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The Liquidity Problem

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August 1, 2011

Cowen Expands to Court Buyside

By Peter Chapman

Besides the push on the trading front, Cowen also feels pressure to beef up its research product. At the end of last year, the firm had 27 senior analysts covering about 400 firms. One quarter of those stocks were in the health-care industry, Cowen's specialty. This year, the number of analysts has increased to 30, Solomon said, and more hires are expected.

Cowen's goal in offering more research and trading services to the buyside is to keep them from taking their business elsewhere. And by making the firm more responsive to the buyside, Cowen will in turn make itself more attractive to investment banking clients.

At Cowen, banking drives the bus. To win underwriting mandates, the firm needs to be able to place the securities with investors.

"It's very important for us to stay inside the top 20 in terms of the research vote and the vote in corporate access," Solomon said. "Because at the end of the day, we're out selling corporate finance or capital markets products."

The problem Cowen faces is one of capacity. A research department is expensive, but corporations want their bankers to cover their stocks. To make ends meet, Cowen must juggle coverage of both large-cap and small-cap stocks, Solomon said. The firm has to cover the large caps to "drive volume," but must also cover the small caps to win banking business. And it must be done with a finite number of analysts.

According to Solomon, many potential investment banking candidates were concerned they wouldn't be "relevant" if Cowen did not employ analysts to cover their stocks. So, after a year spent agonizing over the issue, Cowen decided to take the plunge.

It is launching an "emerging company" research effort and is looking to hire analysts with a history of covering companies under $2 billion in market capitalization. "In doing that, we open up brand-new opportunities to win business in banking and capital markets," Solomon said.

According to Sandler O'Neill's Ryan, Cowen "has spent considerable effort better aligning its research coverage with its clients, and has been committed to trading clients' stocks post offering." Ryan has a buy recommendation on the stock, noting that the LaBranche deal "moves Cowen into the next echelon of investment banks."

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