Third Bridge Views: Post-MiFID II: Remembering John and His Successful Career as a Sell-side Analyst

In this edition of views from our executive team, Third Bridge co-founder and managing director Joshua Maxey writes the eulogy for sell-side research in the wake of MiFID II

It passed away some two weeks ago.

It leaves behind John, an equity research analyst at one of the top sell-side banks in London, who, a few years ago, would wake up in his nice house, get in his expensive car every morning, and go into work to make his six-figure salary. John would try to get an early morning coffee from the local Italian that has just opened at 6am, juggling his newsfeeds from overnight with the polystyrene cup as he goes into work. He knows he would have to get an early morning view on his favourite stock that just got pounded last night if he was to defend himself in front of the sales hound dogs. After facing a torrent of abuse, John would frantically get back to his desk to write a quick morning note that he knows no one will read anyway. After 9am, his first part of the day would be completed and he would have a 10-minute breather before starting more calls to deal with any queries his firm’s salespeople had when speaking with clients, get in touch with some of the firms they cover, and write another memo for distribution to clients. Today, that is no longer the case. 

John has always felt like a glorified, overpaid journalist, and his field is in crisis now. Crises usually wipe out some of the players of the game. Finance is always about survival of the fittest. Just look at Lehman Brothers and Bear Stearns.

Until its untimely demise, it had already survived a few waves of pain, from regulatory issues to the rise of the ETFs and Spitzer killing the juicy investment banking ties. However, until now, many agreed that the markets will always need that human touch, and that data galore is not enough to make informed investment decisions – the humans needed to “digest” the data the machines extracted. However, MiFID II is where it all comes to an end.

Disruption, which has dramatically changed several fields, from transportation to healthcare, wasn’t even the “plague” that was the end of John’s career. The effects of disruption will come later, in the zombie apocalypse-like scenario that many players will live in. Right now, the crisis is Brussels’ crackdown and demand to bring research and its price into the light. The buy-side has now been, for the first time, in the position to wonder what exactly it is they’re paying for, and how much it’s all worth. And the sell-side has had that very unpleasant mirror of reality put in their faces. The moment of truth: what is all this information and what is it worth?

Next, those who will thrive are the ones who can and will continue to disrupt. The ones who can provide value. Those who were bundling together information just for the sake of it will be out of the game. John was one of them.

By the end of the year, at least one of the top ten players on the sell-side will completely close their research department.

What About the Rest?

Those who have caught the early wave, and who are providing high-quality services to their clients, will continue to grow from strength to strength. Those top tier analysts – those who are on a first name basis with all the CEOs in their field and have invaluable insights to provide their clients – will keep their posts and carry on. They will keep their client black book and they will earn their keep. Those who don’t have that luxury will likely disappear too. 

One segment of the market that has been underserved and will have potential in the future is that of small-cap companies. Traditionally, all the big players on the sell-side wanted to cover the large-cap companies. Right now, however, they’ll have to tally that up and decide what they have been known for and where their research adds value. Is it energy? Is it healthcare? Whatever their sweet spot or unique selling point, they will need to identify it quickly and make sure it’s clear to the clients that they can add value there. That is the only place where they have fighting power. Clients want actionable, tailored information, now. Whoever lags behind will take a hit. Independent research firms such as expert networks that have scale to cover pretty much any sector with speed and accuracy will continue to disrupt the space.

Ultimately, MiFID II aims to make a somewhat clunky market leaner and more transparent. However, changing a business model from one year to the next is definitely easier said than done. 

The buy-side has already cut providers. There are countless emails a day saying “please remove me from your mailing list” from the once upon a time clients of John. One would think that a relationship like this is built over time, with trust and mutual respect. Some analysts, however, are getting the breakup memo over email. And the rest is silence.

It was John’s successful career. And it ended January 3rd, 2018. May it rest in peace.