• Market Crumbs

Should Equity Research Analysts Start Learning To Code?


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"25 analysts started coverage of Uber. None of them think the stock is a sell."


"Just one day after a short seller slammed SmileDirectClub, all 10 banks on its IPO rate it a buy."


These are some examples of headlines from earlier this year, showcasing the groupthink among Wall Street analysts. Of course, both stocks have since plummeted. Uber has declined 36% from its high. SmileDirectClub has declined 59% from its high.


Given the lack of value this profession notoriously adds, this news may not cause everyone to feel sorry. Equity research headcount across 12 major banks has declined by 8% to approximately 3,500, according to research firm Coalition Development. Coalition Development's analysis of every major bank shows this year is on track for the largest decline since they began studying the headcount data in 2012.


As of December 31, 2012, equity research headcount at the 12 banks was approximately 4,400. As of June 30, 2019, headcount stood at approximately 3,500. That equates to roughly 1 in 5 equity research analysts losing their job over the period.


This news isn't completely surprising, though. Market Crumbs recently wrote at the end of 2018 New York City had 4% fewer banking, insurance, securities and real estate employees than in 2008. Not surprisingly, technology and regulations are causing the profession to shrink.


Technology is eating away at the need for equity research analysts as passive investing continues to eat away at active investing's market share. Passive investing is now pushing nearly 50% of all assets for U.S. stock-based funds—up from 25% a decade ago, according to Morning Star. Last December, when the market got slammed before Treasury Secretary Steve Mnuchin infamously called the PPT, investors pulled nearly $143 billion from active funds while passive funds pulled in nearly $60 billion.


Regulations, specifically the European regulation MiFID, are also causing banks to cut back on equity research headcount. MiFID, which stands for Markets in Financial Instruments Directive, required research costs to be separated from trading fees. U.K regulators said earlier this year that buyside research spending has fallen between 20% and 30% since MiFID went into effect. While the U.S. Securities and Exchange Commission hasn't implemented a similar rule in the U.S., some banks are paying for research costs out of pocket instead of pushing the cost on to clients.


About half of U.S. fund managers still bundle fees, but some larger firms are beginning to unbundle them. U.S. equities commissions have declined approximately 42% since 2015, according to a Tabb Group. With banks and managers focused on winning client's assets, they have to compete on price and equity research headcount appears to be an expense they're not willing to pay for as they have in the past.


With the market having evolved into an algo-driven, low volume melt-up on the heels of fake trade war news, buybacks and an accommodative Fed, the need for equity research analysts is likely to only diminish further as time goes on. After all, a recent guest on CNBC explained the current environment best, saying markets have "nothing to do with fundamentals anymore."


Leftover Crumbs

  • "Whoops." As Market Crumbs discussed yesterday, many people have often held the view that the stock market is rigged against them. Well, this news isn't going to help sway that opinion. High-speed traders reportedly got a leaked audio feed from Bank of England press conferences, clearly giving them an advantage over those who did not. High-frequency traders paid for a third-party feed that gave them access to a backup audio feed, enabling them to hear the press conferences five to eight seconds before everyone else. In the world of high-frequency trading five to eight seconds is all that is needed to make millions. "This wholly unacceptable use of the audio feed was without the Bank’s knowledge or consent, and is being investigated further," the Bank of England said.

  • There's a shortage of homes. There were 1.66 million homes on the market in the U.S. at the end of November, down 5.7% from the same period a year ago, according to the National Association of Realtors. This marks the lowest level at the end of November since the NAR began tracking the metric in 1999. Demand is strongest at the low end, highlighting how those who can afford a home are shopping for the least expensive homes. Inventory declined 15% annually for homes priced under $100,000, while inventory declined 7% annually for homes priced between $100,000 and $250,000. "The expectation is that prices are going to continue increasing, especially at the lower price points," said Jessica Lautz of NAR. "At the very high end there is supply, but there are not many buyers at the very high end of market."

  • Tough times ahead for vape influencers. Instagram and its parent company Facebook will begin banning branded content promoting vaping, tobacco products or weapons. This marks the first time the company has restricted what influencers can share in promoted posts. "Branded content that promotes goods such as vaping, tobacco products and weapons will not be allowed," said Instagram in a statement. "Our advertising policies have long prohibited the advertisement of these products, and we will begin enforcement on this in the coming weeks." 

  • GM is closing out a rough year with a recall. Following a 40-day labor strike earlier this year that cost General Motors $2 billion in lost production, it's only fitting the company has one more negative development before the year ends. GM announced it is recalling more than 900,000 vehicles due to brake software issues and fire risks. The models affected include the Chevrolet Silverado 1500, Cadillac CT6 and GMC Sierra 1500. 

  • Another blow to Uber in Europe. After losing its license to operate in London last month, Uber has now been banned in Germany after a German court said the company lacks the required license to operate. Uber works with car rental companies and their own drivers to offer its services in Germany. "We will assess the court’s ruling and determine next steps to ensure our services in Germany continue," an Uber spokesperson said. Uber can appeal the verdict, which is effective immediately.