10 January 2018
Reporter: Jenna Lomax

MiFID II has shrunk equity research by $300 million, says study

The new second Markets in Finance Instruments Directive (MiFID II) rules on payments for investment research have already shrunk the market for European equity research by an annual $300 million, according to a new study by Greenwich Associates.

The study, known as The Greenwich Report, showed that in the run up to MiFID II, 39 Europe-based study participants reduced this year’s research and advisory budgets by 20 percent year-over-year.

Greenwich Associates estimated that the 2017 European research/advisory pool currently stands at $1.35 billion, meaning that this year’s market has already shrunk by almost $300 million.

The study, which kicked off in 2017, questioned institutional equity investors to understand how these changes have affected the industry and what the market can expect after the launch of MiFID II on 3 January.

However, a third of respondents said they will still pay research providers the same amount as last year. Greenwich Associates stated that the impacts of MiFID II “won’t be evident before the end 2018”.

The study also examined the movement and behaviour of US investors, many who comply with MiFID II in order to continue working with European clients.

In a statement, Greenwich Associates said: “A growing number of US asset managers are following the example of their European peers by opting to pay for research themselves under MiFID II.”

William Llamas, associate director of relationship management at Greenwich Associates, and author of a new report, MiFID II is Here: How Investment Managers Have Prepared, found that MiFID II has actually prompted investors to cut ties with some research providers.

Llamas said: “Managers express concern about the message it would send to their investors if they made sudden and substantial cuts. Any sign that managers have been wasteful in their spending in the past would resonate poorly.”

The new report also provides typical pricing levels for these relationships, as well as for “mid-level” access and “written only” research relationships—some of which have been priced as low as $15,000 per year.

Commenting on this, Llamas said: “Pricing research at such a low level puts enormous pressure on small providers whose core business is producing equity research.”

In Europe, respondents reported more than a 20 percent decrease in research counterparties.

According to Greenwich Associates, since both budgets and provider lists have been reduced to a similar degree, the amount budgeted for each provider or broker will remain relatively flat year-over-year. Llamas explained: “In other words, if you make the cut, you won’t get axed.”

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