New York – Recent layoffs on Wall Street, specifically in research departments, are not only a signal of a falling economy, but also hurt the economy directly. Or at least in the opinion of John DeTore. Mr. DeTore is an adjunct professor at MIT’s Sloan School of Management and a quantitative research director for GRT Capital and a recent article by Kyle Stock explored Mr. DeTore’s opinions.
Mr. DeTore argues that the “widespread shrinking of fundamental research on Wall Street has led to inaccurate share prices and an inefficient flow of capital”. He believes that the drop in quality started way back in 2000 when Regulation Fair Disclosure made research less profitable by forcing public companies to disseminate investment information to all investors at the same time. The downward trend in quality continued when the Global Research Analyst Settlement forced the erection of “Chinese Walls” at bulge bracket firms.
The argument that decreased profitability from stricter regulation has made Wall Street research less valuable is certainly nothing new, and indeed is one of the main criticisms of the terms the GRAS enacted. The other side of the coin is that there are inherently less conflicts of interest in the research. Mr. DeTore believes that the increased amount of research and of analysts on the Street more than made up for the ethical concerns and that the research put out before these regulations “better reflected future fundamentals.”
The layoffs have continued with the recent subprime crises and the quality of research has continued to decline. Now, DeTore believes investors trade more on mood and market cap than analysis. And while DeTore believes the current research being put out is “elementary school” grade, he also sees a big opportunity for fundamental research. DeTore believes that as Investors start to jump back in and leave the passively managed funds and cash that they have taken cover in, the demand for good research will grow again, profitability will return to the research industry, and quality will increase. Despite the critical nature of Mr. DeTore’s viewpoint on the research industry currently, his optimism for the future paints a promising picture for the next ten years of the industry.
Integrity believes that since 2000, the landscape of the research industry has changed significantly with the addition of a large number of independent research providers. Since Integrity’s inception in 2003, the number of independent providers in our database has grown to over 3,000 and there are a myriad of stories of former Wall Street analysts striking out on their own to join the independent space. While Wall Street’s research might have declined in value, the missing analysis that DeTore laments is still available, even if it is more fragmented. As investor demand for research starts to ramp up in the coming decade, we at Integrity expect that the return to profitability of the research industry will indeed force the bulge bracket to ramp up their research efforts and quality, but we also believe that the independents will take a good share in the increased research commission dollars available.