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Here Comes the Stock Research Shake-Up

A new rule to reduce conflicts should be good for investors. And for the research providers? “All hell breaks loose.”
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Peter Sidoti opened his research shop in New York in 1999. Focused on covering small-cap companies, Sidoti & Co.’s business model was simple: Charge for trading, and bundle research into commissions. For about 17 years that approach worked, Sidoti says.

Then, last year: “The wheels came off,” he says. The commodification of trading made his 3.5¢ commission seem pricey. Exchange-traded funds and shadow indexing also hurt business, as did large banks handling equity offerings for midlevel companies without providing research. Big banks are shrinking staffs, as it costs them about $150,000 to $200,000 per covered company to provide research, including editorial and compliance expenses. Small research shops, meanwhile, are combining or shutting down. “You see research coverage thinning,” Sidoti says.