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Global Third-Party Research: An Industry In Crisis?

Aug. 07, 2018 2:06 PM ET

By Jeremy Monk

Research coverage by analysts at investment banks and other third-party research providers has plateaued in quantity in recent years. That’s according to a study we conducted at AKRO investiční společnost, a Prague-based investment firm. The results confirm what many have suspected: The global third-party research industry has gone “ex growth.”

Since the number of analysts at major investment banks has dropped by as much as 20% since 2010, according to figures from Coalition Development Ltd., this finding may indicate improved productivity overall though it also raises questions about potentially diminished research quality.

While there were some variations across the three regions examined in our study, the results indicate that recent Markets in Financial Instruments Directive II (MiFID II)regulations in the EU requiring that banks “unbundle” investment research charges from their trading commissions have not yet caused a drop-off in research output. Indeed, throughout Europe there has even been a paradoxical upward blip in coverage since MiFID II came into effect on 3 January 2018. Though that blip may prove short-lived, it suggests there is increased pressure on research analysts to improve productivity and justify their cost. In this respect, against the current backdrop of somewhat alarmist headlines and dire predictions, the long-term impact of MiFID II on research output is still unclear.

What is research coverage and why is it important?

Research coverage describes how many financial forecasts are published by analysts for each company included on an index. Adequate research is critical for the capital markets to function properly: Sparse or low-quality analyst coverage can lead to lower valuations and lower trading volumes, and increase the potential for the mispricing of securities and market manipulation.

The Financial Conduct Authority (FCA) in the United Kingdom and the EU’s European Securities Market Association (ESMA) will conduct studies on how MiFID II has

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CFA Institute is a global community of more than 100,000 investment professionals working to build an investment industry where investors’ interests come first, financial markets function at their best, and economies grow.

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