With MiFID II just around the corner, more firms are now deciding that they will pay for equities investment research out of their P&L. As Derek McCole, from Aberdeen Asset Managers, mentioned in his article (page 12), the US Securities and Exchange Commission’s (SEC) recent measures to facilitate cross-border implementation of the EU MiFID II research provisions will support the buy side who decided not to use Commission Sharing Agreements. The fixed income and foreign exchange traders are generally all going the P&L route to pay for research, if they will pay for research at all. Foreign exchange is rarely traded for investment purposes so therefore some firms will not pay for any research in this asset class.
Clearly, investment research should no longer be a topic for a centralised trading desk and traders should by no means be perceived as consumers of such research. The Financial Times specified on the 13th November 2017 that the UK FCA has also specified that “market colour” would also count as research under the inducement rules. With the increasing regulatory arbitrage opportunities between Britain and the rest of the EU27 countries, K&KGC hope that the UK FCA will not pursue such ambitions as the EU27 countries are unlikely to follow.
The UK FCA have also made a unique statement in July 2017 to clamp down on brokers subsidising trading and TCA technology for the buy side. This is something that the buy side have shown mixed levels of excitement about. There is evidence to show that some technology vendors are misusing their dominant market position, overcharging the brokers so some of the buy side have applauded this initiative. It is still questionable if this will result in any better market pricing.
Undoubtedly, we haven’t had the last discussion about execution only rates, which categories should there be, to what extent can you blend execution related services into a single rate and how will the OMS technology handle fills with different rates. We will discuss these topics under the headline “best execution” going forwards in the unbundled world. With this clear delineation of responsibilities between the ‘execution’ and ‘investment’ teams, K&KGC has started mapping the best practice means of collaboration between the teams.