Tough Time on the Sell-Side

Posted by on December 11th, 2012

The environment for sell-side research continues to remain difficult. With trading volumes down and equity inflows weak, the pot of commission dollars available to pay for research is dwindling.

According to Greenwich Associates, equities brokers collected $10.9 billion in commissions in 2011, the lowest amount since 2006.

It appears that the smaller brokerage houses, many of which took advantage of the mass exodus of talent from the bulge brackets in the wake of the 2008 financial crisis to beef up their rosters, are getting hit the hardest.

As Bloomberg News notes in a recent article, a number of boutiques have closed their equity trading business, including ThinkEquity, Rodman & Renshaw and Ticonderoga Securities.

Many of the boutiques specialize in covering underfollowed companies, particularly in the micro- and small-cap universe. By focusing on companies that the bulge brackets are ignoring, the smaller houses believe they can differentiate themselves.

But it’s those smaller companies that have taken the biggest brunt of the drop off in volume. That’s been bad news for many of our clients at KCSA, who, despite being well-run with bright prospects, are having difficulty getting the sell-side to pay attention to them.

The reality, though, is that the bigger banks are also suffering.  Japan’s Nomura Securities has scaled back its expansion into the U.S. equities business as a result of the tough conditions.

Other institutions have put themselves up for sale. Last month, Stifel Nicolaus, which has been very aggressive on the acquisition front, completed a deal to buy KBW for $575 million.

Meantime, Leucadia National, a conglomerate with holdings in the manufacturing, telecom and mining industries, agreed to buy Jefferies for $2.6 billion. The combined balance sheet of the two companies should help insulate Jefferies from the gyrations of the market.

Barring a huge turnaround in volumes and inflows, 2013 is shaping up to be more of the same. According to a recent report by the TABB Group, “The buy side has battened down the hatches and is fully prepared to weather the storm. On the buy side, there has been continuous preparation for a slowdown in business. They have already shortened broker lists, had difficult conversations with their brokers and addressed which services they need and how they will pay for them.”

In an environment of shrinking sell-side research departments, it is crucial that companies maintain strong relationships with the analysts and the banks covering them. Conferences and non-deal roadshows are great ways to educate investors about your company.

But it is also important that companies complement sell-side marketing with their own work through roadshows and analyst days.

After all, you are your own best advocate.