6 minute read
MiFID
The implementation of MiFID II in January of 2018 sounded the bells on significant changes for the equity research industry.
The European regulation ended the long-standing arrangement of research being provided for free to the buyside with the expectations that trades would be channeled to the sellside firms providing the reports. Under MiFID II, asset managers would need to pay for research, “unbundling” it from trading fees.
Market in Financial Instrument Investment
The decision was taken as part of a push to offer greater transparency into the cost of both research and trading commissions. The regulation went into effect in the European Union, but because of the global scope of asset management, many buyside firms made the decision to come into compliance with the European regulation to avoid conflicts elsewhere in the world.
When MiFID II was initially implemented, this unbundling was expected to negatively impact the research industry, particularly niche firms covering small-cap companies. As asset management firms developed research budgets they needed to decide whether to pass that cost along to clients or to find ways to absorb it themselves, a reality that quickly brought the cost of research into focus and put research analysts in a position where they had to prove they generated sufficiently valuable insight.
The effects of the European Union’s decision to implement MiFID II appear to be making their way through the market. A study conducted by the CFA Institute of European may allow the staff to study the impact of MiFID II, taking over members in 2019 found 57% of buyside respondents were sourcing relatively 900 days is simply unreasonable,” the statement said prior to less research than they were prior to MiFID II and that there was a reduction in the eventual extension of the no-action letters. sellside analyst roles as the market contracted. The same survey found buyside firms decreased their research spend by an average 6.3% the year following “Transparency and disclosure are vital to our capital markets. the implementation of MiFID II and that 47% of buyside and 53% of sellside Transparency in government process is equally important. It respondents reported decreased coverage of small- and mid-cap stocks. is critical that investors and other market participants have an U.S. SECURITIES AND EXCHANGE COMMISSION REMAINS ON THE SIDELINES opportunity to voice their concerns and ideas. I encourage the staff and the Commission to consider timely notice and comment rule making in order to reach the best policy Following the announcement of MiFID II by the EU, outcome in this area,” Stein said in her statement. the SEC adopted a wait-and-see strategy. The SEC Division of Investment Management and the Division of Trading and Markets issued a series of no-action letters addressing research payment provisions in MiFID II saying the Commission would analyze the regulations. The latest extension of those letters is in effect until July 3, 2023. The decision to adopt this stance did not sit well with all members of the SEC, however. One of the ...When payments for research and trading are combined, do investors know that they are paying for research? Do investors know what they are paying for trading? Do investors know of the potential conflicts of bundled payments? Kara M. Stein That same day, SEC Chairman Jay Clayton issued a press release explaining the commission’s ‘noaction relief’ for MiFID II: "Today's no-action relief was designed with input from a range of market participants to reduce confusion and operational difficulties that might arise in the transition to MiFID II's research five SEC commissioners, Kara M. Stein, accused provisions," Clayton said. "Staff's the SEC staff of “kicking the can down the road” in a letters take a measured approach in public statement issued on October 26, 2017: “Questions about transparency an area where the EU has mandated a change in the scope and investor protection are central to this conflict. When payments for research of accepted practice, and accommodate that change without and trading are combined, do investors know that they are paying for research? substantially altering the U.S. regulatory approach. These Do investors know what they are paying for trading? Do investors know of the steps should preserve investor access to research in the near potential conflicts of bundled payments? term, during which the Commission can assess the need for any further action. “The staff’s no-action relief does not adequately address these issues and merely kicks the can down the road. This inaction may be costly to investors and “Cooperation with European authorities, including the advantage some market participants over others. While a time-limited approach European Commission, has been instrumental to the SEC's
efforts, and I welcome the additional guidance the EC published today. We look forward to continued dialogue on this and other important issues."
RESEARCH HAS BECOME MORE COMPETITIVE, BUT MAY NOT DELIVER BETTER OUTCOMES
In the wake of MiFID’s implementation, research firms decided to take the financial burden of research onto themselves, primarily. About 74% of firms of all size responded that they firm now pays for their own research. Those with fewer assets under management reported passing the costs along to clients, or sharing costs equally with clients, at a greater rate than those with higher AUMs, but the trend is consistent across the board.
Larger firms in particular scaled back their reseach budgets as the cost of research impacts the bottom-line. Firms managing more than €250 billion in assets reported an average budget reduction of 11.1% in 2019 while firms with less than €1 billion under management reported a 0.8% increase in research budgets.
Anecdotally as budgets for research shrink, so too have the number of sellside analysts. When asked their opinion on the number of sellside analyst positions since the implementation of MiFID II, 54% of European asset managers said they believed the number of sellside analysts decreased. While both the buyside and sellside indicated this translated into fewer research notes, particularly for smalland mid-cap equities, the majority of buyside respondents said the overall quality of research was unchanged. Most sellside respondents felt the quality of research declined in the year following the implementation of MiFID II.
Of the research providers, investment banks appear to be the hardest hit. Results from the CFA survey indicated that 57% of respondents were sourcing less research from investment banks compared to 38% receiving relatively less research from “other third-parties,” and 27% receiving less research from independent research providers. In-house research
appeared to be strong in 2019 with 87% saying the amount of research they source in-house either stayed the same or increased While the survey indicates that most European asset managers believe the research space is more competitive following MiFID II, the majority (59%) also believed that the regulation did not translate into better outcomes for endinvestors.
THE CHANGING FACE OF RESEARCH
In response to changes brought on by MiFID II, the research industry is changing the way it works. Investment banks, which were hit especially hard asset managers reducing budgets, are exploring subscription fees for written research while charging a premium for access to analysts. Analysts are, in turn, working hard to prove their research is generating enough revenue to support their jobs.
The reduced flow of information back and forth between the buyside and sellside is also making it more difficult for the market to come to a consensus on different stocks. This is especially pronounced among small- and midcap stocks. Without quality coverage, those stocks are seeing lower liquidity and greater volatility. The investor relations teams of smalland mid-cap companies will need to work harder to distribute their message on their own in order to avoid mispricing.
For the latest, in-depth coverage of all things Oil & Gas, visit
