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MiFID II is a leap into the unknown for fixed income departments

MiFID II is a leap into the unknown for fixed income departments

‘Juniorisation’ is a fact of life in investment banks’ markets divisions. Experienced traders and salesmen are being shipped out in favour of inexpensive juniors as banks continue to look for cost-savings. There is an exception however: research. In European research, juniorisation will backfire.

The problem is MiFID II, the new European trading rules which require brokerage firms to charge clients for research separate from execution from 2018. When clients are paying for research, they won’t want research produced by juniors.

“Using juniors is fine if you happen to have some hot-shot analysts in the ranks, but it severely impacts banks’ ability to get their research read and distributed,” says Des Supple, the former head of global research at Nomura who launched his own research boutique Event Horizon earlier this year. “Buy-side firms need to justify the payment and need codified, qualified research.”

The fact that Nomura’s highly-rated equity researchers have been readily hired by investment banks across the City since it closed its European equities business in April suggests senior equities researchers are indeed valued as MiFID II approaches. Unfortunately, the same message hasn’t filtered through to heads of research in fixed income.

Fixed income research departments are still dumping senior staff and replacing them with juniors, says Supple: “They’re a long way behind equities when it comes to having a strategy for dealing with MiFID II,” he says. Fixed income research plays a different role to equities research, however, adds Supple – there’s traditionally been less of a link between research and execution. Because of this, he predicts that clients will simply see fixed income research as an additional layer of cost under MiFID, thereby restricting investment in senior staff.

Whether you’re in equities or fixed income, Supple advises junior researchers to specialize early on. This contrasts to the historical research model, where juniors started as generalists. These days Supple says 20-something analysts need to be highly-quantitative, confident in their own abilities and have a clear vision of where they want to work from the outset.

What really happened at Nomura

Supple also offers some insights into what happened at Nomura before the Japanese bank cut its equities business earlier this year.

He says Nomura’s cash equities research team had already been ‘unbundled’ from its trading revenues and had a PnL directly attached to it. Supple oversaw 600 analysts across departments globally at Nomura. His first challenge when he was promoted to head of research in 2013 was to restructure the equity research team, which was underperforming and in the red. He switched to global coverage, cut back on sectors, streamlined the team and focused on producing research that really added some value.

“You could say that we went some way down the road of tackling the MiFID II model,” he says. “You have to have research that is good enough to be read over another firm. The buy-side will only pay for what they rank and consume. It’s therefore more profitable to be, say, top three in 10 sectors than top seven in 20.”

Unfortunately, this wasn’t enough to save the business in the long term.

Going it alone

Supple isn’t the first researcher to launch his own boutique ahead of MiFID II. He says one of the main motivations for launching his own firm was to get back to writing actual research – there was an element of this even as he rose up the ranks at Nomura, but he wanted more. “Writing research gets my thoughts in order,” he says.

Event Horizon has an interesting approach. Supple diagnoses a lack of liquidity as the key problem for markets today. At Event Horizon, his aim is to create a “continuous measure of liquidity” across asset classes to help clients find opportunities in a relatively quiet investment environment. Helping him with this is a team of quants and what he describes as a ‘super-computer’ to help gather and crunch the data.

Supple also has experience of working on the buy-side, having launched the Asian arm of hedge fund London Diversified Fund Management in 2007. Alongside Event Horizon, he’s also in the process of launching a macro hedge fund with Fred Belak, a portfolio manager at Lombard Odier Investment Management.

Contact: pclarke@efinancialcareers.comcom

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