MiFID II Birthday Marks Rapid Changes in Research
A year on from the introduction of the European Union’s revised Markets in Financial Instruments Directive (MiFID II) there is growing pressure on the financial research industry.
MiFID requires brokers to unbundle the provision of investment research from trading services, forcing fund managers to pay for it separately. Unsurprisingly, investors have become much more selective now that the cost of research isn’t hidden within their trading fees. Research spending has been squeezed significantly, with three-fifths of asset managers reducing the number of research providers they draw on. The now paid-for analyst coverage has accelerated its collapse to concentrate on a smaller number of large companies that attract significant liquidity. Although there is an uptick in the number of independent analyst firms, and many on the buy side have set up their own research functions, a lot of the research available to purchase is now further concentrated within the large bulge bracket firms. The shake up in research (driven by the scandals associated with analysts boosting the stocks of their investment bank clients) indirectly pushes more savings into passive, index-based investments.
There is concern that shrinking independent analyst coverage of small-caps makes the market less efficient. Investors are driven towards index stocks and large cap equities, which is bad news in terms of access to public market capital for innovative smaller companies and newer entrants.
However, as regulators around the globe – from Japan, to the US, and the EU – move towards digital disclosures, the barriers between investors and smaller stocks should lower. Machine readable, digital data can be easily drawn out, analysed and compared, giving investors opportunities for analysis previously restricted to large, well-funded teams. With the growing democratised access to financial information that structured data provides, perhaps there will be a host of new entrants using new technology to find opportunity and risks in entirely new ways?
Read more about the effects of MiFID II in The Economist or on Bloomberg.
