The Bear Facts about Alternative Research


New York – One of the areas that Integrity seeks to address is the demand and supply function of research as it pertains to the investment process. In our Equity Research Industry Outlook, we tabulate all of the data and forecast the revenue picture for the Sell-side, Buy-side and alternative research industries. Given that the Global Research Settlement will expire relatively soon and the credit crunch has sell-side budgets getting squeezed, the outlook for the industry as a whole and the shares of each of the research suppliers is particularly uncertain. Specifically, the Global Research Settlement is related to the demand side of the research business and the credit crunch is certain to affect the supply side of the research equilibrium.

Supply – The Bear Facts

Lessons from Bear Stearns are two-fold. First, it is astounding to see the power of information. The fall of Bear is an example of a modern day bank-run, leveraged off of the hyper-speed of information flow and investment response time made possible in the new millennium. Second, the staffing decisions on the research side of the business are a microcosm of the decisions that are being taken at sell-side firms that are directly dealing with the credit crunch.  Research departments are a costly cost center that is one of the areas that can be cut.

Bear is also a microcosm of the impact that the credit crunch will be having on all sell-side research shops. Staffing decisions are made in consideration of the top line. As the investment banks have had to write down asset values extensively and this means that expense control is also under way.  They it probably works at Bear is that the top revenue producers get to negotiate a new position at JP Morgan, mid-level producers get to stay (this is a take or leave it proposition), and lower level performers and cost center personnel are being let go. As such, very few of the equity research staff is expected to survive.

Additionally, there will be like minded decisions being made at other sell-side institutions affected by the sub-prime mortgage crisis. Assuming that the buy-side still needs research, the malaise of the Sell-side shops should provide a boon to the alternative research providers.  Let’s make this point clear—sell-side research is not going away. However, the expenditure on proprietary research is likely to shrink, meaning that the level of experience is likely to contract and the coverage per analyst is likely to increase over time.

Demand – Global Settlement

The overall impact of the Global Settlement has been positive to the alternative research space, but the concern is now what happens when the settlement ends. The alternative research firms that benefitted the most from the settlement will suffer the most from its expiration.

Market Clearing – Winners and Losers

Contemporaneous regulations that are forcing a wedge between execution and research commission expenditure are forcing the brokers to re-formulate their approach to research. Cases in point are Goldman’s Hudson Street and Merrill’s Open Mind third party research offerings.

The sell-side is definitely going to put up a fight to maintain trade flow through offering extended alternative research offerings to their clients. As a result, our forecast which foresees the alternative research space growth significantly over the next several years remains in tact. However, what is already apparent from our consulting work, and Merrill’s and Goldman’s efforts, is that the epicenter of this alternative research growth will occur in primary research offerings and deep industry consulting areas.


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