MIFID II aims to restrict conflict of interest by requiring any benefit passed to an investor that might be interpreted as an incentive to trade and paid for by the client. The bundled pricing of research and execution is seen as an obstacle to transparent prices and competition. Therefore, regulators are trying to force the brokers to separate their commission model in order to minimize conflict of interest, increase price transparency and boost execution.

When MIFID II was announced it proposed two potential opposing outcomes: the death of CSA or the expansion of CSA across Europe, what is the most likely to happen?

With the introduction of the MIFID II this will lead to obvious evolution in the price structure in how asset managers will obtain their investment research. At this moment in time the most common structure among independent research firms is tiered by product but numerous models remain. The pressure of the MIFID II will render this more transparent even though the sell and buy sides want to stick with using commissions. How will the fee structure change after the introduction of the new regulation?

The new regulation will also evolve the traditional opaque methods of payment to a more transparent relationship between the sell and buy side firms. The new regulation will set out guidelines on how much asset managers can spend on research. How will this affect payment methods between the buy side and sell side firms?.

In the latest Integrity Research survey we can observe that the firms using transparent pricing are the least successful. However, this choice is largely due to the fact they are looking for stability. This trade off is accepted by these independent research firms as they seek regular and predictable cash payments. Therefore, stability for small research providers is key because the industry is over-competitive.

However, the constant factor through all this change will be the fact that asset managers will still be looking for the highest quality research at the lowest reasonable price. How do you expect the total amount paid by the firms for research to change? Will independent research providers be able to consolidate their position in the market?.

As the industry is becoming more and more dense one aspect is for sure is that asset managers will continue to search for the highest quality of research for the most reasonable price even after the introduction of MIFID II. Therefore, it is clear that unbundling the price on research will cause drastic changes to the industry on how analysis will be obtained and paid for by the asset managers. However, the most important changes are yet to come.

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FABRICE BOULAND, an accomplished entrepreneur, is currently the CEO of Alphametry and a former equity derivatives trader.

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