In the last five years, trading commissions have come down significantly (as low as two basis points) for all the major institutions, making execution trading a less viable stand-alone business. In addition, research and corporate access used to be offered to investors in exchange for minimum thresholds of trading commissions or CSA/soft dollars.
As a consequence, the loss in trading revenues has created a significant cut in research coverage and corporate access. Today 30% to 40% of publicly listed companies are suffering from low coverage and poor investor access.
Those companies tend to have limited resources for in-house investor relations specialists, and very often outsource the investor relations function to public relations firms, creating a gap between them and investors.
The implementation of MiFID II in 2018 is acting as a catalyst
The introduction of MiFID II in January 2018, although well-intentioned for investors, has created a high degree of pressure on banks, asset managers and corporates: banks continue to lose out on trading commissions (unbundling of research and trading) and have stricter reporting obligations.
Asset managers see their margins compress further with the reintegration of research expenditures into their P&L (a large number of asset managers chose this approach). As a result, corporates lose coverage and access normally offered by investment banks (if investment banking fees paid are
insufficient).
Some commentators have expressed severe views on MiFID II and the marketplace has not yet fully adapted to the new realities. The immediate effects of MiFID II are destructive and all investors will likely lose out with the disappearance of research and the limitation of corporate access.
Today, most companies are in ‘wait and see’ mode with MiFID II despite the reduction in research coverage. They do not know which model or provider will help them and they are waiting to decide how to address the new environment.
They, however, recognise that there is a greater pressure on them to build visibility and access for investors.
MiFID II will open new market opportunities and favour innovation
Despite the short-term impact of MiFID II, there is a silver lining: fair pricing for corporate access, research and investor relations can emerge. Instead of being lumped and subsidised, pricing for services will be made more transparent for asset managers, research companies and service providers, creating a healthier, more competitive and creative environment.
For instance, when asset managers pay directly for research, they are more discerning in their choices and place more value on high-quality research.
Corporates may need help from professional investor relations services creating fresh opportunities for independent IR professionals to offer high-quality bespoke services as well as access and relationships.
MiFID II, while creating short-term negative effects, is creating an environment requiring a higher quality of service from providers to help small and medium-sized issuers and will favour the emergence of new services.
One can imagine a new paradigm where on-demand services for research, investor relations, and access to investors are made available to small-and medium sized companies, who will receive high quality services on par with FTSE 100 companies at a more reasonable cost.
While short-term pessimism seems to dominate, we are confident that new and successful solutions will emerge and address the concerns of smaller companies.
