Channelchek
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Channelchek is a web services provider headquartered in Boca Raton and owned by Noble Financial Group, Inc.
Channelchek
Channelchek is a web services provider headquartered in Boca Raton and owned by Noble Financial Group, Inc.. The beta version was launched November, 2018. Channelchek provides a web portal and related services for investors, including equity research, advanced stock market data, aggregated news, corporate webcasts, proprietary podcast series, short-form video, daily audio overviews from equity analysts, opportunities to meet corporate management through nationwide luncheons and dinners, quick-search for corporate comparisons, and the option to select and track “favorite” companies.
The portal is populated exclusively by emerging growth public companies, approximately 7,000, as defined by Channelchek as those with market capitalization of between $10 million and $1 billion. Targeted users include self-directed investors, Registered Investment Advisors representatives, hedge funds, family offices and independent brokers. The name of the portal references a Wall Street colloquial term that connotes the most respected method of equity research, wherein the analyst does not rely solely on the input of the company’s management but also “checks its distribution channels” to get the feedback of the end-user of its goods and services. Market data on Channelchek is supplied by QuoteMedia. Channelchek is patent pending; on July 26, 2018, inventors Mark Pinvidic and Nico Pronk filed a United States Utility Patent application (Provisional) with the United States Patent and Trademark Office.
According to the website ([iv]Terms of Use), companies listed on Channelchek are categorized in three groups: Explore, Probe, and Discover. Equity research is available for companies categorized as Explore only. Independent Company Sponsored Research is published by analysts employed by Noble Capital Markets, a FINRA-member broker-dealer established in 1984 and a wholly-owned subsidiary of Noble Financial Group, Inc. (“Noble”). Noble receives compensation from listed companies on Channelchek thereby allowing for no-cost, unencumbered use by investors. Compensation varies dependent upon the level of services provided by Noble to the companies, and the scope of information available on Channelchek. Generally, the highest compensation received by Noble comes from companies in the Discover category; the lowest will come from the Explore categorized companies. There is no charge for listing of Explore companies during the beta-phase of development.
History
Impact of regulatory controls on emerging growth companies
Regulation Fair Disclosure, Decimalization, Sarbanes Oxley and the Financial Crisis leading to the signing of the Dodd-Frank Wall Street Reform and Consumer Protection Act into law in 2010, has all but eliminated the ability of broker-dealers (sell-side firms) to be paid by institutional investors (buy-side firms) for the issuance of equity research on emerging growth companies. Although research analysts are less costly than experienced traders and M&A professionals, their contributions to profits are more ephemeral. Stricter regulations imposed after the dot-com crisis in 2000 curtailed their ability to directly develop business opportunities. [i]
The steady decline in the issuance of equity research and the equally steady decline in broker-dealers issuing research covering emerging growth companies has led to an information vacuum, making it increasingly difficult for emerging growth companies to build awareness and to access capital required to reach their corporate goals. [ii] [iii]
Regulation Fair Disclosure
Regulation Fair Disclosure (Reg FD) is a rule passed in 2000 by the Securities and Exchange Commission (SEC) in an effort to prevent selective disclosure by public companies to market professionals and certain shareholders.[iv] Reg FD was created in response to instances when issuers of stock gave advance warnings of earnings results and other nonpublic information to selected institutional investors and analysts.
This created circumstances that allowed those with the information to make a profit or avoid losses at the expense of the rest of the investing community. While the ruling was a positive move for the public, it had a negative impact on less liquid, emerging growth companies. Without the “advance notices” that the rule prohibited, market professionals took more risk in the trading of thinly traded stocks. The move to more liquid companies began.[v] [vi]
Decimalization
Decimalization is a system where security prices are quoted using a decimal format rather than fractions. Before June of 1997, the rules of the New York Stock Exchange (NYSE) required all stocks priced above $1 to be quoted in 1/8 of US dollars. Between June 1997 and the beginning of 2001, the minimum tick size (for the large majority of US equities) was reduced to 1/16 of US dollars. Then, in 2001, the tick size was again reduced to one cent ($0.01).[vii]
Both quoted and effective bid-ask spreads and depths have declined significantly following decimalization. Both trades and trading volume have declined significantly in all trade size, as well as in all stock size, categories.[viii]
Sarbanes Oxley
The Sarbanes-Oxley Act, passed in July 2002, requires public companies to strengthen audit committees, perform internal controls tests, make directors and officers personally liable for the accuracy of financial statements, and strengthen disclosure. The Act also establishes stricter criminal penalties for securities fraud and changes how public accounting firms operate. Public companies are required to perform extensive internal control tests and include an internal control report with their annual audits. Testing and documenting manual and automated controls in financial reporting requires enormous effort and involvement of not only external accountants but also experienced IT personnel. The compliance cost is especially burdensome for companies that heavily rely on manual controls which are often the case with smaller, emerging growth companies.[ix]
Some critics feel all these controls make the Act expensive to comply with, distracting personnel from the core business and discouraging growth. According to the GAO report, public companies with $75 million or less in market capitalization paid a median of $1.14 in audit fees for every $100 in revenue under the act, compared to just 13 cents for every $100 by companies with over $1 billion in market capitalization. Fear of non-compliance, particularly in the earlier stages of implementation of the Act, resulted in many small public companies discontinuing, or severely curtailing communication with Wall Street analysts.[x]
Dodd-Frank
The Dodd-Frank Wall Street Reform and Consumer Protection Act is a massive piece of financial reform legislation passed by the Obama administration in 2010 as a response to the financial crisis of 2008.[xi] The Act established a number of new government agencies tasked with overseeing various components of the act and by extension various aspects of the banking system. The Dodd-Frank Act effects a profound increase in regulation of the financial services industry. The Act gives U.S. governmental authorities more funding, more information and more power. In broad and significant areas, the Act endows regulators with wholly discretionary authority to write and interpret new rules.[xii] In fact, 225 new rules have been established across a total of 11 federal agencies. Proponents of Dodd-Frank believe the Act will prevent the US economy from experiencing a crisis like that of 2008 and protect consumers from many of the abuses that contributed to that crisis. Detractors, however, believe that the need to maintain regulatory compliance unduly burdens smaller financial institutions.
