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AGENCY NEWS // FEBRUARY 13, 2013 //  

The Opening Bell: How to Manage Small Cap Research Stress

In an earlier post, we provided you with a few data points on equities trading for the 2012 calendar year. Our initial intent was to follow-up with commentary on how changes in commission payments and trading have impacted sell side research. So, after a brief delay, due to the storm and flu, let’s reprise the earlier data and offer some tips at the end of today’s post.




According to NASDAQ OMX, total shares traded in 2012 fell by 18.5% from the previous year to 1.6 trillion shares. It represented the lowest level since 2007 when 1.5 trillion shares were exchanged.
Average daily volume fell to 4.6 billion shares in 2012 representing a decrease of 18.6%, and representing the lowest level since 2007 when 4.8 billion shares traded on a typical day.
According to Bloomberg data, forty investment banks announced more than 68,000 job cuts in 2012 with the bulk of those cuts in equities.
Integrity Research reprinted data from Frost Consulting projecting that global investment bank spending on research will have declined from $8.2 billion in 2008 to $4.8 billion in 2013, representing a 42% decline.

So, what does this all mean? The numbers continue to confirm that the sell side research model is broken irreparably. This is no longer a debate on cyclicality of the business. Not when bank spending on research has been reduced by levels approaching 50% in five years. (Integrity Research’s most recent piece on the trend can be found here: What’s Ahead?) Research has always been a cost center for banks. But decreased trading commissions and the impact of decimalization (the trading and quoting of securities in one penny increments) has forced banks to question the practice of continued subsidization of research.


Over the years, smaller banks and independent research firms shifted coverage from small cap stocks to more liquid and larger cap stocks hoping this would generate additional commission revenue. What seemed to be a smart and logical move has proven to be self-defeating in that other holes in the model were made apparent. First, it became increasingly more difficult for analysts to differentiate their research from the vast universe of coverage on large cap names. Secondly, there’s now less coverage of small cap companies which, in turn, leads to less market interest in these stocks and fewer deals. A study prepared by Grant Thornton (attached here: paper) found that small company IPOs (market caps of less than $250 million) fell from 2,990, from 1991 to 1997, to 233 from 2001 to 2008. Decimilization was implemented in 2001.


Consequently, it’s sad and not surprising to read the names of smaller/boutique broker dealers – including Kaufman Bros., Rodman & Renshaw, ThinkEquity, Avian Securities, WJB Capital, Ticonderoga, Auriga Securities and others – that have shuttered over the last two years. In addition to these closings, several groups were absorbed by larger organizations including KBW by Stifel Nicolaus, Collins Stewart by Canaccord Genuity and Caris & Co. by B. Riley. 


Research has become an oversupplied commodity and its’ value ever more difficult for the buy side to assess. Recent studies have shown that investors (and especially asset managers at smaller institutions) continue to view access to management – through investor conferences and non-deal roadshows – as the more valuable services provided by sell side research. As a result, one could argue that the role of a sell side analyst has evolved from offering stock recommendations and written research to a greater focus on providing unique information and management access. With that said, there’s still a need for sell side firms to provide other critically important areas of service; primarily product and distribution.


It’s becoming increasingly important for small cap companies to find ways to differentiate themselves through committed and efficient research. We offer some tips below:



Identify bank and independent coverage targets selectively. Identify potential coverage banks using a criteria based on product (analyst’s understanding of your sector), service (analyst’s relationships with the buy side) and distribution (bank’s commitment to supporting the stock). Ideal coverage would include a blending of analysts covering specific criteria.


Actively support analysts covering your sector on industry trends. Speak with your sector coverage analysts on a regular basis in order to be viewed as a resource. Doing so enables you to ensure they fully grasp sector trends but also keeps your company’s name on their minds for events, senior management briefings, updates and coverage (if your company is currently not covered).


Enhance your IR website and engage in social media. Make improvements to your corporate website – with respect to updated financial, governance and industry data and information – and then drive interested investors to it. Utilize social media – Stock Twits, Twitter, YouTube etc. – in order to enhance your company’s visibility.


Focus on increasing your company’s visibility and developing long term investor interest. Gaining sell side coverage comes not just through deploying the right messaging but also through increased volume and liquidity (generating commission revenue for the bank). 

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