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April 1, 2003

Sellside On the Hot Seat

By John A. Byrne

Sellside research is under pressure from the buyside.

"The balance of power has shifted to the institutions away from the broker dealers," according to Rick Waks, a former buyside trader who recently joined the sellside firm of Imperial Capital in Beverly Hills, CA., as head of institutional equities.

The buyside is also flexing its muscle, spending, for example, more time grading the sellside's research, pros note. A low grade on a scorecard from a portfolio manager, or his firm's analyst, could hurt business for the sellside.

The buyside typically assigned grades on a quarterly basis. Indeed, some pros note that this trend towards more frequent - sometimes daily - grading was influenced by Fidelity Investments.

The buyside behemoth touts a real-time system that allows portfolio managers and analysts to rate Fidelity's research. This model also accepts votes based on investment styles and regions.

Sellside research, both retail and institutional, is on the defensive since regulators cast a spotlight on a plethora of questionable practices. This has made life more demanding for traditional sellside research departments.

Buyside firms are now more likely to use their own analysts for specific advice than turn to the sellside, Imperial's Waks told a panel at the annual conference of the Security Traders Association of Los Angeles in La Quinta, Ca.