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Research unbundling triggered by MiFID II causing unhealthy price war

Publication Date: 09 Jan 2019 - By Gaurav Sharma (Editor ReachX) By Gaurav Sharma (Editor ReachX)
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Macro Environmental, Social & Governance Multi Asset UK EU ex-UK Financial Services

The first anniversary of the inception of the second Markets in Financial Instruments Directive (MiFID II) requiring 'buy-side' firms, such as pension funds, unit trusts, hedge funds and private equity funds, to purchase research as an 'unbundled' product, detached from an execution fee has come and gone.

And if the evidence of the last 12 months is anything to go by, it has created a huge shift requiring 'sell-side' investment banks to price and sell their research into equities, currency and other financial investments rather than provide it free to clients. 

“Inevitably, it has unleashed a price war as “bulge bracket” investment banks seek to gain market share ahead of an expected consolidation of research providers,” says Gianluca Corradi, Head of UK Banking at pricing strategists Simon-Kucher

“This price war is detrimental to the financial industry overall and ultimately for the buy-side firms who use the research. Large investment banks are currently pricing their research low in order to push smaller research providers out of the market.  They expect a consolidation of the industry and want as much market share as possible now in order to be one of the eventual winners.”

On the flipside, the price-war is good news for buy-side funds and asset managers, especially as they are themselves experiencing strong price pressure from their own customers particularly through a shift towards lower margin passive funds. 

“This too is translating into hard negotiations with investment banks over the cost of their research. Despite the twin pressures of the price war and the buy-side’s push for lower prices, the value of financial research has never been stronger and research providers need to hold their nerve,” Corradi adds.

“How much would a Portfolio Manager pay for speaking to an analyst with the right information at the right time? The value is immense, and this information is potentially worth billions of pounds. Therefore, despite the pressures I don’t believe the research industry will commoditise anytime soon."

Furthermore, Corradi agrees with wider market conjecture that MiFID II has triggered a strong push for innovation among sell-side providers, with their research becoming more specialised and heterogeneous.

“Investment banks are trying to differentiate their value proposition from their competitors, both by providing research through different channels and also by making their content more innovative. The provision of raw data has consequently become almost as important as traditional written content.”

ReachX’s has compiled an exclusive guide looking at the implications of MiFID II for issuers, asset managers and research houses as the new regulatory environment is being redefined. To download your free copy click here.

 

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