Despite a dreary outlook for jobs in equities, one firm is hiring in its quest to build a boutique research house.
Wedge Partners is a tiny but steadily growing firm that is part of an elite group of only 165 broker-dealers that offer research and trading services.
Based in Denver, the broker-dealer is benefiting from two significant trends that have transformed the brokerage landscape in recent years. First, money managers have shifted more of their research dollars away from the bulge bracket and to smaller providers. Second, turmoil at larger firms has made seasoned talent available to smaller shops. "In this environment, we have an opportunity to find good people," Wedge chief executive Evan Morgan told Traders Magazine. "It’s during these periods when you build businesses."
While the news isn’t all bad in equities-Sanford C. Bernstein reported a rise in stock trading commissions last year-there have been plenty of layoffs and more expected. Investment Technology Group, Knight Capital Group, and Bank of America Merrill Lynch have all announced layoffs in equities. Banking boutique Gleacher & Co. made redundant its entire 80-man equities group. Hedge fund giant Citadel Investment Group shuttered its nascent investment bank and equities research effort. The bankruptcy of MF Global threw equities staffers on the street.
By contrast, Wedge is looking to hire across the board, said Morgan, the firm’s CEO since 2007. That means adding analysts, research salespeople and sales traders to the 25-person staff. Still, Morgan cautioned, he’s doing so slowly and selectively, with an eye on costs. Salaries for most of the sales and trading staff are commission-based.
Midwest/Maxus
Morgan has built up research platforms before, most notably as director of research at Midwest Research/Maxus Group, a prominent Cleveland boutique that fell apart in 2006 after five years of ownership by First Tennessee Bank.
Founded by Morgan and others in 1996, Midwest was "well regarded by clients for integrating channel checking with its fundamental research," according to industry consultant Integrity Research. It was often named among the "Best of the Boutiques," according to Institutional Investor. The shop grew steadily from 1996 to 2001, whereupon its acquisition by a unit of First Tennessee accelerated things, Morgan said.
Growth is harder this time around, though, Morgan says, because the buyside has a smaller commission pool to spread around. That can be seen in the numbers. According to Greenwich Associates, institutional stock commissions dropped by about 16.5 percent between 2008 and 2010. From an all-time high of $13.9 billion in the 12 months to February 2009, commissions dropped to $11.6 billion in the year leading up to February 2011.
At least one research house expected further declines last year. Tabb Group, which pegged institutional commissions at only $8.4 billion in 2010, predicted that figure would decline by 17 percent last year, to $7.25 billion.
The trend of the previous decade was one of money managers shifting their research business away from the bulge bracket to smaller outfits. The percentage of the broker research vote accruing to the bulge, according to Greenwich, declined from 71 percent in 2006 to 64 percent in 2010. Smaller shops reaped the benefit. But given the recent drop in the commission pool, that trend may be at an end, as the figure for 2010 was unchanged from 2009. Sources confirm that with fewer dollars to spread around, the buyside has no choice but to favor its largest suppliers, presenting a challenge to boutiques like Wedge.
"Investors say it’s easier to get incremental services from the bulge bracket firms, given their relationships," said Sandy Bragg, a principal with Integrity Research. "So very often as part of a relationship, they can make additional demands without paying extra."
A senior executive with a money management firm agrees. "Trading has so collapsed on the traditional long-only buyside that they can’t pay their existing bills," said Harold Bradley, chief investment officer at the Ewing Marion Kauffman Foundation. "They have to pay for what they already have in place," he said. "It just makes it that much harder for smaller firms to get into the stable."
Despite the downdraft, Wedge saw its revenues rise in the first half of last year and has managed to roughly double its staff in the past two years, Morgan said. Most of these professionals did not come from the bulge bracket, but rather smaller shops that were still larger than Wedge. The firm has brought on analysts, research salespeople and traders from the likes of Leerink Swann, Abel/Noser, Ticonderoga Securities, Kevin Dann & Partners, Janco Partners and Pali Capital.
The firm has also built up its presence in New York to get closer to customers and prospects, and now counts eight employees in the financial capital. Notably, Wedge president Matt Mathison, a Goldman Sachs alumnus, moved his office to the city in August.
Not Underserved
Wedge specializes in the technology, media and telecom, or TMT, sector, which accounts for over a quarter of industry trading volume, according to Barron’s. Wedge’s coverage list is dominated by large- and mid-cap names, including Apple, Juniper Networks, Dell Computer, CBS, Nokia, Yahoo! and Viacom. All in all, the firm covers about 120 TMT names, including 30 based in China.
TMT is not an underserved sector. Although it accounts for a tremendous amount of volume and is a favorite of portfolio managers, the competition is intense. According to Yahoo! StarMine data, about half the stocks on Wedge’s coverage list are followed by at least 20 analysts apiece. Top names such as Apple, Cisco and Intel are watched over by more than 40 analysts.
"It’s a fiercely competitive space," Morgan acknowledged.
The buyside maintains relationships with many research providers. Reports by Greenwich Associates show that a money manager uses, on average, upward of 40 brokers for its U.S. research needs. About a dozen of those are considered "important relationships."
The group to which Wedge belongs is not large. Of the roughly 4,500 registered broker-dealers in the U.S., only 165 operate stock research departments, according to theflyonthewall.com, a source of stock news, rumors and analysts’ reports.
Of those brokers offering research, the field is stratified into three tiers: bulge shops, regionals and midsize firms, and boutiques. Below that, there are about 2,000 independent non-broker-dealer research shops. Integrity Research lumps the boutiques without a banking affiliation in with the indies and pegs revenues at about $1.5 billion per year.
Wedge is a meat-and-potatoes bottom-up research outfit formed as an independent in 2002 by Kirk Adams, an alumnus of Midwest Research and former Silicon Valley executive. It was not until 2007, when the firm had about a dozen employees, that the group established a broker-dealer. Morgan says the firm receives 80 percent of its revenues via order flow and the rest through commission-sharing arrangements, or CSAs. Wedge does no banking and commits no capital. It is strictly an agency broker. The firm has a trading staff of five, and for a short while employed industry veteran Jim Deasy. The exec, who spent 20 years at Credit Suisse, was hired in April 2010 to build up Wedge’s trading-which he did-but he left the firm last spring.
Two of Wedge’s sales traders joined the firm in the past year from execution-only shops. That’s a group of broker-dealers that has been especially battered by the current commission drought, in large part due to their lack of research.
The nature of the hires was the result of a deliberate strategy by Wedge. "We’re trying to hire good traders from execution shops," Morgan explained, "that want to come to a place with research."
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