Almost a year on from the introduction of MiFID II, the regulatory framework has already contributed to a reduction in trading liquidity and broker research across most areas of the market.

MiFID II, which took effect on 3 January, requires buy-side firms to pay for research as an ‘unbundled’ product, separate from other broker services.

The introduction of the new rules has already seen asset managers reduce the amount of research and number of brokers they are using, which in turn has prompted analysts to start leaving brokers in their droves, while liquidity has declined across the market.

Analysis from research provider Hardman & Co reveals that since the beginning of the year, liquidity levels across the market have declined. Liquidity levels on the London Stock Exchange main market have continued their decline from an average of 9.4% per company in July to 15.5% today.

Mid-cap AIM stocks have seen liquidity recede the most with a fall of 29.8% on average since the start of the year, up from 25.2% in July. Meanwhile, the average decline in liquidity for a stock on the AIM market was 7.3%.

Keith Hiscock, CEO of Hardman & Co, said: “A reduction in stock liquidity makes it harder for investors to find enough available stock to make sizeable investments in those companies.

“To reduce the impact, companies should take steps to increase engagement with small-cap specialist fund managers and retail investors.”

The average stock on the main market saw a reduction in research coverage of 6.2%, with the exception of small caps, which have seen research coverage increase by 9.2%.

Small-cap AIM stocks also saw an increase in coverage of 2.4%, while mid-caps and large-caps on the markets saw a decrease of 8.1% and 10.1% respectively.

Hiscock said: “The predicted drops in liquidity and research coverage are already clearly visible, and unfortunately show little sign of recovery for now. The situation for mid-cap stocks in particular has continued to worsen.

“I am encouraged that coverage of small-cap stocks, where the need for independent research is typically greater, has held up.

“However, with just over two analysts per Main Market stock, and one on AIM, investors continue to need a greater range of expert views on individual companies. This is particularly important to reach retail investors, a market essential for maintaining supply and demand, or liquidity, in stock trading.”

This is reproduced from Investment Week; all views are from the publication. This originally appeared online on 7 November 2018.

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Further reading on this topic:

EU regulators prepare for no-deal Brexit with MiFID II back-up plans