Closing the Information Gap in a Post-MiFID World

By Mehdi Sunderji, Nucleus195

When the European Union in January enacted the lengthy and complex law known as MiFID II, the extent of the new regulation’s global reach was unclear. Nearly a year later, one effect that’s being felt worldwide is the accelerated upheaval of the investment research market. In a business already upended by consolidation, budget cutbacks, and the looming role of artificial intelligence and automation, the new rules governing how research is paid for and consumed is adding to the disruption.

Investors rely on a broad range of data to help inform their investment decisions, but there’s an increasing “information gap” that separates them from independent and locally sourced investment research, presented by analysts who know their markets and don’t have a host of financial incentives affecting their opinions. Providers around the world work across a range of markets, from the most developed pillars of the global economy to the emerging and frontier markets that may supply its next breakout success stories.

But as research analysts leave their jobs at major institutions due to budget constraints, and only the largest investment clients get the full range of their findings, changes to research pricing and compensation only serve to reduce access to the best available information. As large institutions dominate the market, many portfolio managers see research from a lot of providers where there are conflicts of interest, which may lower the quality and level of detail they deserve. Also, many investment banks have cut back on coverage of mid-cap and small-cap stocks, and dramatically trimmed or eliminated coverage of emerging market and frontier market regions.

Investors are clamoring for high-quality research that reflects local market expertise. In a climate of plunging research budgets, created by intense cost pressures, investment managers feel justifiably frustrated at their lack of exposure to new opportunities, and may struggle to find information that gives them new ideas. Without sustainable, deepening relationships with on-the-ground analysts who know the nuances of local conditions, whether they’re investing in developed, emerging or frontier economies, there’s every chance that investment professionals with global vision aren’t able to act for their clients with as much information as they’d like.

In a post-MiFID world, there’s room for a more level playing field. Research providers can play an even more vital part of the investment process, provided their product can be quickly distributed and widely accessed at a fair rate of compensation. Investors want to be able to find and pay for the research they need in the markets where they want to invest.

In a world with new rules, technology can play an equalizing role. A platform – or rather, a complete ecosystem for finding and managing investment research – allows investors to survey opportunities from any corner of the globe. But if the information gap keeps widening, there’s every likelihood that managers, particularly at firms where the research pinch is felt most deeply, will miss opportunities for better returns.

That won’t just affect investors whose portfolio managers can’t maximize returns. If information flows from emerging and frontier markets dry up, then investment flows to those markets suffer as well. When investment managers do try to seek out research across global markets, they face a time-consuming, difficult, and inefficient task.

A centralized research marketplace and efficient payment mechanism could provide the best alternative for investment managers that need viable options in an age of shrinking research budgets and MiFID II regulatory requirements. Transparently priced, accessible, local research is a vital step to keeping this information gap from getting bigger.

Mehdi Sunderji is co-founder and managing director of Nucleus195.