We are aware of no other firm in our niche with few ties to investment banking.  The oldest independent research groups—the Value Line Survey and Argus Research—focus on large-cap stocks and do not provide institutional-quality product.  Sanford Bernstein is owned by Alliance, and that firm, too, focuses only on the large end of the market.

Some large wire houses have special sales and trading teams focused on equities with relatively small market caps; their efforts, however, are small and not coordinated well with the research teams of the firms.  The research departments, meanwhile, appear in disarray.  Scandals and a host of new rules and limits pose higher hurdles for the analysts.

The available research on Wall Street will continue to diminish.  Our view is supported by Prudential’s abrupt exit from equity research in 2007 and the exit of Fulcrum and IRG in 2005.  We estimate it costs most brokerage firms $250,000 per year to cover a single company.  We find other firms needing Corporate Finance revenue to fund this huge expenditure.  This subsidy, however, is quickly coming to an end, as new regulations from the SEC and FINRA prevent such support because of the apparent conflict of interests.  Earnings from trading will not ease the squeeze.  The advent of decimalization eliminated much of the profitability of the over-the-counter desk, while declining commission rates have taken an additional toll on agency business. 

We do not expect significant competition in our niche.  The early promise of a regulation-driven windfall for independent research generated great interest, but most of this money was dedicated to large-cap equities and, we posit, was distributed to large firms focusing on the retail investor, such as Morningstar and Standard & Poor’s.  The effort to jumpstart an independent research effort clearly has failed.  The time and money costs to enter the market and reach critical mass simply are proving too exorbitant for others.