As the US Securities and Exchange Commission readies a plan to “blunt the fallout” MiFID II regulations that are fast approaching, a Greenwich Associates survey shows that the delicate game of negotiation between brokerage firms and institutional investors over research is coming down to the wire. In an apparent high-stakes game of chicken, investors appear to be patient, waiting for research prices to break as mifid ii regulation deadlines approach.
Institutional investors and the negotiation waiting game as Mifid ii regulation approaches
January 2018 is the month that MiFID II regulation require brokerage firms to separate the cost of research from their commissions, which had been bundled into one cost.
Establishing a fair value for that research has been challenging, with market prices fluctuating from as much as $455,000 per year and $10,000 per phone call with a research analyst, to just $10,000 per year for a skinny bundle of equity market insight.
In an algorithmic analysis, the wide differential in bids is a sign of market confusion and a lack of cohesion, which appears to be the case heading into the implementation of a historic regulatory approach.
“The stakes are high for global, regional and specialist brokers,” Greenwich Associates noted in a report titled “The $1.35B Question: MiFID II’s Impact on Equity Industry?”
The report highlighted what appears as a tense standoff. “Equity brokers and institutional investors in Europe have been holding fast to their ‘wait-and-see’ approach to what could be revolutionary change to their business when new rules on payments for investment research take effect at the start of 2018,” they wrote.
Waiting for the issue to resolve itself appears to be the strategic path investors are taking, with a potential expectation that research prices might drop further once the MiFID II deadline approaches and even passes, according to sources who previously spoke with ValueWalk.
Purchasing research in a fashion similar to buying a stock at a low price comes as the stakes are high. Of the 340 European institutional equity investors in Greenwich Associates Universe, over $2.9 billion in commission revenue was generated on a year over year basis, with 46% used to pay brokers as well as research and advisory services.
Top research provider and top brokerage firm are not one in the same
Dichotomies in the institutional research / brokerage market are not uncommon. Digging deeper into the Greenwich Share Leaders in 2017 reveals a slight disconnect between those voted as providing the best research and those gobbling up the largest share of commissions.
In Europe, for instance, UBS has the highest share of equity trading, but it is Morgan Stanley and Bank of America Merrill Lynch that were the top vote getters when institutional investors determined the best research and advisory services. UBS tied for third in the best research category along with Exane BNP Paribas, which was not among the top five brokerage firms in receiving commissions.
The differential between brokerage firms receiving the largest share of business and providing the best research will likely resolve itself, but that might not happen until the start of the year.
““Any shake-up will likely come at the beginning of 2018,” Greenwich Associates Managing Director Jay Bennett said in a statement. “People are holding off strategic decisions until they get a better idea of how this will play out. Right now, there is a scramble among brokers for insight and data about how investor behavior will change under the new rules—and vice versa.”
One institutional investor with whom ValueWalk previously said he planned on waiting until after the dust had settled, perhaps in February, to make research decisions, hoping to obtain the best value in a similar fashion to a “buy on a drawdown” strategy the hedge fund uses.
The issue for brokerages becomes even more complex, as the majority of European institutional investors do not plan on changing their research budgets in 2017, with nearly ¼ plan on reducing their spending.
This all comes as the SEC is working on providing regulatory clarity and potential relief to US firms doing business in Europe subject to MiFID II regulation, Bloomberg reported. The effort is designed to help regulations work in concert with European rules so as not to put US firms in jeopardy of obeying one regulation in Europe but violating another in the US.
“The industry is seeking SEC confirmation that global asset managers’ mifid ii regulation compliance plans are consistent with US securities law provisions -- and to do so by the early fall, so that firms have adequate time to prepare,” Jennifer Choi, an associate general counsel at the Investment Company Institute, told Bloomberg. “Confirmation would help global firms continue running efficient global trading and research programs for the benefit of their investors.”