Mid-Tier Firms – The Best Defense is a Strong Offense


New York – We have indicated on these pages in previous articles, that CSAs could be considered a vehicle to concentrate execution at the bulge bracket brokers.  In turn, this leaves mid-tier firms caught with a decision to make.  The path which we have discussed is whether the small and mid-sized broker/dealer shops would close down their sales and trading desks. Certainly, this is a serious possibility, but perhaps one that will meet with some resistance.

Recent discussions with mid-tier research brokers suggests that some of these firms might be moving upstream rather than downstream.  In short, some are considering expanding their business into investment banking as one strategy to deal with the changing environment.

In addition, some mid-sized research brokers are looking considering whether it makes sense to leverage their research capabilities by rolling out money management operations.  In either case, these strategies suggest that many research firms are proactively looking for ways to combat the new market realities and grow their franchises.

An example of one alternative research firm that is also an asset manager is Thomas White International. TWI has high net worth and pension money under management, as well as having an arms-length research company. As such, TWI’s research can be used internally to support their money managers, for customer consumption, and as a service that can be sold to other buy-side and retail investors.

The main issue with this model is the internal mechanism by which the research is distributed to all users. According to the rules and regulations, the research must be distributed to all users at the same time, so that no user (including internal money managers) has an unfair advantage.

Another business approach for these small and mid-tier firms is to create boutique investment banks. Certainly, there are a number of successful boutique investment banks that have good research.  An example here is FTN Midwest Securities.  For some alternative / independent research firms, the move to investment banking may be enticing because it could generates a significant diversified revenue stream that leverages a firm’s company management relationships and internal research capabilities.

It makes sense that the more enterprising research firms are thinking about taking one or the other of these routes.  Standing still and giving up business is not really an option for firms that have scraped their way into building successful companies.  In this industry, the best defense is a strong offense.


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