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Small groups feel a pinch as the cost of investment research goes down

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The price of a corporate survey released by an independent provider fell 8% last year as fierce competition with large investment banks continued to weigh on the profits of smaller analytics firms.

Independent research providers have complained to UK and European regulators that major banks have been hurt by saying their business is unfair competition after cutting costs for research services in recent years. increase.

“Unfair and anti-competitive pricing by investment banks remains the most fundamental issue for independent research providers. 78% of independent research providers have to deal with predatory pricing by investment banks. We believe that urgent regulatory action is needed, “said Steve Kelly, Special Advisor to EuroIRP, an industry body representing 70 independent research providers.

Euro IRP estimates that research prices by independent providers have fallen by an average of about 40% since the introduction of a radical package of European market rules. Known as Mifid II, 2018.

Under Mifid, the FCM must split the purchase cost of the survey from the transaction costs of buying and selling securities. This is an arrangement called “unbundling”. It was designed to prevent investment banks and brokers from providing research to portfolio managers as an incentive to direct transaction orders directly to portfolio managers.

Investment banks responded by significantly lowering the price of the survey. For example, JP Morgan now provides asset managers with access to all written findings for an annual fee of $ 10,000, making face-to-face meetings with analysts even more expensive.

Large banks, which are primarily profitable elsewhere, can absorb this decline, while smaller research-focused businesses remain exposed. Some independent providers are also using research as loss leaders for investment banks and are taking part in this activity from other parts of their business to promote the sale of other, more profitable services to their clients. I believe we are funding.

“Investment banking research is a route to clients who can sell many other much more profitable services,” Kelly said.

JP Morgan declined to comment.

In April, the Financial Conduct Authority proposed a study created by an independent provider. Should be exempt From the Mifid rules that cover the incentives that apply to investment banks.

Prices charged for each research subject vary widely, but Kelly said “decline and ongoing pressure” has been widely reported by Euro IRP members, especially small providers.

Richard Kramer, founder and chief executive officer of independent provider Arete Research, said he believes that many investment banks set the price of research services below cost.

“Almost all investment banks mutually subsidize the cost of research services from other activities,” Kramer said. He also questioned the value of some studies. “If 80% of bank analyst recommendations are’buy’, how are investors well serviced? Research by investment banking journalists and journalists is part of a promotional machine that promotes other banking services, “he said.

Small groups feel a pinch as the cost of investment research goes down

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