More than half of UK fund managers focusing on small and mid-sized companies have reduced the number of brokers they engage with just four months into the new MiFID II regime.
A survey of 100 fund managers carried out by Peel Hunt and Quoted Companies Alliance (QCA) found that 42% have reduced broker lists somewhat, while 19% have reduced their list significantly.
Those surveyed said they believe there will be an overall reduction in the number of broking houses as a result of MiFID II, with 28% stating there will far fewer broking houses and 45% believing there will be slightly fewer.
“I’ve been saying this for years, the market is ‘over-broked’, and the business models have changed,” said one fund manager. “What’s happening at the moment is that MiFID II is coming in and has made the broker try and keep its existing business model, and throw managers, and there’s quite a lot of kick-back on that.
“So, something has to change, and that either means the business models or their underlying brokers have to change, or there’s a bit of a shakeout and there becomes purer but stronger broking houses.”
Steve Fine, CEO of Peel Hunt, also commented he fully expects consolidation in the broking industry as MiFID II puts further pressure on research revenues moving forward.
The survey suggests the impacts of MiFID II overall are far more negative on small and mid-sized quoted companies, in terms of both research coverage and liquidity in their shares.
A majority of 70% of those interviewed said that they believe MiFID II will result in less research being produced on small and mid-caps in the future, with 48% saying they have already witnessed this in the market.
Similarly, 54% of fund managers said that MiFID II will negatively impact liquidity of small and mid-caps with 23% predicting the impact will be very negative.
“I think the most likely expectation is less liquidity initially but that’s not a given,” one fund manager commented. “There are clearly some unintended consequences, we know the research projects will fall by the wayside.
“We know the research costs or the responsibility for research and marketing will fall increasingly on the companies and so there is clearly a risk that there is less research, ergo less knowledge, ergo less liquidity.”
Fine concluded: “The reduction in quality research coverage on these businesses is of most concern, as it’s impacting their visibility in the market and restricting liquidity in their shares, which will ultimately hinder their ability to access capital for future growth.”