The City of London's analyst landscape has undergone a significant transformation, and it's a story that reveals the intricate dance between regulation, market dynamics, and the evolving nature of financial services.
In my opinion, the decline in analyst numbers, particularly in the small and mid-cap sector, is a direct consequence of the implementation of MIFID II. This EU directive aimed to enhance investor protection and market transparency, but it had an unintended consequence: it disrupted the traditional research model.
What many people don't realize is that MIFID II forced brokers to unbundle their research costs, which previously came as part of the package with broking commissions. This change hit the small and mid-cap segment hard, as it made it less economically viable for brokers to provide research coverage for these companies.
The impact is evident in the numbers. In 2007, there were 29 small and mid-cap analysts; today, that number has halved. Support services analysts have also seen a decline, from 26 to 20. This reduction in analyst coverage has broader implications for the market's liquidity and transparency.
However, there's a glimmer of hope. The Financial Conduct Authority has softened the rules, allowing some bundling of payments for research and trade execution. This move is a recognition of the challenges faced by the industry and an attempt to strike a balance between regulation and market viability.
David Enticknap, CEO of Extel, believes that the seeds of recovery are there, but he emphasizes the need for research to be valued and for the buy side to recognize its importance. He also highlights the need for fresh talent, suggesting that attracting young graduates back to the City might be a challenge, given the allure of tech industries.
The decline in analyst numbers is a symptom of a broader shift in the financial industry. The City of London, once a bustling hub of financial innovation, is now facing increased competition from other global financial centers and the allure of tech startups.
In conclusion, the vanishing analysts of London are a reminder of the delicate balance between regulation and market viability. While MIFID II aimed to protect investors, it also highlighted the need for a flexible and adaptive regulatory environment. The future of the City's analyst landscape will depend on its ability to attract and retain talent, adapt to changing market dynamics, and find a sustainable model for research coverage.
