Enhanced financial regulation typically comes with intended and unintended consequences. Directive 2004/39/EC, the Market for Financial Instruments Directive (MiFID), for example, successfully increased competition among financial instrument trading organizations in Europe. This brought down consumer prices and narrowed margins. It also sent market participants looking to move large blocks of shares into dark pools, where trade data are not made public.

There will be intended and unintended consequences from MiFID's successor, MiFID2, which is anticipated to be in effect by January 2018. Laura Noonan, of the Financial Times (FT), identifies one anticipated effect when she writes here , "MiFID2 will reshape the way analysts report on companies and how the research can be priced and circulated to investors."

She's referring to the expectation that banks will no longer subsidize research departments, and will instead look to charge consumers of financial products for research on a stand-alone basis. That kind of potential change to legislation has banks in Europe experimenting with data to determine what kind of research consumers are willing to pay for, and how much they are willing to pay.

The upcoming changes are also a concern to research departments, some of whom believe an already shrinking number of in-house analysts will be reduced further as banks look for ways to turn research cost centers into research profit centers. While Noonan suggests the changes will trigger an impending flight to quality, there may also be other effects. For example, there may be further movements into the financial research market by non-dealer organizations, like media outlets, and the continued emergence of growth among stand-alone research providers.

The latter could occur because leaner research departments would be less flexible when research demand fluctuates with market volatility, and more likely to outsource research to external research providers. Those providers would see increases in intermittent client numbers and growth to bottom lines.

While MiFID2 will undoubtedly refine pricing and quantity in financial research markets, the anticipation of such a change is in itself an argument for outsourcing research. When there is a cost center, there can be too much supply and not enough demand. Down-sizing the cost center and outsourcing to meet intermittent demand can turn a cost-center into a profit center.

Click here to read up on MiFID2.



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