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Downturn shrinks demand for independent research

The independent equity research business arose as a shining beacon of hope from the rubble of the last bear market. Now, it's being buried under the rubble of the current one, a new study suggests.

Greenwich Associates, a financial services consulting and research firm based in Stamford, Conn., said that independent third-party research providers have garnered just 11 per cent of research commissions paid out by institutional money managers this year, down sharply from 18 per cent in 2008.

Worse still, institutional clients have drastically slowed down their payments of commissions for independent research, opting to pay monthly or quarterly rather at the time of each trade.

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The findings stem from Greenwich's annual survey of more than 200 U.S. equity fund managers.

The shrinking demand for independent research is in stark contrast to the expanding share of institutional business the independents captured for years following the 2003 Spitzer settlement, after the bear market of 2001-2002 exposed serious conflict-of-interest controversies in the equity research departments on Wall Street. The Street's biggest brokerage firms agreed to dish out hundreds on millions of dollars to fund independent research over the next five years.

Greenwich said market share for the independents flattened out in 2007-2008, as the settlement funds began to run out.

Then the market plunge and financial-sector crisis made business considerably worse.

"There's no question this is a tough period," said John Coffee, a business professor at Columbia University who has researched the Wall Street settlement and the independent research business.

"I don't know if the demand that was there has proven to be entirely natural."

The decline in business could be bad news for many Wall Street research veterans who have left their firms as a result of the shake-up and downsizing on the Street over the past several months, and are hoping that their reputations will translate into new careers on the independent side of the business.

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"There has been a lot of attention paid to high-profile analysts that have left the Street to launch independent research firms. I wish them well, since our research suggests they are entering into a very competitive market," said Jay Bennett, managing director at Greenwich.

"There is still a high degree of dependency between institutions and the major banks, investment banks and broker-dealers, as these large institutions have the resources needed to meet institutions' growing demand for direct access to analysis, as opposed to published research."

Mr. Coffee said the downturn has reduced demand for equity research of all kinds, as clients were more focused on liquidating assets and finding safe havens to park their funds, as opposed to picking stocks.

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About the Author
Economics Reporter

David Parkinson has been covering business and financial markets since 1990, and has been with The Globe and Mail since 2000. A Calgary native, he received a Southam Fellowship from the University of Toronto in 1999-2000, studying international political economics. More

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