JPMorgan 'pulled a rug out from underneath' its competitors, and now they're all feeling the pain
- Stock research firms are getting battered so far in 2018, with revenues declining substantially.
- Part of the blame is new European regulatory reform, which were widely expected to constrict research budgets.
- But JPMorgan Chase deserves some of the blame as well for conducting a multi-front attack on sell-side research industry that "pulled a rug out from underneath" its competitors.
The stock research departments of global banks are suffering this year, with revenues falling in the face of European regulatory reforms that have led their customers to slash research budgets.
In the fallout from the Markets in Financial Instruments Directive II (MiFID II) going live in January, top-tier banks have seen 10% to 30% declines in research revenues in 2018, while second-tier firms are seeing declines of as much as 60%, according to consulting firm Oliver Wyman.
The reasons for the decline are myriad, though the new regulatory requirement that research cannot be bundled with trade execution services, is paramount. With this provision, a decline of some degree was almost inevitable.
But the depth of cuts in research revenues can also be blamed, in part, on JPMorgan Chase - which has executed a multi-front attack on the research industry to snatch up market share.
On one hand, JPMorgan's massive asset management business was among the earliest to declare that it would absorb the cost of paying for research, rather than passing it along to customers.
While many investment managers around the world were still considering the alternative, JPMorgan Asset Management and fellow behemoths BlackRock and Vanguard all pledged to bear the brunt themselves, setting a crucial precedent that led many others to fall in line.
"Many listed asset managers ... did not want to absorb research costs onto their P&Ls, because it further challenges their ability to deliver operational leverage," Credit Suisse said in a research note in October. "In the end they effectively had to following competitive pressure from largest peers like JPMorgan AM and BlackRock who decided to absorb costs."
Mary Erdoes, the head of JPMorgan Asset Management, predicted in November that this would tighten up spending on sell-side research and in the future her firm would trim the number of analysts it works with by half.
As Oliver Wyman partner Michael Turner recently told Business Insider, by now nearly every "buy-side client has come out as absorbing the research cost, placing further downward pressure on prices."
But JPMorgan also has a formidable equity-research department, which is completely separate from its asset and wealth-management business.
On the exact same day last August that JPMorgan Asset Management announced it would absorb research costs, Bloomberg reported that the firm was planning on charging just $10,000 for its entry-level equity research - one-fourth what some rivals were considering.
This was part of a "strategy to grab market share from rivals with smaller research operations," insiders told Bloomberg.
"It was massively disruptive to firms that cover all sectors," Erick Davis, the CEO of financials-focused boutique research firm Autonomous Research, recently told Business Insider.
He added that it was probably a brilliant strategy by JPMorgan: "They just pulled a rug out from underneath everyone else that had come out with a pricing point for global sectors."
So, while JPMorgan took a swipe at research budgets from the asset management side by encouraging investment managers to absorb costs and cut their budgets, it was also undercutting competitors on pricing its own research - two significant headwinds from opposite sides for research firms to reckon with.
JPMorgan doesn't get all the blame, but Oliver Wyman's figures show that early on in the post-MiFID II world, the strategy is exacerbating the pain for many of its competitors.