We’re now a full month into 2018. For a long time, we’ve been saying that MiFID is coming. Well, it’s here!. MiFID II is a huge set of regulations but the big change was supposed to be transparency in transactions. In 2017 if you bought stocks or debt in Europe, you got a single fee that bundled transactions with research and other cots. After MiFID II, all 2018 will separate transaction from everything else. That means that customers, rather than research directors, will determine the size and direction of Equity Research. How big a difference will this make?
- Lower Research Fees: As Fund Managers receive and review fees from traders, there are going to be differences. If two traders provide the same service, but one charges more, why not just keep the lowest cost provider? Isn’t that the core takeaway from years of working with procurement?
- Fewer traders: There is an argument for some redundancy. What if something goes wrong? You need more than just one trader. You may need two or three, or if you use ten what do you gain? Before MiFID, it really didn’t matter since bundled fees made true cost analysis difficult. Now, dealing with fewer traders could significantly cut operating costs.
- Kill low-value reports: In the lead up to MiFID II, everyone agreed that far more reports were written than read. The 15 biggest investment banks produce 40,000 reports a week, with less than 1% read by customers. We’ve created a multi-billion dollar research and publication industry (with tens of thousands of employees) that has no readership.
- High-value reports: Some reports are better written and more insightful than others. Apple has is covered by 50 analysts. The top five or ten probably have more original insights than the remaining 40+ reports. Do we benefit from more than 5-10 analysts covering a stock? Yet we have so many small-cap stocks that are barely covered.
- Spread To USA: MiFID II is specifically a European regulation. However, the US and European market are so tightly integrated that it would certainly make sense to just follow MiFID rules in Europe AND the US. If so, the combined jobs losses in research will be huge.
- Profitability: If equity research departments are aggressive, a hundred thousand or more positions would be terminated, and software and data service licenses reduced. Billions saved here could keep the stock market’s momentum going through 2018.
- Fewer Reports: Fewer equity reports will be written and distributed, slashing costs. Firms like \Bloomberg and Thomson/Reuters will also need to reduce staffing. At a minimum, data firms can expect urgent demands for contract renegotiation.
- Specialization: it’s hard to guess the “voice of the customer”. But I’d bet that customers are going to say something like, “Kill that mediocre stuff!” Big, highly paid research departments need to produce reports with insight, with info directly from the c-suite and above. Few research department can do that across a large number of stocks. But maybe someone can develop a new approach to equity sales research that surprises the market?
- Unfamiliar Faces: 2018 will be a year of unfamiliar faces. Many sell-side analysts will disappear, but some may reappear as buy-side analysts. Researchers on both sides may swap places, swap specialties or be retrained to fill new positions… after the “voice of the customer” is heard we will know which firms, industries, and specialties are worth the cost of research.
- Higher Efficiency: MIFID isn’t the only big thing happening in 2018. For decades automation and Artificial Intelligence has been at the forefront of Wall Street’s evolution. Automation is taking over processing (buy, sell, compliance, billing); AI is taking over decision making (what to buy or sell, when to change strategies, building portfolios); and customers are moving towards indexed funds that don’t require traditional research.
During the first quarter, customers will analyze their billing. By the end of the quarter, trading firms are going to tell us what they do and do not want to pay for. By the Second quarter, we can expect a wave of terminations and position changes. In the third and fourth quarters, we will find out if the cuts are just 20-30%, or if MIFID plus new technology takes away 75-90% of research and other staff.
Will 2019 be a quiet year for Wall Street to recover, or are this year’s changes just a ramp up to even deeper transformation? If you have insight into the next set in Wall Street’s evolution… we’re all ears! Tell us what you think!