Editor’s note: In a previous version of this article, BlueMatrix mistakenly claimed that Wellington Management and other parties had endorsed the adoption of a regulatory framework, akin to MiFID II, in the U.S. This statement was inaccurate and the piece has since been updated to reflect this.
Updated with corrections
It's been more than a year since the European Union's Markets in Financial Instruments Directive II regulation forced asset managers with EU interests to unbundle research payments from the trading commissions they pay to brokerages.
So far, what we've learned from the new transparent pricing model is that the availability of research significantly outweighs the buy side's need for it. Look no further than BlackRock slashing its Europe, Middle East and Africa research budget by 60% in 2018, or the Financial Conduct Authority's claim that MiFID II saved U.K. equity investors more than $200 million in its first year alone.
While discussion continues, the Securities and Exchange Commission's temporary no-action letter enables temporary compliance with MiFID II research provisions in a manner that's consistent with U.S. federal securities laws. This will expire on July 3, 2020, by which time the commission must decide whether to roll out new regulation, take an opposing stance or extend their period of no-action on the subject.
The debate is a time-sensitive one. As regulators spend time assessing the impact of MiFID II's research provisions, to determine whether further rule-making is required, domestic asset managers are absorbing research costs. One method of this is through the client commission agreement, a type of soft-dollar arrangement whereby a money manager pays their brokers executing a trade before asking them to allocate part of the commission to an independent research provider. Until consensus is reached on how to better align research consumption with Europe, this pattern of increased spending will continue.
Under new scrutiny and cost pressures, asset managers, pension fund professionals and the investors they ultimately report to will shift their focus, reprioritizing quality over quantity and spending only on products they believe will provide an edge.
This isn't the end of research, but it is the end of research distributed scattershot throughout Wall Street. News that major U.S. asset managers are clamoring for research pricing reform saddles the sell side with an existential threat. How do they pivot from the pre-MiFID model of winning order flow, where bundled research incentivizes the buy side to route trades their way, to a "research-on-request" format that inverts the status quo?