Today's early morning program on CNBC provided breaking coverage of the announcement of Prudential's dissolution of its equity group. According to the story, some 400 people are being dismissed, including institutional equity trading, analysis, and, one supposes, underwriting.
As Becky Quick and Joe Kernen discussed the new development, nobody seemed to acknowledge the elephant in the room on this issue. Rather, they were musing about whether this means most research shops are not able to pay their way. One would think this was a foregone conclusion after the heavy use of 'research' to market underwriting and trading during the technology bubble of the late 1990s and early 2000s.
Conventional institutional equity trading of highly liquid, large- or mid-cap issues is simply unprofitable. Prudential is an also-ran player, behind the major investment and commercial banks. What hope could a second-rate securities unit, at an insurance firm, have to add unique value for institutional investors in the area of vanilla equities?
Personally, I'm happy to read of this development. It is yet another good example of Schumpeterian dynamics at work, weeding out the mediocre players in mature product/markets.
It's unlikely that anyone will notice, six months from now, that Pru's equity operation is even missing. The next two or three smallest shops could also shut down, with similar lack of impact on the markets. With so much free information available online now, why is anyone surprised at the shrinking market for providing conventional research and related equity services to institutional investors?
Of more value in today's market is the shifting volumes of transactions in specific issues, and sources of upward or downward pressure on demand for them among fund managers. That is a far cry from the old-style, conventional paper-based equity research provided by firms like Pru.
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