HONG KONG, March 28 (Reuters) - A period of severe turmoil is facing the securities research industry as a new regulatory overhaul threatens the way investment research is done.
Online portals, in particular, are set to gain market share at the expense of major “bulge bracket” investment banks.
“The global investment research market is on the cusp of major disruption,” said Benjamin Quinlan, CEO of Quinlan and Associates and author of a report on the challenges facing the research sector.
Forcing the change are new rules, known as Markets in Financial Instruments Directive, or MiFID II, due to take effect next January and aiming to make European securities markets more transparent.
A key aspect of these rules is that investment banks must charge fund managers an explicit fee for research rather than bundling the cost into trading commissions charged to clients, as at present.
Though banks have scrambled to reorganize their research functions by focusing on top-tier clients to minimize costs, rolling out proprietary portals, or adopting a model where clients pay for research depending on what they need, analysts say the sheer volume produced on a daily basis means the research effort has a long way to go before becoming efficient.
For example, about 40,000 research reports are produced every week by the world’s top 15 global investment banks, of which less than 1 percent are actually read by investors, according to Quinlan.
More than 30 analysts cover HSBC <0005.HK on a regular basis, though only 11 of them have a rating of three stars or above even though it is a key factor of consideration by many global fund managers.
Though the immediate impact of the Mifid II rules will be in Europe, with a recent Greenwich Study predicting a cut of $100 million by European money managers in their research budgets annually.
In recent months, global investment banks such as Standard Chartered, CLSA, Jefferies and Barclays among others have retrenched staff or completely pulled back from their equity research and sales businesses in some markets.
At Credit Suisse’s annual conference on Tuesday, Chief Executive Tidjane Thiam said the bank will continue with restructuring in the Asian equities business which will result in some more reduction in headcount.
“The (equities) platform has to be of the size that’s commensurate with the demand today not with the demand in five years or 10 years,” Thiam said.
Some independent research platforms making their presence felt in Asia has been seen in recent months, such as Smartkarma’s tie up with Societe Generale last year, but their business model is still aimed at filling existing gaps rather than snatching market share.
“Both managers and brokers will need to think long and hard about how they engage with the new market place,” Quinlan said. (Reporting by Saikat Chatterjee; Additional reporting by Sumeet Chatterjee; Editing by Eric Meijer)