MiFID II’s unbundling mandate puts data front and centre for traders
Giles Nelson, MarkLogic: MiFID II is changing the way buy-side firms acquire and produce investment research
It is now a year on from the introduction of MiFID II and it’s becoming clear that, although the regulatory deadline has long since passed, the ongoing effects of the regulation on investment firms and trading venues are still being understood in Europe and globally.
A key goal of MiFID II was for the cost of research and trade execution to become more transparent. Restrictions were placed on the bundling of investment research and execution services by brokers to fund managers. Previously, research was usually provided for “free”, exchanged for transaction commissions, in a process known as “soft dollaring”. MiFID II has made this a thing of the past. Generally, investment firms now have to pay separately, in “hard dollars”, for research which has made them rather more discriminating over the research they receive.
This scrutiny on the value of research is leading to changes in the way the industry in Europe works. Asset managers are placing less value on broker research now it’s unbundled. They are building up their own research teams and using non-broker third party research. This has led to lay-offs of broker research analysts who, if lucky, move to an asset management firm. With broker execution services made more transparent this has led to a reduction in the number of brokers used by asset managers. These changes put pressure on many smaller brokers’ whole business models. Over time it is likely that some will consolidate or go out of business altogether.
This isn’t just an issue for firms operating in Europe. As recently reported in the Financial Times, 53% of asset managers have implemented the MiFID unbundling standards as global policy. And some in the industry believe that as asset managers appreciate the benefits of greater transparency they will expect this of the industry generally, whatever jurisdiction they are operating in.
What is clear is that research providers will have to improve, whether they are brokers, independent third parties, or indeed, internal teams within asset management firms. Higher quality, more personalised research will need to be delivered more quickly. A corporate or high net worth individual with a substantial portfolio, for example, will expect the best bespoke research to be provided to them incorporating the latest market news and movements. It will need to combine a firm’s own primary research with the use of industry standard data feeds from, say, Bloomberg, together with information on public platforms and non-standard data feeds (often termed alternative data).
Good research thrives on quality data, but accessing this data quickly and ensuring it is the most relevant to a possible trade is challenging. To be able to provide this research quickly and efficiently it needs to be integrated into one central repository, which is easily searchable and which notifies the research team when new relevant research is available to the system. This is exactly what a number of fund managers are now doing – accessing previously siloed sources of data, integrating these together and making them accessible through one system to, ultimately, give a 360-view of their entire research data set. These firms are able to produce more bespoke, more authoritative research, more quickly.
A year on, MiFID II is changing the way buy-side firms acquire and produce investment research. For firms who take investment in house, and for brokers wanting to maintain their research business, it raises the important technological question of how best to use all of the data at their disposal to deliver the best possible result for clients. Only those firms with the solution to this question are going to be able to survive and thrive.
By Dr. Giles Nelson, CTO financial services, MarkLogic
I am the CEO of RSRCHXchange a research aggregator and marketplace with over 1,200 asset management firms as customers.
I think we have a reasonable dataset and cross section of asset management firms and research providers.
I would like to start by saying that I see no evidence in our data of anything at all described by the author of this article. Literally nothing.
1. Asset managers are building up their opwn research teams – no. The price of investment research has fallen so much that the cost of broker research is far cheaper than the fully loaded cost of a FTE. We have seen no evidence at all of this. Buy side firms appear to net be reducing headcount if anything.
2. Asset managers are using third party non-broker research – no. We have seen very little evidence of this in fact we have seen the opposite with smaller independent firms suffering to larger banks and brokers given the price at which the latter are able to price.
3. This has led to a reducting in the number of brokers used by asset managers – not really. The pricing is so low very few managers have reduced their lists and if they have it has not been dramatic.
4. Small brokers are under pressure – yeees but not because of the reduction in lists but because of the reduction in prices where they do not have other businesses to help offset the revenue decline in research.
5. Higher quality more bespoke research will need to be delivered – well it can now but not at the prices being paid.
6. Only those firms with the solution to this question are going to be able to survive and thrive – seems highly unlikely don’t you think? I think the larger player can do what they like and still be around due to their size, distribution and flow of primary issues. They may wish to do as the author describes but only if they can make money from it.
Thanks for your comments and apologies it’s taken some time for me to respond. You may well have a different view based upon your experience of the market. My commentary is based upon my company having both buy and sell-side firms as clients, using our platform for research authoring, management and dissemination. Some asset management firms are expanding their research teams, some brokers are too if they see this as a core strength, some brokers are getting out. And in summary, if a firm does choose to invest in research then bringing all its data assets to bear on this process, to maximise insight and do this in an efficient and personalised manner, is key. Commoditised research is, surely, an oxymoron?