EU rules pushing small brokers to the brink of extinction | 2019-01-07

EU rules pushing small brokers to the brink of extinction

6th January, 2019 10:38:37 printer

LONDON: A year after new EU rules forced banks and brokers to charge investors for equity research, the pressure on small brokerages to make ends meet is becoming intense and more look set to merge or even shut up shop in 2019.

According to dozens of executives at major hedge funds, asset managers, banks and brokerages, the picture looks bleak for smaller brokers who are being undercut by large banks and face increasingly cost-conscious asset managers, report agencies.

Smaller brokerages have far less clout in negotiating contracts with investors, forcing some to cut prices or research, carve out a niche with bespoke research or, in more drastic cases, team up with a rival or close.

Smaller brokerages' research generally focuses on certain key market segments, usually via a strategy team that assesses value and quality as a means of identifying themes and stocks of interest to investor clients which are then analysed in greater depth. Often, this involves stock specific research from analysis to in-depth reviews and thematic pieces, catering to clients’ requests.

The aim of the EU's Markets in Financial Instruments Directive II (MiFID II) was to increase transparency and ensure investors got a fairer deal, but the dominance of the big banks is also pushing some regulators to have a rethink.

"MiFID is going to have continued significant ramifications. I always felt the fourth quarter [2018] or first quarter [2019] would be when the change starts to bite," said Steven Fine, chief executive at mid and small-cap broker Peel Hunt.

Before MiFID II came into force in January 2018, banks and brokerages bundled the cost of research into their overall charges for executing customer trades, or gave it away free. Under the new EU rules, they must bill institutional investors for everything from research to meetings to conference calls, and separate research from execution fees.

Itemising the services has caused havoc.

US bank JP Morgan led the charge in 2017 before the rules came in by offering research subscriptions to investors for as little as $10,000 a year, a fraction of the six or seven figure sums some smaller boutique firms had hoped for.