These burdens on smaller Wall Street firms – those that are most likely to publish equity research on emerging growth companies - have translated into fewer resources to deploy in their research initiatives. In addition, regulatory hurdles established by the Act, such as the Anti--Money Laundering provisions, has resulted in many large Wall Street buy-side firms dramatically reducing the number of sell-side firms with which they establish trading relationships, making it increasingly difficult for sell-side firms to be compensated for the research they produce.[xiii]
A Shift from the traditional payment model
The traditional model of Wall Street equity research distribution, which Noble followed prior to the launch of Channelchek, allowed access to research by financial institutions only. In turn, these institutions would pay broker-dealers like Noble, for access, usually via commissions generated through equities trading activities. The companies covered by research would not be involved in these transactions. Over the last two decades, government intervention into the capital markets, through the issuance of regulatory controls and procedures, as described above, coupled with electronic markets and trading platforms has dramatically changed the relationships between and among the buy-side, sell-side and public companies, particularly small, emerging growth public companies.[xiv]
According to the website (About Channelchek), using the Channelchek-model-of-payment for the issuance of equity research – direct payment from the company covered to the publisher of the research – is a paradigm shift from the traditional model and allows for a quantitative increase in the information available on emerging growth companies, to a larger investor base. However, the model brings into question the qualitative value of company-sponsored research, as there may be the perception that the issuer of the research is incentivized to produce favorable reports in exchange for payment. If that perception is the reality, the research produced is of no value to investors. Therefore, Noble follows rules and procedures to offset the conflict of interest that could arise which include: all decisions to initiate equity research coverage are made by the research department; the compensation of the analyst writing the report is in no way related to the opinion rendered; the company covered does not have access to the fundamental / market analysis done by the analyst, prior to publishing a report on Channelchek; only Noble research department employees have access to the fundamental / market analysis prior to publishing, and; the company must sign a Research Stipulation document in which the company agrees that it may not influence the opinion of the analyst and that the company understands that the opinion and recommendations of the analyst may be contrary to those of the company.
[i] Wigglesworth, R. (2017, February 7). Final call for the research analyst? Retrieved from Financial Times: https://www.ft.com/content/85ee225a-ec4e-11e6-930f-061b01e23655
[ii] Marriage, M. (18, September 2016). Banks face $5bn hit to research teams as asset managers cut spending. Retrieved from Financial Times: https://www.ft.com/content/14bee15e-7c15-11e6-b837-eb4b4333ee43
[iii] Cappon, A. (2014, April 16). The Brokerage World Is Changing, Who Will Survive? Retrieved from Forbes: https://www.forbes.com/sites/advisor/2014/04/16/the-brokerage-world-is-changing-who-will-survive/#5eeef0b668a7
[iv] SEC. (2000, August 21). Final Rule: Selective Disclosure and Insider Trading. Retrieved from U.S. Securities and Exchange Commission (SEC): https://www.sec.gov/rules/final/33-7881.htm
[v] Kenton, W. (2018, June 18). Regulation Fair Disclosure (Reg FD). Retrieved from Investopedia: https://www.investopedia.com/terms/r/regulationfd.asp
[vi] Morgan, N. (2007, August 14). The Rise, Fall (And Return?) Of Reg FD. Retrieved from Forbes: https://www.forbes.com/2007/08/13/reg-fd-sec-oped-cx_nmo_0814regfd.html#3a595fe19d70
[vii] Whitby, R. J., & Blau, B. M. (2018, May 18). Rethinking Decimalization The Impact of Increased Tick Sizes on Trading Activity and Volatility. Retrieved from SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3182683&download=yes
[viii] Chakravarty, S., Wood, R. A., & P, H. S. (2002, January 10). Decimal Trading and Market Impact. Retrieved from Purdue University: http://www.cfs.purdue.edu/Class/Sugato/research/decimalsVer3.02.pdf
[ix] Vitez, O. (n.d.). The Impact of Sarbanes Oxley on Small Business. Retrieved from Chron: https://smallbusiness.chron.com/impact-sarbanes-oxley-small-business-3797.html
[x] Loten, A. (2006, May 8). Sarbanes-Oxley Takes Toll on Smaller Firms. Retrieved from Inc.: https://www.inc.com/news/articles/200605/sarbox.html
[xi] Amadeo, K. (2019, February 14). Dodd-Frank Wall Street Reform Act. Retrieved from The Balance: https://www.thebalance.com/dodd-frank-wall-street-reform-act-3305688
[xii] Sweet, W. (2010, July 21). Dodd-Frank Act Becomes Law. Retrieved from Harvard Law School: https://corpgov.law.harvard.edu/2010/07/21/dodd-frank-act-becomes-law/
[xiii] Kenton, W. (2018, May 23). Dodd-Frank Wall Street Reform and Consumer Protection Act. Retrieved from Investopedia: https://www.investopedia.com/terms/d/dodd-frank-financial-regulatory-reform-bill.asp
[xiv] Wigglesworth, R. (2017, February 7). Final call for the research analyst? Retrieved from Financial Times: https://www.ft.com/content/85ee225a-ec4e-11e6-930f-061b01e23655
External Links
References
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