MiFID II is still the unpopular kid on the block

It was introduced in pursuit of greater transparency in public markets, but MiFID II clearly remains the unpopular kid on the block.

At a conference held by the Federation of European Securities Exchanges (FESE) on Wednesday, there was little love for the controversial European directive that aimed to restore investor confidence in markets in the aftermath of the financial crash.

In pursuit of that, MiFID II split payments for trading commission and analyst research, something that was previously bundled into trading fees. As lawmakers saw it, the previous way created a conflict of interest for asset managers.

What resulted was a decline in demand for research – as it suddenly came with a price – which led to consolidation in the industry, meaning the services of smaller players was no longer needed.

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The effect of that was that fewer companies were being covered because it would be uneconomical to cover everyone. Apple, General Electric and Unilever will never have that problem because of their sheer scale and liquidity. But research about small and medium business has not been abundant since the introduction of MiFID II.

For asset managers that outsource to – or at least rely heavily on – outside research companies to make their investment decisions, those smaller companies simply aren’t getting the attention they need.

Vicious circle

Ironically, new, and often small, market entrants are most reliant on getting access to funding but few analysts are writing about them. And this creates a vicious circle whereby big investors don’t notice them and don’t invest and then analysts continue to avoid writing about them and so on.

So, as has been the case since MiFID was introduced, the FESE complained again that it wasn’t working. Noel O’Halloran, chief investment officer with KBI Global Investors, went so far as to say that “MiFID is killing small and mid-cap stocks”.

As such, the organisation argues for a review of MiFID without which entrepreneurship could suffer simply as a result of lack of funding.

For a measure that sought to leave behind the scars of the financial crisis, the unintended consequence of unbundling research suggests MiFID II hasn’t had the desired effect.