[ R E S E A R C H
coverage of small- and mid-caps
was already clear prior to MiFID
II, Decuyper argues.
However, Hardman & Co found
that in the UK in 2018, the worst
impact was in fact felt by large-
caps, with average analysts for
each London Stock Exchange
large-cap stock falling 7.4%
during the year. At the same time,
mid-cap coverage fell 3.1%, and
coverage of main market small-
caps and AIM companies actually
increased by 15.6% and 7.9%,
respectively.
This was backed up by the UK’s
Financial Conduct Authority
(FCA), which found in September
that, despite research budgets
falling on average by 20%-30%
since the introduction of MiFID
II, most asset managers agreed
that they are still getting the
research they need. There was
no sign of a material reduction in
coverage of small- and mid-caps in
the UK, the FCA found.
Yet, the AMAFI association
of French market professionals
reported in September a “large
consensus among issuers, asset
management companies and
research providers” that the total
amount paid for research has
dramatically diminished and is
set to continue to fall, with the
decline particularly severe for
small- and mid-caps.
This suggests the supply of
research is driven by the overall
attractiveness of a stock exchange
for smaller companies, rather than
simply by regulation. The UK has
by far the largest weight in the
MSCI Europe Small Cap Index
at 32%. Sweden and Germany,
both on 11%, are the next largest
constituents.
Under the previous bundled
model, Decuyper explains there
was an assumption that there
was greater incentive for bulge
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U N B U N D L I N G ]
brackets to cover large-cap stocks and get paid with
large cap flow. Under the current system, becoming
an expert in a small-cap company “enables the
provider of research services to remain relevant to
clients, rather than being yet another junior analyst
in a large-cap where you are unlikely to be paid
commensurably for your work,” she says.
Ways forward
The aim of MiFID II to promote innovative ways
to produce, price and distribute research at a more
realistic price point has not yet been realised as the
bulge bracket still dominates research spending,
Decuyper says, outlining that the status quo is
“increasingly unsustainable”.
Rather than the focus being on returning to the
research provision of the past, Decuyper concludes
that the industry needs to adapt and evolve to
what is required going forward. One way forward,
she suggests, would be to provide the competition
regulator in each jurisdiction with a mandate to
investigate whether research prices are so low that
they might be considered a form of inducement.
There is also a need to regulate new sectors
“Becoming an expert in a small-cap company
enables the provider of research services to
remain relevant to clients.”
CHARLOTTE DECUYPER, MARKET STRUCTURE
AND STRATEGY ANALYST, LIQUIDNET
of research including alternative data and
Environmental, Social and Governance (ESG) as well
as new ways to improve distribution. In the UK, the
FCA has said it will challenge firms it deems to be
‘greenwashing’ products. The AMF argues that there
is a need for certification of ESG research analysts,
but without providing details of how to do so.
Steven Maijoor, chair of the European Securities
and Markets Authority, said in a speech in February
that the level of public scrutiny and supervision of
ESG ratings agencies is “far from optimal”, and public
regulation is needed.
EU regulations continue in force in the UK during
the Brexit implementation period which runs until
December 31. After that, providers who can supply
high quality ESG research are likely to have a bright
future no matter which regulatory regime they
operate under.
Issue 63 // thetradenews.com // 45