What if we were to tell you that for the bargain basement price of just $10,000 per hour you could buy yourself the privilege of a 1-hour conversation with an equity research analyst from a top-notch investment bank, would that be something that might be of interest to you? While we hate to be overly pessimistic, we're gonna go out a limb and guess that most of you answered in the negative to that question.
As we pointed out a few weeks ago, the traditional I-banking equity research model is about to undergo a radical transformation courtesy of the new Mifid II regulations set to go into effect in 2018 in Europe. Among other things, the new rules require i-banks to break out the pricing of equity research charged to buyside clients, which up until now had been provided 'free of charge' but effectively covered by trading commissions.
The problem, as anyone who has ever been flooded with a daily barrage of 1,000s of reports can attest, is that while the supply of equity research is seemingly endless, the demand may not be quite as pervasive as the bulge bracket banks once thought.
As Reuters points out today, just the top 15 global investment banks produce over 40,000 research reports every single week. Unfortunately, only about 1% of those reports are actually read by investors on any given day and we suspect even that estimate is generous.
For example, about 40,000 research reports are produced every week by the world's top 15 global investment banks, of which less than 1 percent are actually read by investors, according to Quinlan.
More than 30 analysts cover HSBC (HSBA.L) (0005.HK) on a regular basis, though only 11 of them have a rating of three stars or above even though it is a key factor of consideration by many global fund managers.
Meanwhile, the fairly massive supply/demand gap for research seems to be driving a wide bid/ask spread between what investment banks require to cover the costs of their expensive analysts and what their buyside clients are willing to pay for the end result. In fact, a recent survey of fund managers by consultancy Quinlan & Associates found that analyst headcounts at banks would have to fall by 30% by 2020 in order to eliminate all of the costs that funds simply wouldn't be willing to absorb (a.k.a. the "crap" as one fund manager put it). Per the Financial Times:
“The figures are all over the place at the moment. Some [quotes] are fair and reasonable, and [with others] we thought: there is no way we are paying that — they will have to recalibrate their business models or part ways with us altogether.”
“This is the biggest problem,” he said. “It will cause a lot of problems in 2018 because no one has worked out how much the research is worth.
“There will be a lot of c**p that clients won’t pay for and that is when the big cuts [to the analyst workforce] at the global banks will come. The feedback from many [in asset management] is that the price of research is too high and not granular enough.”
Meanwhile, with the large global banks looking to charge clients $300,000 - $500,000 per year to cover their bloated equity research budgets, the more nimble, independent research providers could be on the verge of some major share gains.
A period of severe turmoil is facing the securities research industry as a regulatory overhaul threatens the way investment research is done.
Online portals, in particular, are set to gain market share at the expense of major "bulge bracket" investment banks, reaching a forecasted market share of $1.4 billion or 15 percent of the global investment research industry spend by 2020 - from less than 1 percent last year.
"The global investment research market is on the cusp of major disruption," said Benjamin Quinlan, CEO of Hong Kong-based Quinlan & Associates and author of a report on the challenges facing the research sector.
Frankly, we're not sure how the hedge fund industry will survive without an army of 23-year-old equity research analysts writing hourly updates instructing managers to BTFD.