Have We Seen a Bottom to Research Layoffs?

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New York – Thomson Reuters Extel estimates that 1,200 sell side analysts have lost their jobs in the last 12 months, based on its surveys of European research staff.  According to Extel, there are 5,119 equity analysts in Europe as of the beginning of June, down 15% to 20% from a year prior.  We don’t have statistics for the US, but the experience is likely to be similar.

While hedge funds, regional brokerages and independent research firms have been adding staff, many – if not most unemployed analysts – will not find new research jobs.  Others will need to move into new areas.  The lucky ones will find related jobs such as investor relations, while the unlucky ones will have long painful searches leading to unrelated and lower paying employment.

It is particularly hard for the more junior analysts.  We are seeing a surge of resumes, mostly from analysts with less than five years of experience.  The Indian KPO firms, which supply junior analytic support to the research departments of many of the bulge firms, have also been impacted.  Reductions of 15% to 20% mean lower demand for junior support staff.  Many of the resumes we are receiving are from Mumbai, Hyderabad, and other Indian cities.

Before the crisis, we were seeing a bar-belling effect within equity research, as the bulge firms and independents gained share at the expense of the regionals and mid-tier brokers.  Post-crisis, we’ve seen a flattening of the curve as the bulge firms have reduced capacity while regionals and independents have added capacity.

Will 15% to 20% reductions be enough?  The actual reductions in commissions are running twice that rate.   The issue will be how quickly commissions rebound.  Research managers are counting on a rebound in commission volume, and the current rally seems to be validating these decisions.  However, if the rally turns out to be a bear market rally or the market recovery becomes more protracted, there will be pressure to cut further.

The bigger issue will be whether the economics of research will change through regulation.  Equity research has been subsidized since 1975.  Congress in its wisdom decided that investment management clients, such as pension funds and retail investors, should subsidize research by paying for research rather than having investment managers pay for it directly.  The effect of the subsidy has been to stimulate the supply of research, as investment managers historically treated research as ‘free’ (to them at least).

The research subsidy has been changing as commissions paid for research are being unbundled from execution commissions.  In the US this process has been more gradual than in Europe, where regulators in the UK and France have required transparency for the commissions used to pay for research.  With Washington becoming more assertive, can soft dollars survive?  It seems only a matter of time before the question of soft dollars rises in the political agenda.  At a minimum, the industry will need to be more proactive in embracing greater disclosure to forestall an outright ban.  If so, research capacity will be declining further as the subsidy wanes or is removed outright.

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