analysts, private investors, asset managers, and entrepreneurs meeting in the Financial Research eXchange, the P2P online marketplace for finding, buying, selling and sharing the independent professional financial and economic knowledge.

Would the knowledge, research and analyses on such an exchange be reliable? Well, it would of course depend on the buyers and sellers on the marketplace. Most probably, in the world of cheaters we’d have a problem. Yet it is a transparent and personalised way of doing things. Apparently it’s much easier to say whatever you are directly or indirectly suggested to say under someone else’s label (as it is right now, and especially when you are being paid for it) than under your own name.

To answer the question: “Where is the Financial Research eXchange?” It’s starting here at FRXmarket.com.

1 comment:

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