MiFID II Monitor: Small caps boosted by MiFID II as brokers reorganise

26 Feb 2019 / Insight MiFID II Monitor News

By Keith Hiscock, Yingheng Chen

Burford Capital

UK equity markets have witnessed reduced broker research coverage and diminished liquidity a year on from the introduction of landmark MiFID II requirements, according to Hardman & Co.

In our latest analysis, we found that the heaviest impact of diminishing coverage was in the large-cap space. Average analyst coverage per large-cap stock on the London Stock Exchange Main Market was down 7.4% over the course of 2018, falling from 15.8 analysts per company to 14.7. Mid-cap stocks on the London Stock Exchange Main Market saw a 3.1% decline, to 6.4 analysts.

However, coverage of small cap stocks and AIM companies has bucked the broader post-MiFID II trend so far. Coverage of Main Market small caps and AIM companies across the market-cap spectrum increased 15.6% and 7.9%, respectively.

The analysis indicates about one in two AIM stocks has acquired an extra analyst over the past two years, amid encouraging signs brokers may be investing in research where coverage is thinnest.

Keith Hiscock, CEO of Hardman & Co, comments: “A year on from MiFID II, we may be seeing a reallocation of broker research resources from well-researched large cap stocks towards smaller cap companies. But coverage of the largest stocks continues to dominate research output and most companies still struggle to have their story told by more than two or three analysts.

“While large-cap CFOs and IR officers facing double-digit numbers of research analysts may delight in having slightly fewer to deal with, smaller company boards should push for any increase in volume to be backed by sustainable in-depth analysis, which is not restricted from reaching smaller companies’ specialist end investors.”

Companies need to ramp up engagement

Meanwhile, liquidity – a key measure of an investor’s ability to deal in shares without significantly moving the price – remains a cause for concern. Average stock liquidity has continued to fall since MiFID II came into force, dropping more than 13% on the London Stock Exchange Main Market.

Falling liquidity has hit companies of all sizes across the market, with mid-cap AIM stocks impacted hardest over the past year. This may signal a rising challenge for listed companies to find new investors or raise capital for expansion, exacerbating any weakness in equity market levels.

Citing the recent most recent survey from the Quoted Companies Alliance[i], Hiscock notes: “Like it or not, the MiFID II reforms have fundamentally changed brokers’ business models. The latest evidence shows many institutional investors are seeing less research, often of lower quality, with less broker engagement to back it up. In research, as with corporate reporting, the devil is often in the detail – which these new models fail to provide.

“There is no single quick fix. Companies need to ensure the research covering them includes a detailed analysis of company performance, as well as its operating sector. Research coverage that is simply a copy and paste exercise of financial statements adds little or no value to the basic distribution of corporate news. Additionally, companies should consider broadening their investor relations activities to reach investors through other channels.”

Hiscock sounds a note of caution for the year ahead, adding: “We’ve been clear for several years that it will take time for the dust to settle. With fund managers reported to be making double-digit cuts to research budgets as they enter the second year under MiFID II, companies will continue to face challenges in securing high quality research coverage from well-respected analysts that reaches their end investors, without commissioning it directly.”

[i] Mid and Small-Cap Investor Survey 2019: https://www.theqca.com/news/briefs/178156/mid-and-smallcap-investor-survey-2019-mifid-ii-the-search-for-research.thtml. References to ‘quality’, ‘volumes’ and ‘levels of contact’ are on pages 24, 22 and 21 respectively.

Read the full report


Further reading:

We have produced a series of research pieces on the impact of MiFID II, the relationship between research coverage and liquidity, and the importance of retail investors for liquidity. Publications include: