Why there will always be demand for research


Despite the doomsday forecasts that come with MiFID 2, equity research isn't going anywhere. Investors will always demand rigorous analysis of listed companies, and those companies will always want research written about them in order to raise awareness, raise new capital when necessary and attract good quality shareholders. The question is who will pay for it...


Large-cap research is oversupplied, but it's more complicated for small to mid-caps

In many respects, the MiFID II regulatory changes address important issues in the current market. Institutional investors do not need 35 different opinions on a large cap company. However, while we believe reforms will reduce coverage to more reasonable levels at the larger end of the market, it will put severe pressure on the coverage of small to mid-cap companies.


Small cap research largely funded by the corporates

Low liquidity at the smaller end of the market means, below a certain market cap threshold, analysts can't earn enough from secondary commissions alone to justify covering the stocks. But there is still demand for research from: 

  • Small cap fund managers and private investors looking for proper analysis of potential investments
  • The stock exchange looking for efficiently priced securities, and
  • The quoted companies who are keen to raise awareness of their story, have better-informed shareholders and attract new good quality investors.

This research is therefore primarily paid for by the quoted companies, whether through an explicit paid-for agreement with houses like Edison, or through annual fees paid to their broker, or both.

The typical argument of bias misses the point. Research providers build their reputation on the quality of their research and their calls. When they decide to cover a company, they do so in the vast majority of cases because they believe in the prospects of the company. Analysts and houses know that if they are wrong there is a good chance of lasting reputational damage. Furthermore, much of the value in the research comes from the rigorous analysis, the exploration of the risks/opportunities, the forecasts and so on. It is a starting point for many investors during their own analysis, rather than the whole process.

MiFID II will increase the amount funded by corporates

The MiFID II reforms will, in our view, move this threshold up to the market cap scale, below which research is primarily paid for by the quoted companies. As secondary commissions and fees paid by asset managers continue their downward trend, these revenues will need to be replaced to some extent by listed corporates. For this reason, we would not be surprised to see the fees charged by the research houses and brokers increase, just in order to cover costs.


The information contained within this post is based on personal experience and opinion and should not be considered as a recommendation to trade nor financial advice.