“Mifid II research rules centred around the unbundling of trading and research, and the rigorous assessment of the value of research consumed,” he says. “That valuation process ensured that asset managers had a much clearer picture on which providers they used in each area. Unsurprisingly asset managers then asked if they could only pay for the areas they were most interested in receiving research.”
“From our data it is evident that providers will often cut back the staffing and experience levels significantly instead of exiting that area completely,” he says. “This suggests that it doesn’t matter if providers decide to unbundle their research offering or not, the clients are doing it already when they value their research relationships.
“It suggests that in future, the top three or four providers on any asset manager’s provider list will continue to take a very large portion of the research budget, but payments for the rest of the provider list will be flatter and only focused on rewarding each provider’s comparative advantages.”
Since the implementation of the Mifid II unbundling in January 2018, the global research market has lost over 7,500 years of analyst experience, according to a report by Substantive Research.
The report found European brokers and banks lost 3,074 years of experience while US brokers and banks lost 4,606 years of experience.
“It was not a surprise for me,” says Pedro Fernandes, CEO of ResearchPool. “I think there was an overproduction of contents and research from senior analysts prior to Mifid and when it was implemented, the markets start adapting to the new reality.”
Earlier research by Substantive Research found European brokers have shrunk their analyst teams by 12 percent since the implementation. It also found the value of analyst meetings had fallen by 47 percent since the pandemic.
Analysts are under stronger scrutiny from the banks and brokers, according to Carrodus.
"The banks and brokers are tracking the value that each analyst is driving. They have built models, tracking who’s delivering them value and assessing that. It never existed before but every bank and broker has changed the way they look at things.”
Similarly, analysts have become more sales orientated from the unbundling, according to Fernandes.
“They were more passive before Mifid but now they are more active in the promotion side. There was an overall thinking before that the buy side will reach out but now things are the other way around meaning the sell side needs to further promote their content.”