Should Research Analysts Start Learning To Code?

Submitted by Market Crumbs,

“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.”