THETRADETECH DAILY news
THE OFFICIAL NEWSPAPER OF TRADETECH 2022
Regulation
EXCLUSIVE : Mifid II has made research market less competitive , finds new survey
THE RESEARCH FOUND THAT COMPETITION FOR THE PROVISION OF INVESTMENT RESEARCH HAS DECREASED DUE TO MIFID II , WITH BULGE- BRACKET PROVIDERS DOMINATING .
new survey of the asset management
A community on researching pricing trends has revealed a number of notable challenges in the wake of MiFID II , The TRADE can exclusively reveal .
Substantive Research , a comparison site that monitors and curates investment research and provides data-driven analytics on research spend to the buy-side , surveyed 40 asset managers across Europe and the US with AUM of between $ 2 billion – $ 800 billion . The findings show that regulatory changes designed to unbundle research to make the market more competitive have in fact done little to alleviate the massive concentration in research spend going to the core bulge-bracket banks .
According to the research , 52 % of research budgets went to the top 10 providers in 2019 , decreasing to 51.6 % in 2020 . But in 2021 , this jumped again to 53.1 %, suggesting that the incumbents are actually getting more powerful , and competition is decreasing as a result of MiFID II .
“ If you look at all the benefits to competition that the regulator was hoping for , none of these have happened ,” Substantive Research CEO Mike Carrodus told The TRADE in an exclusive interview . “ There is a big focus on value now , but what hasn ’ t happened is new entrants managing to gain a foothold and encouraging competition , as that focus on value from the buy-side is what has constrained them to managing their existing relationships with brokers . “ There is a clear message when you look at these numbers . To be honest , it ’ s not even about the top 10 – most of the spend is concentrated in the top three . The market is not fragmenting , it ’ s not deconstructing , as was hoped .”
Tight budgets The problem is that research budgets are being consistently slashed . Year-on-year , both US and European budgets decreased by 11 %. And this is having an impact on provision . “ On both sides of the Atlantic , asset managers have cut the tail ,” said Carrodus . “ This all speaks to resourcing and staffing . We lost 7,500 years of experience in the three years after MiFID II . Outside a small handful of brokers , people are maintaining a strict cost base when it comes to research . But you need this diversity , you need a market that encourages new launches and independent research . We don ’ t want to be like frogs being boiled – every year choosing from a more finite and more junior pool of analysts .”
The problem is that although MiFID II had good intentions , the regulators underestimated the brokers ’ propensity ( and ability ) to discount their product , subsidising their research provision internally in order to keep their clients . These meant that by comparison , independent providers looked very expensive , and the concentration towards brokers continued .
Death of diversity “ Top of any research list is those people who have managed to retain a cost base that manages to cover the most bases for most people ,” said Carrodus . “ But that doesn ’ t help diversity , depth and breadth in this market , which is arguably something clients also want to see .
“ In Europe , people have shrunk their budgets materially . And what was cut was optionality – the ability to call someone tomorrow that you don ’ t need ( or pay for ) today . People are only paying for what they need right now . But what happens when the market turns ? How many people wanted to know about wheat , a year ago ? Everyone is now scrabbling for new sources
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