MiFID II’s unbundling mandate puts data front and centre for traders
It is now a year on from the introduction of MiFID II and it’s becoming clear that, although the regulatory deadline has long since passed, the ongoing effects of the regulation on investment firms and trading venues are still being understood in Europe and globally.
A key goal of MiFID II was for the cost of research and trade execution to become more transparent. Restrictions were placed on the bundling of investment research and execution services by brokers to fund managers. Previously, research was usually provided for “free”, exchanged for transaction commissions, in a process known as “soft dollaring”. MiFID II has made this a thing of the past. Generally, investment firms now have to pay separately, in “hard dollars”, for research which has made them rather more discriminating over the research they receive.
This scrutiny on the value of research is leading to changes in the way the industry in Europe works. Asset managers are placing less value on broker research now it’s unbundled. They are building up their own research teams and using non-broker third party research. This has led to lay-offs of broker research analysts who, if lucky, move to an asset management firm. With broker execution services made more transparent this has led to a reduction in the number of brokers used by asset managers. These changes put pressure on many smaller brokers’ whole business models. Over time it is likely that some will consolidate or go out of business altogether.
This isn’t just an issue for firms operating in Europe. As recently reported in the Financial Times, 53% of asset managers have implemented the MiFID unbundling standards as global policy. And some in the industry believe that as asset managers appreciate the benefits of greater transparency they will expect this of the industry generally, whatever jurisdiction they are operating in.
What is clear is that research providers will have to improve, whether they are brokers, independent third parties, or indeed, internal teams within asset management firms. Higher quality, more personalised research will need to be delivered more quickly. A corporate or high net worth individual with a substantial portfolio, for example, will expect the best bespoke research to be provided to them incorporating the latest market news and movements. It will need to combine a firm’s own primary research with the use of industry standard data feeds from, say, Bloomberg, together with information on public platforms and non-standard data feeds (often termed alternative data).
Good research thrives on quality data, but accessing this data quickly and ensuring it is the most relevant to a possible trade is challenging. To be able to provide this research quickly and efficiently it needs to be integrated into one central repository, which is easily searchable and which notifies the research team when new relevant research is available to the system. This is exactly what a number of fund managers are now doing – accessing previously siloed sources of data, integrating these together and making them accessible through one system to, ultimately, give a 360-view of their entire research data set. These firms are able to produce more bespoke, more authoritative research, more quickly.
A year on, MiFID II is changing the way buy-side firms acquire and produce investment research. For firms who take investment in house, and for brokers wanting to maintain their research business, it raises the important technological question of how best to use all of the data at their disposal to deliver the best possible result for clients. Only those firms with the solution to this question are going to be able to survive and thrive.
By Dr. Giles Nelson, CTO financial services, MarkLogic