BULGE BRACKET FIRMS RECLAIMING RESEARCH BUSINESS FROM INDEPENDENT PROVIDERS

Posted July 23, 2008

STAMFORD, Conn. – Bulge bracket equity brokers reclaimed research and advisory share from 2007 to 2008, according to Greenwich Associates, which surveyed more than 1,000 buy-side analysts about what research providers they use to cover 59 different industries.

Brokers had lost ground to regional and sector specialists, and independents, in providing equity research to US institutions in the years following the 2003 Wall Street research settlement, which made research much less profitable for brokerage firms, according to Greenwich Associates, which surveys analysts each year on where they obtain research services.

The regulators who crafted the settlement wanted independents and specialist firms to gain traction as a meaningful alternative to Wall Street research. “That trend appears to have run its course for now, with independents topping out at roughly 4 percent of overall share of the US institutional research/advisory vote,” says Jay Bennett, Consultant, Greenwich Associates. “Although the settlement changed the dynamics of the industry to a certain extent, it did not change the fact that independent research is still a very tough business. And that is in spite of the recent proliferation of commission sharing arrangements that actually makes it easier for third-party research providers to get paid.”

The research and advisory business is about $5.7 billion annually, in trading commissions paid by institutional research users to the providers.

In 2004, the 14 major brokers as a group controlled nearly 79 percent of research share among US institutions; regional and sector specialist firms controlled almost 18 percent and independents captured about 2.5 percent. By 2006-07, the majors’ share had dropped to 74-75 percent, while specialist firms had grown to more than 21 percent and independents had increased to just about 4 percent. But from 2007 to 2008, the majors’ share increased to 76 percent from about 75 percent, while specialists slipped below 20 percent and independents essentially held at just about 4 percent.

Among the bulge bracket firms that lead the US equity research industry, Citi captures the biggest institutional research/advisory share at 8.5 percent. Close behind is a group consisting of Merrill Lynch, Lehman Brothers, JPMorgan, and Bear Stearns. Greenwich conducted interviews for the research from November 2007 to March 2008, before the collapse of Bear Stearns and the subsequent acquisition of the securities firm by JPMorgan.

“One of the most interesting questions facing the US equity brokerage market in the coming year will be: How will the combination of JPMorgan and Bear Stearns affect the equity research industry?” says John Feng, Consultant, Greenwich Associates. “Both firms were gaining market share from 2007 to 2008 and one or both firms rank as leading providers in several industry sectors.”