UK brokers/Mifid II: tombstoning
Research houses have been chasing an elusive quarry as pricing nosedives
Just like Wile E Coyote, UK brokers have been chasing an elusive quarry. Research payments from portfolio managers are required under the latest incarnation of UK securities regulation, Mifid II. Some brokers, such as Berenberg, prepared by hiring high-stepping staff in hopes of attracting research revenues. But research pricing has fallen by as much as four-fifths even as the market for initial public offerings has slowed.
The German private bank has found itself running furiously in mid-air with the canyon yawning below. On Tuesday, it cut about a tenth of its London staff of 350, mostly in research. Imperilled City analysts who saw it as a hirer of last resort should think again. Rumours abound of other culls.
Operating profits halved at Redburn, a well-known independent research house, in the financial year to March, according to filings. Cenkos reported sharply lower profits recently. At least the latter and Berenberg have banked some corporate finance profits. Even so, the European IPO market looks sickly. So far this year a third of IPOs have been postponed, notes Morgan Stanley. Well over half of the floats that went ahead were priced in the bottom third of the range, or even below the minimum.
Brokers and fund management have watched in horror as research pricing has nosedived. One can understand the initial optimism, given their skill in advising and underwriting European corporates. But it was a no-brainer that charging for analyst time would diminish demand for it.
Not only have research prices fallen, by around 80 per cent for online-only packages from bulge bracket outfits. So has analyst coverage. The average number of researchers covering a typical FTSE 250 mid-sized company has dropped 13 per cent since 2016 according to Hardman & Co.
Chasing business is part of the game for brokers. But that game moves faster than ever. Like that cartoon coyote, UK brokers can expect to eat lots more dust as they lope through the desert.