MIFID II dampening liquidity and cutting research

08 Nov 2018 / In the media MiFID II Monitor

By Keith Hiscock

Burford Capital

Liquidity – a key measure of investors’ ability to buy and sell shares without significantly moving the price – has fallen 16% on the London Stock Exchange Main Market since MiFID II came into force, according to Hardman & Co analysis.

Similarly, average analyst coverage per stock is down 6.2% to end September 2018, from its peak in January this year. Furthermore, the average company on the London Stock Exchange Main Market is now followed by just over six analysts. The situation has continued to worsen since 30 June 2018, with Main Market liquidity down 6.6% and research coverage down 2.1% over the past three months.

AIM mid-caps hardest hit by receding liquidity

Mid-cap AIM stocks have been the worst affected area of the market, with post-MiFID II liquidity down 30% on average. This trend may make it harder for these stocks to find new investors or raise capital for expansion. Research coverage for mid-cap AIM stocks has fallen 8.1% since the new rules came into force on 3 January 2018, with the average stock now covered by fewer than three analysts.

The analyst count has also worsened among Main Market mid-cap stocks, with on average two fewer analysts for every three companies covered. This is a 6.2% drop since December 2018 and 8% lower since the end of January 2018. It follows what appears to have been a rush to publish research before MiFID II was introduced.

The largest percentage drop in research coverage has been among large-cap Main Market stocks, where the average stock has lost one covering analyst, equating to a 8.2% reduction in coverage since the new rules came in. However, with an average of 16 analysts covering a typical large-cap stock, the impact is likely to be less visible than among smaller stocks.

Small-cap stocks on the Main Market and large-cap stocks on AIM have so far bucked the post-MiFID II trend, with increases of 9.2% and 10.1% in coverage, respectively.

Keith Hiscock, CEO of Hardman & Co, comments:

“The predicted drops in liquidity and research coverage are already clearly visible, and unfortunately show little sign of recovery for now. The situation for mid-cap stocks in particular has continued to worsen. “I am encouraged that coverage of small-cap stocks, where the need for independent research is typically greater, has held up. However, with just over two analysts per Main Market stock, and one on AIM, investors continue to need a greater range of expert views on individual companies. This is particularly important to reach retail investors, a market essential for maintaining supply and demand, or liquidity, in stock trading.”

Hiscock says liquidity and coverage are important bellwethers for the health of the market, adding:

“A reduction in research coverage makes it harder for experienced investors to discover and understand investable opportunities. Furthermore, a reduction in stock liquidity makes it harder for investors to find enough available stock to make sizeable investments in those companies. To reduce the impact, companies should take steps to increase engagement with small-cap specialist fund managers and retail investors.

“It is still early days, but MiFID II could eventually impact broker distribution and interaction, research coverage and liquidity. There is already anecdotal evidence of a sharp reduction in brokers’ ability to distribute research to fund managers. Company management needs to monitor the impact, as lower liquidity and reduced analyst coverage may spell trouble for company ratings, making raising money much harder as well as dramatically increasing share price volatility.”

Read the full report here


For further information, or to speak to Keith Hiscock, please contact 

Keith Hiscock

Chief Executive Officer

[email protected]

020 7194 7622


Charles Gorman

KL Communications

[email protected]

020 3603 2803