Global banks challenged in securities research

A period of severe turmoil is facing the securities research industry as a new regulatory overhaul threatens the way investment research is done.

Online portals, in particular, are set to gain market share at the expense of major “bulge bracket” investment banks.

“The global investment research market is on the cusp of major disruption,” said Benjamin Quinlan, CEO of Quinlan and Associates and author of a report on the challenges facing the research sector.

Forcing the change are new rules, known as Markets in Financial Instruments Directive, or MiFID II, due to take effect in January 2018 and aiming to make European securities markets more transparent.

A key aspect of these rules is that investment banks must charge fund managers an explicit fee for research rather than bundling the cost into trading commissions charged to clients, as at present.

Though banks have scrambled to reorganize their research functions by focusing on top- tier clients to minimize costs, rolling out proprietary portals, or adopting a model where clients pay for research depending on what they need, analysts say the sheer volume produced on a daily basis means the research effort has a long way to go before becoming efficient.

For example, about 40,000 research reports are produced every week by the world’s top 15 global investment banks, of which less than 1 percent are actually read by investors, according to Quinlan.

More than 30 analysts cover HSBC on a regular basis, though only 11 of them have a rating of three stars or above, even though it is a key factor of consideration by many fund managers around the world.