- Analysts can't prove the commissions they generate, Hintz says
- `Research is a leech on the compensation pool,' traders say
When it comes to fighting for a piece of the commission from a client’s big trade, Wall Street analysts are often unarmed.
That’s the view from Brad Hintz, a former Lehman Brothers Holdings Inc. finance chief and 14-year financial analyst, who says a new chapter of the saga is starting. As big banks overhaul how they produce and distribute research-- using the Internet to limit access and track what gets read -- they may finally see how much clients are willing to pay for analysts’ work.
Hintz, now an adjunct professor of finance at New York University’s Stern School of Business, shared his take on the plight of analysts:
“This is simply another chapter in the unending quest for revenue clarity in institutional equity trading. When an institutional client executes a trade in equities and generates commission revenue, everyone on the floor claims his or her share. The equity block desk demands its portion, since it has provided liquidity to the client. The derivatives desk says ‘It’s mine’-- and points out the structured trade it recently made for the client. The sales force points out the numerous sporting events and lavish dinners that they provided the client. ‘We took ’em to the U.S. Open.’ And even the quants ask for a cut, arguing that ‘their’ algos or ‘their’ dark pool are the true reasons the client is even trading with the firm.
"Only the poor equity research staff has nothing to prove that the commission dollar belongs to them. Research management knows that the analysts meet with the institutional client regularly, they know that the client’s portfolio managers are on their research distribution list, but they cannot prove that their specific research is being read -- or if read, acted on. Indeed, research management relies on internal votes of client portfolio managers and the voluntary self reporting by clients to judge the success of their efforts.
"And this client reporting is not reliable. Research management knows that during IPO booms, client research votes shift to the largest underwriters and away from the rest of the Street. This boosts a client firms’ ranking among the bulge-bracket firms and thus allows an asset manager to capture a greater share of highly sought after underwritings.
"And to make matters worse, only a minority of hedge funds (which represent more than 30 percent of the total U.S. commission pool) report research analyst usage at all. So research management is always flying blind; measuring analyst effectiveness with e-mail counts, telephone time logs, numbers of research calls written, number of ‘actionable’ research calls written, number of travel days, number of clients on conference calls and of course the annual Institutional Investor rankings.
"It’s not surprising that research shrinks and grows with the predictability of a pendulum. ‘Clients don’t care; research costs us money’ goes the mantra of investment banking. ‘Research is a leech on the compensation pool’ is the familiar cry from traders at bonus time. But after each decimation of research, contrite management teams decide that fundamental research is part of the service that clients expect and the department is rebuilt -- only to be put to the sword once again.
"Maybe this time, technology will finally provide the answer to that age-old question: ‘Whose commission dollar is this?’"