January 22, 2018 / 1:17 PM / 2 years ago

Big banks' cut-price research puts the squeeze on small brokers

LONDON (Reuters) - Big banks have been offering deep discounts on the research they offer fund managers since the start of new European market transparency rules this month, raising doubts over the future of smaller securities firms.

Companies providing such research must now give a transparent breakdown of their charges for their work under the MiFID II rules that went live on Jan. 3 so reports that were previously bundled in with other services can less easily be used as an inducement to sell other products.

The result, brokers and asset managers say, is that fund managers are reducing their budgets for external research by 20-40 percent, with some dropping about a quarter of their brokers and planning to do more of the analysis themselves.

In response, some of the big investment banks have offered massive discounts on bundles of research to maintain relationships that can be profitable in other ways.

Research priced a year ago at hundreds of thousands of pounds is now being offered for 5-10 percent of that, said Neil Robson, a partner at law firm Katten Muchin Rosenman, which advises funds and broker-dealers on regulatory compliance.

“Managers who agreed fees last year will be smarting that they are paying too much. In most cases it will be renegotiated,” said Robson, pointing to discrepancies in what different brokers are charging for different kinds of research.

JP Morgan (JPM.N) has offered some clients online access to its written stock research for $10,000 a year but will charge considerably more for additional services, such as conversations with analysts, said a source familiar with the offering.

Other banks are asking for up to $50,000 for similar access, according to the head of research at a major European bank.


“You’re likely to end up with a bar-bell distribution of bulge-bracket banks and true specialists, with middle-sized brokers squeezed out because they can’t afford to subsidize equity research,” the head of research said.

Another big European bank views some of the deals on offer as price-dumping and plans to collect email evidence to send to Britain’s FCA financial markets regulator, a source at that bank told Reuters.

A person familiar with the FCA’s thinking told Reuters that the regulator could deem research priced substantially below cost as a breach of the rules, but it would be likely to depend on the details of each case.

More of a concern would be if banks were charging a below-cost price as an all-in fee, including personal time with analysts, rather than only for written research, the source said.

A JP Morgan spokesman declined to comment. Five of its investment bank rivals contacted by Reuters declined to specify a floor price for written research.

The FCA is expected to let some time pass before taking any action on the fallout from MiFID. However, Russell Napier, co-founder of independent research provider Electronic Research Interchange (ERIC), said that some research firms could go bust before that.

“It’s dangerous for the regulator to stand back and let quite a lot of independents go bankrupt because there’s a risk you form an oligopoly in the provision of research,” he said.


In a sign of the strains on some firms — such as falling research revenue, rising compliance costs and pressure to cut broking commission — small stockbroker Arden said last week that it was willing to merge with a rival after turning around its business, saying the broking industry was “in need of further consolidation”.

Some brokers have shifted to a model of free research, paid for entirely by their corporate clients as part of a broader advisory relationship. They also plan to write less detailed reports about non-corporate clients in the same sector, partly in an attempt to secure advisory work from them.

Whether that is viable will depend partly on how strictly regulators interpret the MiFID rule allowing free research for non-corporate clients provided that it brings only a “minor non-monetary benefit” to the issuer.

SP Angel, a UK-based brokerage with six analysts covering three sectors, said it moved to a free research model paid for by corporate clients three months ago.

“The big boys have been trying to undercut everyone else,” said partner and head of research John Meyer. “We didn’t want fund managers switching us off.”

Meyer said that SP Angel’s work risks being dumbed down now that MiFID bars brokers from issuing free research that contains investor recommendations on non-corporates.

Fund managers are also voicing fears of a hit to the quality of research and corporate access to financial markets.

If fund managers drop brokers that handle only a small number of their stocks to cut costs, then the brokers will come under pressure from corporate clients, said Nick Burchett, Cavendish Asset Management’s head of UK equities.

Without that access, companies will look elsewhere to find someone who can put them in front of investors, he said.

($1 = 0.7186 pounds)

Additional reporting by Laurence White, Karin Strohecker and Kit Rees; Editing by David Goodman

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