Goldman Is Said to Mull Bulking Up Small-Cap Coverage Post-MiFID

  • Bank sees MiFID II reducing trading volume in small stocks
  • Goldman joins BofA in discussing issue with corporate IR teams

Why Investment Research Won't Be Free Under MiFID II

Goldman Sachs Group Inc. is considering bulking up its research coverage of small- and mid-capitalization companies, even though Europe’s MiFID II rules are likely to shrink trading volumes in those stocks, bank representatives said on a conference call last week.

The officials discussed analyst coverage of smaller equities with several companies’ investor-relations professionals as part of a broader question-and-answer session about the revised Markets in Financial Instruments Directive, a person who was briefed about the call told Bloomberg News. The person asked not to be named discussing a private matter.

Goldman Sachs has hired four managing directors in research in the past 18 months as part of an effort to boost its research offering before MiFID II transforms the relationship between analysts and their fund manager clients, the bankers said. MiFID II aims to improve transparency and root out conflicts of interest by separating research and trading commissions. But the looming ban on free reports is seen seen costing hundreds of analyst jobs, with banks set to cut about $1.2 billion of investment in research.

A Goldman Sachs spokesman declined to comment.

Goldman Sachs joins Bank of America Corp. in warning companies about the seismic shift in equity research coming once MiFID II kicks in. After the rules come into force, firms with a market value of less than 2 billion euros ($2.4 billion) are going to be particularly vulnerable as banks focus on the largest, most-traded companies, Bank of America executives warned an audience of company investor-relations representatives this summer.

“MiFID II will likely result in less overall coverage in impacted markets and further concentration of coverage into the more liquid large and mega-cap stocks,” according to Bank of America’s presentation to the investor-relations teams, which was seen by Bloomberg News. While the number of analysts per stock has risen in the U.S., the bank said that it has declined in Asia, Europe, the Middle East and Africa, “with the most notable decline in European small and mid-cap stock coverage.”

Jefferies Group LLC has said passive investing will become a larger proportion of overall trading volume for small caps as reduced analyst coverage deters active investors. Some small firms are even footing the bill for research themselves.

In 2016, the average number of analysts covering each stock with a market cap under $5 billion in the EMEA region was 4.5, compared with 7.8 in 2011, according to the Bank of America presentation.

A Bank of America spokeswoman declined to comment.

— With assistance by Julie Edde

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