Stockbroker M&A Brings Unintended Costs
By Daniel Carpenter, Head of Regulation at Regtech firm Meritsoft
Nearly a year on from MiFID II, no market participant is feeling the pinch more than UK stockbrokers. After years of bundling investment research in with fees charged for executing trades, rules forcing brokers to split the two are starting to take their toll. As so often is the way, with asset managers reviewing and reducing analyst research, it leaves the David’s battling against the Goliath’s of the stockbroker world for a seat at the investment research table and a slice of the budget.
The problem is that for the smaller firms, without the vast resources and other income streams of the big institutions, MiFID II has decreased the profitability of their research business. Macquarie’s reported £100 million bid for small-cap broker Liberum is the latest case of an industry giant and specialist research arm coming together.
There is, however, a possible chink in the armour of those on a pre-Christmas acquisition spending spree. What if, assuming a deal like this goes through, an asset manager already receives a considerable amount of research from both brokers. Depending on the nature of the interaction in question, broker research rates could differ drastically. A fund manager may be quite happy paying monthly fixed fee for corporate access from one firm, but not so keen on the variable rates for insights into FTSE 250 stocks from another. As more and more consolidation of brokerage houses takes place, and it will, asset managers will be seeking maximum bang for their research buck.
In fact, in a market increasingly devoid of choice, it could be that the brokers left standing will be forced to accurately capture all their specific research interactions, and then invoice against them. If having to wade through hundreds of interactions wasn’t enough, they would then need to reconcile against information provided by their fund manager. All this will do is have an even greater impact on the cost, processing and validation of billing and invoicing activities. This is probably not what stockbrokers on the acquisition hunt have in mind. Even if only a few fund managers consider this approach, the big firms need to prepare for the worst. After all, it only takes one of the large asset managers to enforce this model, and suddenly the old approach of creating a spreadsheet and attaching it to an invoice becomes completely unsustainable. So, this begs the question, if asset managers start forensically assessing whether it is worth paying £10,000 or £10 on every line item, how exactly do the large houses go about accurately valuing research on a daily, monthly and quarterly basis?
Clearly, in an ideal world, nobody wants to get into “line by line” reconciliations. We don’t live in an ideal world sadly. And the reality is that asset managers will look at each line item because they have costs to either absorb or pass on. Whether we will see the widespread enforcement of this approach or not is too early to say. For the big players looking to take over smaller-cap firms, they will need to prepare for all possible eventualities. After all, if transparency really means transparency 12-months on from MiFID II, perhaps they should arm themselves with the capabilities to meet the spirit of the rules. Occasionally, even Goliaths need a more firepower.
There are three key areas where action is required.
Some material changes have come out of ESMA’s review of algorithmic trading.
A consolidated tape will significantly improve transparency and create a level playing field.
AFME said there should be mandatory free data contribution to the consolidated tape.
The review is an opportunity to recalibrate MiFID II regulations post-Brexit.