Many commentators realise that the traditional institutional broking model is no longer sustainable. However, the reduction in the quantity of non-corporate coverage that has already occurred, even before MiFID2 comes into effect, will still come as a shock. The evidence shows that there is no commercial sense in brokers covering non-corporate companies with less that £200,000 daily turnover in their shares.
Let me own up. In the not too distant past I was Head of Research at one of the more successful mid and small cap brokers. I have also been an analyst at ‘bulge bracket’ investments banks and even a fund manager. Thus I have seen the way in which the role of the research analyst has evolved over many years, as well as personally experiencing the challenges of running a research department.
In the golden era of equity analysts, the 1990s, managing a team of analysts was famously likened to herding cats. The ideal analyst was smart, individual, possibly quirky and not too keen on being told what to do. Starry analysts were a must have for any investment bank and, though expensive, were affordable. Since then the additional burden of heavier regulation and the unceasing shrinkage of equity commission rates means employing a galaxy of top rated analysts is only affordable by the richest banks.
For the smaller houses, typically focusing on small and mid-sized companies, the shrinking commission pool means having another look at the business model.