Nasdaq Reveals 50% Spike in Paid Research Triggered by MiFID II

(Bloomberg) -- When it comes to equity research, good intentions have gone awry.

Nordic companies are increasingly bankrolling analysts now that banks are barred from folding research costs into trading fees. Almost half, or about 450, of the 1,000 companies that are listed on Nasdaq Inc.’s main market and alternative First North market in Sweden, Denmark and Finland are now covered by such pay-to-play analysis, according to Nasdaq. That’s up 50% over the past two years.

“This new conflict of interest -- that a company pays for an analyst to cover it and the potential effect it has on the analyst’s opinion and recommendation -- is clearly a bigger conflict than a broker doing so-called independent research with commission paid from an institution,” Lauri Rosendahl, the head of Nasdaq Stockholm AB, said in an interview.

It’s an unintended consequence of European rules introduced in 2018 known as MiFID II that were designed to crack down on research conflicts by forcing equity analysts to specify a charge for their work; previously, costs were incorporated into trading commissions. With the revised rules, banks and brokerages have had to unbundle the fees they charge for research and trading.

As a result, research commissioned by and paid for by the companies being analyzed is starting to become the norm. By the end of 2019, brokers’ revenue from European equity research will drop by 20% as a result of MiFID II, according to consulting firm Greenwich Associates.

The European Securities and Markets Authority -- an EU authority whose tasks include ensuring investors’ rights are protected -- declined to comment, through a spokeswoman.

Read More: Junior Analysts Who Followed MiFID 2 Are Out of Favor at DNB

Not everyone agrees that paid research, which is marked as “sponsored” or “commissioned” for investors to see, entails a conflict of interest. At Inderes Oy, an independent equity research firm in Finland, head of research, Sauli Vilen, says the model means that some companies that were being ignored in the past are now getting noticed.

It “gives companies in Finland a voice in capital markets,” Vilen said. He argues that commissioned research actually makes “the analyst more independent” as the analysis isn’t affected by corporate finance considerations or trading needs.

Meanwhile, companies traded on the main Stockholm index for large caps -- OMXS30 -- have seen a 12% drop in analyst coverage since the beginning of 2017, according to Bloomberg data. The decline is steeper than in Europe in general, where the coverage of companies in the Euro Stoxx 600 index is down just 5% over the same period.

While all OMXS30 companies are still followed by several analysts about half of Nasdaq’s listed companies, mainly small caps and First North, have no continuous research coverage. This is roughly the same situation as before MiFID II, Rosendahl said. The difference is that much more of that coverage is now paid for by the companies themselves.

To contact the reporters on this story: Hanna Hoikkala in Stockholm at hhoikkala@bloomberg.net;Niclas Rolander in Stockholm at nrolander@bloomberg.net

To contact the editors responsible for this story: Niklas Magnusson at nmagnusson1@bloomberg.net, ;Blaise Robinson at brobinson58@bloomberg.net, Tasneem Hanfi Brögger, James Hertling

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