Financial Analysis Essay On MiFID II
Drawing on a wide range of sources, and within 1200 words (approxfive pages), answer the following question:
What impact is Europe’s Mifid II directive having on how financial analysis is paid for, and thus on the role and incentives for financial analysts?
The evidence that you use to answer this question should be mainly derived from research that is published in academic journals, but as this is a fast moving area, you may use some good quality non-academic sources, such as the FT, Wall Street Journal or the Economist.
Learning outcomes assessed
- Evaluate critically the assumptions underlying various financial models and relevant implications;
- Communicate complex ideas effectively through verbal and written means;
- Demonstrate an ability to conduct an independent research and critical analysis.
Assessment criteria – see below for more detailed explanation
- Use of literature
- Critical approach to sources
- Application of theory to issues and practice
The financial analysis essaydiscusses about the Financial Instruments Directive II, which is even known as the MiFID II is known to be a financial directive services that started its operation from 3rd January 2018 within the European Union. The directive is applicable to all the 31 nations within the European Economic Area (Fang et al. 2020). The key transformation that was given by MiFID II was the need of the brokers and the asset managers for the purpose of unbundling the expenses of the advisory services from the expense of trade execution. It is stated herein financial analysis essay thatMiFID II has shaken up the conventional business activities in which the dealers used to pack the research and the services of the execution provided to the asset managers which are even known to be soft dollars (Utkilenand Wakeford-Wesmann2019). This financial analysis essayhas therefore been prepared so that effective idea and understanding can be attained with respect to the impact MiFID II has on the roles and the incentives that are given out to the financial researchers and analysts.
MiFID II was introduced in order to provide extensive safeguard to the investors and for the purpose of creating transparency within the class of the assets. MiFID II will be helpful in restoring confidence among the investors post the financial crisis. MiFID II will move a key section of the trading that is over the counter towards a trading venue that would be regulated. The research on financial analysis essaymentions that the key authorities of MiFID II is to create a better transparency of pricing, keeping a cap of volume for the dark pools of the equity, segmenting the payments of the financial analysts from the trading commission and creating better standards for the investment products (Financial Times 2017).
MiFID II is intended to be the foundation for the efforts of EU in order to create one financial market for any kind of bloc that can compete with the capital market. MiFID II is looking to conclude the monopoly that is existent among the stock exchanges and thereby reduce the trading expenses for the investors and thereby enhance the overall economic development (Utkilenand Wakeford-Wesmann2019). MiFID II is having an impact on both the analysts who are on the sell side and the analysts who are on the buy side.
Sell Side Response
Fanget al.(2020) cited in this section of financial analysis essay signifies that the key challenge towards equity research has is a problem for the public as any researches are difficult to keep confidential and thereby the investors are not willing to pay for the same and therefore such researches are provided for free. Herein financial analysis essay, it is seen that equity research is sort of a product and therefore it becomes difficult for the organizations to maintain profits as the research is an expense for them. The brokerage organizations have conventionally sponsored the research with the help of the earnings from the trading. But it has been observed in this financial analysis essay that these earnings have reduced in the past few years due to certain pressures from the clients and the regulators.
Guo and Mota(2019) highlighted that mergers of the brokerage organizations have been made in order to understand the activity of bias competition. It is seen that there is a fall in coverage for one analyst on the merger of stock of two brokerage firms. This leads to lesser number of forecasts and the forecast being more biased. Spenceet al.(2019) have discussed about the fact that how closure of brokerage can either enhance data asymmetry or minimize the information quality. They have debated that subsequent outcome will be reliant on whether prior public sign is lost or it has become privatized. It has even been debated that with the fall in the number of signals the researchers would leave the sector and the organizational investors would abstain from altering the signal that is lost within the house.
The analysis that is given out by the buy side researchers have a direct impact on the decisions of the investment companies. The suggestions that are provided by the buy side researchers are not available to the common people but the suggestions are only for the companies that appoint these researchers. It is seen that the trading that have been caused from the buy side analysts have shown greater returns in comparison to the suggestions given by the sell side analysts. Haig and Scarth(2016) revealed that sell side researchers are essential for the buy side researchers because of their in-depth knowledge and idea about the industry and proper accessibility to the management of a firm specially when the firm is smaller in nature. It is seen that MiFID II compels the buy side analysts to re-evaluate their research sources and thereby it is expected that the sell side analysts will be looking to make themselves handy by giving out quality information that would provide value to the buy side analysts (Langfield and Pagano 2016). It is seen that post MiFID II, the organizations have been increased their dependency over their in-house researchers and it is observed that the number of in-house analysts have increased as the companies have looked to reduce their dependency from the third party analysts.
