MiFID II Is Crushing Independent Research Shops: 2018 Equity Research Budgets Seen Down 32%

Original post

For the past several months we’ve discussed many theories about how the new MiFID II rules in Europe might drastically change the investment banking research business model.  For those who haven’t followed this narrative, MiFID II is a new set of regulations in Europe that, among other things, requires investment banks to charge separately for research as opposed to just lumping it into an asset manager’s trading fees. 

Here are a couple of our thoughts/predictions:

  1. Investment banks will find that there just might be a very large bid/ask spread between what they think their research is worth and what their clients are willing to pay for it.
  2. Exorbitant research fees will create even higher barriers to entry for upstart hedge funds and cause existing small funds to ditch research vendors altogether.
  3. Large asset managers will be forced to cut back their research vendors leaving smaller, independent research shops doomed.

Of course, the first prediction was proven true when Deutsche Bank announced plans to slash the price of their fixed income research in half due to a “lack of demand” (see: Deutsche Bank Forced To Slash Fixed-Income Research Price By Half On Lackluster Demand). Shortly thereafter, our second prediction was also confirmed when Bloomberg reported that small hedge funds were being forced to ditch pricey research packages because they simply couldn’t afford it.

Now, it looks like our third, and final, prediction about MiFID II is also playing out exactly as we would have thought as funds in Continental Europe are seen slashing their equity research budgets.  As Bloomberg  notes, while fund managers are seen spending roughly the same amount per broker…

That’s according to a survey of fund managers conducted by U.S. consulting firm Greenwich Associates, which assessed the shakeup to the multi billion-dollar market for research under the European Union law that started Jan. 3.

The decline in spending from last year prompted by the revised Markets in Financial Instruments Directive, or MiFID II, is largely driven by more selective fund managers buying research from a smaller number of banks, according to the survey. For those who “make the cut,” there’s encouraging news: the amount budgeted for each provider will remain relatively flat.


overall spending is down 32% in Continental Europe and 17% in the U.K. indicating the number of brokers engaged by each fund are being drastically scaled back.

“Over the last two years, European investment managers have clearly expressed their intention to reduce equity research spend,” Greenwich Associate Director William Llamas said in a report set for release on Tuesday and based on data gathered late last year. “The official data is telling a more aggressive budget-cutting story.”

Greenwich, which last year predicted a $300 million reduction to external research budgets, found the biggest budget changes at fund managers based in continental Europe — a 32 percent decline — compared with a 17 percent drop in the U.K. The finding was based on responses from 29 firms.


All of which means that a set of regulations intended to introduce more transparency into financial markets will actually have the opposite effect as small, independent research shops will be forced out of business and there income consolidated into the hands of Goldman, JP Morgan, Morgan Stanley, etc.