The effects of MiFID II on research

Chris Hamblin

9 March 2021

In its first analyst mapping report which it published in November, Substantive Research found that since MiFID II came into effect, in proportionate terms, European brokers shrank their teams of analysts at least three times more than their US counterparts. There has been a 12% loss of analysts in Europe, but only a 4% loss in the USA, with buy-side budgets and research prices decreasing everywhere. In December Substantive Research also published research that showed that the value of analyst meetings had fallen by 47% since the Coronavirus had hit the market.

In the second analyst mapping study which has just come out, Substantive Research concentrates specifically on the level of experience to be found on teams of analysts - 'analyst tenure' is a vital factor in the quality of research - and changes to this since January 2018. The results are as follows.

European brokers and banks lost 3,074 net years of experience since MiFID II came into effect, while US brokers and banks lost 4,606 net years. The American universe of analysts in the study was 1.8 times larger than the European, showing that the effect among European firms is more pronounced.
The experience levels of analysts lost to banks and brokers in the three-year period averages out at just under 7 years per analyst, whereas the average experience levels for those gained is just under 2 years.
The drain in experience from the research market began to stabilise in 2020, with the loss slowing to 928 years over the twelve-month period.
In a comparison between banks and their research-driven competitors in the research market, the premium brokers, the experience drain is very different, with US and European banks losing 6,287 years of experience compared with premium brokers losing 1,393 years of experience.
The picture varies significantly if one looks at each research provider in turn. For example, one unnamed provider X has had a net gain of 17 analysts since MiFID II came into effect, but its competitor Y has had a net loss of 138. On the subject of experience levels (to check if the provider with the net gain has hired junior or senior staff), provider X has actually lost only 50 years of experience, but Y has lost 1,328.

The sample size of current active analysts in the study was 5,300. These were selected from the largest and most prominent banks and premium brokers, who command approximately 60% of average research budgets.

Mike Carrodus, the CEO of Substantive Research, told Compliance Matters: “While we see a significant reduction in the analyst experience levels that the wider market is providing, when you look individually, broker by broker, the picture varies dramatically. It is clear that some firms have used MiFID II and COVID-19’s structural shocks to the research market as an opportunity to gain market share.”