The Evolving Role of Alpha Capture: Technology Matures and Opportunity Expands

Over the past five years, the alpha capture business has significantly matured. While a number of large systematic funds have long used alpha capture programs as the basis of their activity, an increasing number of fundamental funds have begun to show interest. At the same time as these changes on the buy side, an increased need for low-latency content delivery is impacting the sales role.

In terms of explicit revenue, TABB Group estimates that alpha capture represents approximately 4.8% of the commission pie globally. However, firms also receive implicit payment in trading flows and other services. This method of payment is much harder to quantify. Over the next five years, TABB expects commission share to grow, driven by the expanding opportunities for alpha capture in new regions, as well as new clients.

Today the majority of alpha capture happens in Europe; however, many sell-side firms are planning for growth in Asia, India and China. While the majority of alpha capture clients are systematic funds, there is significant room for growth by fundamental firms. Fundamental funds generally do not want to consume the signal in the same way as systematic funds. Instead, they consume a fewer amount of ideas that are much more specific.

Alpha capture’s role within the larger compliance and surveillance framework is also evolving. Regulations around the globe are transforming the need for hard, quantitative measurements and greater transparency — a move that particularly benefits firms engaged in alpha capture programs and using supporting systems. Two important regulations, MAR and MiFID II, will cement the necessity of the alpha capture infrastructure and could push more brokers to use the systems and processes behind alpha capture even if they do not offer it as a core service.
The most exciting development for alpha capture is how it is being viewed internally at brokerage firms. Alpha capture is now being given a nod by upper management at the highest ranks of the top brokerage firms, and these firms are working to institutionalize alpha capture throughout the business. No longer just an idea, alpha capture is a critical practice that management believes has a strong link to overall profitability.

These growth opportunities — and the changing landscape of financial services —will drive alpha capture to continue its evolution. It is clear that the alpha capture service, systems and structure have far reaching benefits to many areas of the securities and investment sector. While alpha capture programs have been in operation for more than 10 years, the sector continues to evolve and innovate and offers growing opportunities to market participants.