The City of London's analyst landscape has undergone a significant transformation, and it's a story that deserves a closer look. In this article, we'll delve into the factors that have led to the vanishing of analysts, the implications for the financial industry, and what it means for the future of the City.
The Rise and Fall of Analysts
The introduction of MIFID II, an EU directive aimed at enhancing investor protection and market transparency, dealt a severe blow to the analyst community. This directive forced brokers to separate research costs from trading commissions, which had a particularly detrimental impact on the small and mid-cap segments of the UK equity market. As a result, analyst numbers have plummeted, with a notable decline from 29 to just 17 small and mid-cap retail analysts between 2007 and the present day.
What makes this particularly fascinating is the insight it provides into the delicate balance between regulation and industry practices. While MIFID II's intentions were noble, the unintended consequences have been significant. It's a reminder that even well-meaning regulations can have unforeseen effects on specific sectors.
Consolidation and the Changing Landscape
Alongside the decline in analyst numbers, the industry has also witnessed consolidation. Several well-known names, such as Bridgewell Securities and Oriel Securities, have disappeared, while others, like Numis Securities, have been acquired by larger entities. This consolidation has further reduced sector coverage, with some industries, like Chemicals, Metals & Mining, and Transport & Logistics, no longer represented in the UK SMID survey.
In my opinion, this consolidation trend is a natural response to the changing market dynamics. As the industry adapts to new regulations and market forces, we can expect further shifts and realignments.
A Glimmer of Hope
However, there is a silver lining. The Financial Conduct Authority's Investment Research Review, led by Rachel Kent, has resulted in a softening of the rules, allowing asset managers to bundle payments for research and trade execution once more. This move has been welcomed by Extel's CEO, David Enticknap, who sees signs of recovery.
Enticknap's comment, "The seeds are there. But research has to be valued. The buy side has to value it. If there's research, liquidity will follow," highlights the importance of recognizing the value of research and its role in driving market liquidity. It's a call to action for the industry to embrace and support research efforts.
The Challenge of Attracting Young Talent
One of the key challenges facing the City is attracting young talent back to the analyst role. With the allure of tech startups and the promise of quick fortunes, enticing graduates to pursue a career in finance is no easy feat. Yet, as Darling observed in 1996, a good ranking in the Extel survey can significantly impact an analyst's salary and career prospects.
Persuading young graduates to see the nobility in being a broker's analyst is crucial for the revival of the London market. It requires a shift in perception and a recognition of the vital role analysts play in the financial ecosystem.
Conclusion
The vanishing of analysts in the City of London is a complex issue with far-reaching implications. It's a story of regulatory changes, industry consolidation, and the challenge of attracting and retaining talent. As we navigate these changes, it's essential to reflect on the value of research and the critical role analysts play in driving market transparency and investor protection. The future of the City depends on our ability to adapt, innovate, and attract the best talent to this noble calling.
