[ R E S E A R C H
Declining levels of coverage
for large stocks have no obvious
impact on liquidity, but price
discovery is hindered if the
number of analysts on a small-cap
drops from one or two to zero.
Pacitti points to the fact that there
are already at least 15 research
aggregator platforms operating in
Europe today, not including the
largest market data vendors such
as Bloomberg, Refinitiv, FactSet
and S&P Global.
“The idea that a research
marketplace would somehow
stem the flow of commission
dollars towards the bulge bracket
research houses is as fanciful as it
is impractical,” he argues.
Devil you know
The intention of MiFID II to
improve transparency
and protection for
investors in the wake
of the 2008 financial
crisis has fallen
victim to unintended
consequences. The results,
according to Pacitti, are “less
research, less liquidity, and less
efficient markets resulting in
worse returns for investors,” even
when considering asset manager
fee compression and reduced
research budgets for the buy side.
Woozle conducted interviews
with 45 independent research
boutiques in Europe and the
vast majority reported that they
were somewhat or significantly
disappointed with the levels of
commission generated by the
research marketplaces to which
they contribute. Woozle found
that 30% of research providers
are earning no revenues on those
systems, and approximately half of
the total commission dollars being
spent by buy-side investment
firms is being split between the
top 20% of sell-side vendors.
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U N B U N D L I N G ]
Pacitti’s Woozle Research firm takes its name from
the “Woozle effect” in academia, where a research
conclusion is cited as evidence by other researchers,
regardless of whether the conclusion was correct
in the first place. He draws a parallel with the
1933 Glass-Steagall Act in the US, which separated
investment and commercial banking in the wake of
the Wall Street Crash of 1929.
The unintended consequences of restricting US
banks to only sourcing a maximum of 10% of income
from investment securities has increased risk as
institutions weren't able to diversify exposure. The
Glass-Steagall Act was eventually repealed in 1999
and Pacitti adds that in the long-term, industry
regulations will be “cyclical not structural. There's
a good probability that the adverse consequences
of MiFID II will be repealed or will see significant
changes”.
In the meantime, the buy-side may prefer to stick
with the devil it knows. Introducing adequation
“The idea that a research marketplace would
somehow stem the flow of commission dollars
towards the bulge bracket research houses is as
fanciful as it is impractical.”
MARK PACITTI, FOUNDER AND MANAGING DIRECTOR, WOOZLE RESEARCH
between the price and cost of research would change
research providers’ business models once again and
add a new regulatory burden on asset managers,
argues Patrick Simion, head of public affairs at
BNP Paribas Asset Management in Paris: “We have
become used to MiFID II rules and we don’t feel that
additional rules will help.”
That view is echoed by Charlotte Decuyper, market
structure and strategy analyst at Liquidnet in London.
When MiFID II came into force, the challenge for
most asset managers was being able to collate data
to accurately assess and evaluate their consumption
and the quality of research. The result is that asset
managers, also facing the growth of passive investing,
are now seeking to only consume research where
they see clear value-added in the investment process.
“Based on the new data, the objective is to select the
best in class type of research,” Decuyper says. Asset
managers have also started favouring new types of
access such as discussions with a veteran analyst:
“The industry has been adjusting to the new rules
over the last two years and processes are just starting
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