Mifid II  

Mifid rules have damaged investment markets

"Lower liquidity in small and mid-caps has a number of potential implications.

"During periods of market volatility – such as the correction seen in Red October in 2018 – it makes it more difficult for traders and investors to unwind positions in what was previously a more liquid market, causing wider spreads and greater price swings.

"Over the longer term, a focus on large-cap indices from both research houses and investors means we could see a hit to smaller company initial public offerings (IPOs) due to a lack of investment appetite, meaning fundraising will need to come from other sources."

David Scott, an adviser at Andrews Gwynne in Leeds, said the rules are a major problem because many fund managers "do only basic work" on stock selection in the small cap part of the market.

Without analysts research, Mr Scott said fund houses will have less information to use when selecting a stock.

He said there could be an issue with liquidity as multi-cap investment managers, who have a choice between buying large cap stocks and smaller ones, are more likely to shun smaller companies as they require more work, at the same time that analysts research on companies diminishes.

Mr Scott said: "There are now small companies where the only analysis available is from the brokers, and because their job is to sell the shares they will always be positive, and of course that is not always useful."

david.thorpe@ft.com