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Wall Street Retreats: Arrivederci Research


Goldman Sachs is a perfect example of what’s happening on Wall Street. The company’s stock is trading below its peak price of 10 years ago seriously underperforming the market. The company just reported one of its worst quarters in trading. They refer to it as FICC, which stands for, fixed income, currency and commodities.

Why is trading so important to one of Wall Streets biggest, most diverse and most pure investment banks? Because the future is not as bright as it once was and industry “doers and shakers” haven’t come up with the next big thing to generate massive profits. In the meantime Wall Street is in retreat mode.

If it is happening at Goldman Sachs, retrenchment is happening elsewhere. Goldman is the bellwether. Evidence is hard to find but it is clear, sellside research coverage is shrinking and that means higher costs for buyside firms.

Sellside research directors are becoming modern day magicians. They can take a six-person group focusing on retailing, for example, and cut out three junior members. Up front on the firing lines it appears the three senior analysts are still covering the same stocks. The three juniors that do all the time-consuming grunt work simply disappear.

Why Is This Happening?

Wall Streets traditional role of raising capital and brokering stock trades is being disrupted.

Things like private equity and crowdfunding have created alternative sources of capital. High Frequency trading has taken over traditional markets.

Wall Street leadership has become less risk oriented. This has become ever more evident since the 2008 financial crisis.

In the past investment banks like Goldman Sachs and Bear Stearns would routinely leverage their capital to a ratio of 50:1 even financing operations with risky overnight lending instruments called repo agreements.

Commercial banks, on the other hand were limited in their capital ratios to something closer to 10-12:1. Following the 2008 crisis that forced Bear Stearns into the hands of JPMorgan Chase, a more restrained rule of financial law has gone into effect.

The Changing Face Of The Client

How can you earn a living when your clients don’t need you anymore? Consider High Frequency Trading or HFT.

The exact extent of HFT trading in US equities is only an estimate. Glen Barrentine who is a partner at the law firm of Winston & Strawn recently produced data showing HFT accounting for 50% of all trades but others put the figure closer to 70%.

HFT operators work with machines, not people. Buy and sell decisions are made totally by software programs and commissions amount to virtually nothing. HFT traders aren’t customers of Wall Street underwritings.

The hedge fund business is another case in point. A tiny niche of fewer than 100 funds back in the early 1990’s, there are now over 11,000 hedge funds running nearly $3 trillion.

Ron Baron, the well-known hedge fund star, has his own research staff and little regard for what Wall Street puts out. Ron picks his own stocks using a 10-20 year horizon. The quarterly wiggles that analyst write about are of little interest.

As a hedge fund billionaire, Ron can afford just about anything he chooses. But what about a bright new star trying to get into the investment business?

In the past Wall Street basked in game of soft dollar payments but with commission prices so low, the average buyside firm practically has to donate a kidney in order to get real service from the sellside. The only other option is to play the IPO game.

Research: A Necessary Evil

It is time for a tired old saying about research. In a bull market, one does not need an analyst and in a bear market you can’t afford one.

Wall Street analysts are the most maligned group in the world. The worst critics are those who depend on analysts for their opinions on stocks when the real value is in providing intelligence on companies and industries.

But because trading commissions traditionally paid their overhead, and those have shrunk to nothing, sellside coverage is shrinking as well. But somebody has to do the

dirty work. This gives big firms with their huge budgets the advantage over new comers. On Wall Street, the rules are simple: eat or be eaten.