In the final analysis, years from now, history may relate that the easiest way of understanding MiFID was to appreciate that it rhymed with triffid.
From Wikipedia: ‘The Day of the Triffids is a 1951 post-apocalyptic novel by the English science fiction author John Wyndham. After most people in the world are blinded by a meteor shower, an aggressive species of plant starts killing people.’
Where MiFID II is concerned it’s death by a thousand interactive cuts.
To recap: MiFID II was introduced on Jan 3rd & represents the latest attempt to ensure a fairly priced & transparent market for research that ultimately improves investment outcomes. 10 weeks on it’s increasingly apparent it has failed.
By way of example take the following 2 headlines from Bloomberg:
– Mar 6th: SBI Holdings Reinstated at JPMorgan With Overweight; PT 3K Yen
– Mar 8th: [Delayed] SBI Holdings (8473): Initiate At Overweight. Owns High-Risk Businesses, But Undervalued on Financial Segment Alone
The first announces JP Morgan’s coverage of Japanese online broker SBI. The second confirms the report is available for anyone to read on Bloomberg 2 days later. For free.
Q: Why would JP Morgan make all its equity research available (with a 2 day delay) for free?
A: Because the one thing it cannot afford to do is lose its buyside clients.
In theory MIFID II looked like every investment bank’s worst nightmare: menu pricing, free trials restricted to 3 months, the threat of me-too maintenance research being exposed as just that &, ultimately, the prospect of a much reduced client list as the buyside clustered towards quality.
In practice JP Morgan et al recognised the threat early. A buyside client is not simply an institution that buys research. It also requires execution, trading, IPOs, FX, fixed income & custodial services, all of which grease the investment banking wheel with significantly higher margins. Put another way: research is only one spoke, but you need all the spokes for the wheel to spin.
Given most equity businesses have been losing money for years, a decision has been taken to effectively maintain the status quo in the face of MiFID II. ‘Who cares about the price of research, as long as our client sticks with us’ is the abiding thought process.
And, so far, it’s working. All MiFID II has accomplished to date is to crush the price of written research to the benefit of the large (on both the buy & sellside) at the expense of the small.
Its other shining achievement is bureaucracy. In the name of transparency all interactions require logging. If everyone is going to pay for research out of their own P&L, as is now largely the case, then they expect to know exactly what they’re getting.
Cue the below email triptych:
- 8th Mar, 12.20 GMT: ‘In order for us to gain a comprehensive view of our consumption of research services, we have asked Bloomberg to aggregate interactions from all of our research providers. This will allow us to simplify our broker evaluation process and provide better feedback to you.
Please contact Bloomberg at email@example.com, to facilitate the integration of our data into their platform, for our use. We ask that you provide them with the following:
1. A historical file with all interactions, year to date.
2. Reoccurring file of interactions, on a monthly basis.
We would like to get this process established by March 22, 2018.’
- 8th Mar, 14.41 GMT: ‘Today I sent out a communication requesting that you provide research interaction data via Bloomberg. Apologies, but this communication should have been clearer. One Access is our primary system for monitoring research interactions and this has not changed. Our understanding is that many brokers are providing interaction data for many clients over Bloomberg. If this is a relatively straight forward exercise it would also be useful for us to also see our interactions on Bloomberg so that we have a second source for validation. However, this is a nice to have and not a requirement.’
- 8th Mar, 14.56 GMT: ‘After further discussion it has become clear that uploading interactions into Bloomberg is rather more complex than we first understood. This being the case we are putting this on hold and would ask you all to ignore any follow up requests from Bloomberg until we have formally discussed this with you at a future date.’
The thought process is logical: to establish the ‘value’ of research services being supplied the client wants data, & the more data the better. The problem is the implicit underlying assumption of quantity trumping quality.
If the buyside thinks interaction data is ‘nice to have’ the sellside is going to give it more data than it ever dreamed of. A forecast for 2018? It’s going to rain interaction data, heavily.
What does all this actually achieve? In reality very little, other than generating a huge amount of data input work. Meanwhile the prospect of a fund manager finding a good idea amidst all that data, & using it to generate good performance, appears to have been lost in the wash. As John Wyndham wrote, “…there is something seriously wrong somewhere.”
Despite MiFID’s strange world of unintended consequences all is not lost & we suspect many fund managers will identify with the thoughts of Apple’s head of iTunes, Eddy Cue, at the SXSW conference last week. He commented:
‘We’re after quality, not quantity. We don’t try to sell the most smartphones in the world, we try to make the best one…’.
Fund managers in search of the best ideas in Japan should get in touch with Storm Research.