Overall Analysis on the case scenario of financial analysis essay
The introduction of MiFID II has changed the concept of equity research. It is observed in the financial analysis essay that research on equity is not packed with the other services that are offered by the companies. With the introduction of MiFID II, several European firms have lost their coverage for the financial researchers (Woodward 2017). However, it has been observed that the researchers who are lost from the market have a lower quality based. It is however seen that revision of stock suggestions have increased content of information, the suggestions of purchase have been more profitable and the suggestions for the stocks have been escorted by the suggestions given by the industry (Lang, Pintoandand Sul 2019). The recommendations of sell and hold have increased post MiFID II. The implementation of MiFID II has revealed that the number of buy side researchers have increased, which explains to have a substitution impact as the number of sell side researchers have reduced due to loss of coverage(Fang et al. 2020). The introduction of MiFID II have explained that the impact over the financial analysts have been a mixed one. It is seen that the companies are impacted owing to the loss of their research coverage, it is even observed that the financial analysts with poor quality are eliminated from the market and the recommendations for stock have been of greater quality thereafter (Huettingerand Krašauskait?, 2019). It is even observed that the buy side financial analysts have increased their incentive feature due to rise in recruitment of in-house financial analysts from the end of the organizations.
The completion of the analysis on the implementation of MiFID II has shown significant outcomes. It has been observed in this financial analysis essay that with the foundation of MiFID II, the financial analysts who are on the sell side have been greatly impacted as the companies have changed their traditional strategies and have opted for in house financial analysts and hence their role and incentives have greatly been affected. On the other hand, it has been observed that the in house financial researchers or the buy side financial analyst have been benefitted from MiFID II. The financial analysts from the buyer side have maintained their incentives and it is seen that their incentives have increased and the demand for in house financial analysts have increased which has compelled the sell side analysts to get recruited as in house analysts. MiFID II therefore has impacted the role and the incentives of the financial analysts and the amount that is paid for them in a mixed manner.
Cfainstitute.org. 2020.MIFID II: ONE YEAR ON Assessing the Market for Investment Research.Financial analysis essayAvailable at: https://www.cfainstitute.org/-/media/documents/survey/cfa-mifid-II-survey-report.ashx [Accessed 15 July 2020].
Fang, B., Hope, O.K., Huang, Z. and Moldovan, R., 2020. The effects of mifid ii on sell-side analysts, buy-side analysts, and firms. Rotman School of Management Working Paper, (3422155).
Financial Times 2017. What is Mifid II and how will it affect EU’s financial industry? Available at: https://www.ft.com/content/ae935520-96ff-11e7-b83c-9588e51488a0 [Accessed 15 July 2020].
Guo, Y. and Mota, L., 2019. Should information be sold separately? Evidence from mifid ii. Evidence from MiFID II (January 30, 2019).
Haig, A. and Scarth, S., 2016. The role of asset owners in the market for investment research: Where are the fiduciary capitalists?. Available at SSRN 2765539.
Huettinger, M. and Krašauskait?, A., 2019. Will MiFID II tame the investment services industry of the Baltic tigers?. Qualitative Research in Financial Markets.
Lang, M.H., Pinto, J. and Sul, E., 2019. MiFID II unbundling and sell side analyst research. Financial analysis essayAvailable at SSRN 3408198.
Langfield, S. and Pagano, M., 2016. Bank bias in Europe: effects on systemic risk and growth. Economic Policy, 31(85), pp.51-106.
Spence, C., Aleksanyan, M., Millo, Y., Imam, S. and Abhayawansa, S., 2019. Earning the “Write to Speak”: Sell?Side Analysts and Their Struggle to Be Heard. Contemporary Accounting Research, 36(4), pp.2635-2662.
Utkilen, H. and Wakeford-Wesmann, S., 2019. Liquidity Following MiFID II estimating the effect of research unbundling on norwegian small and mid-cap stocks (Master's thesis).
Woodward, M., 2017. The need for speed: regulatory approaches to high frequency trading in the United States and the European Union. Financial analysis essayVand. J. Transnat'l L., 50, p.1359.