How equity researchers came to be the hottest people in investment banking

In 2003, an equity researcher was a bad thing to be. Henry Blodget had just been banned and fined 2m. Eliot Spitzer had proven widespread corruption among equities analysts, whose main purpose it seemed had become praising companies to help win corporate finance work. And in the absence of praising companies to help win corporate finance work, no one knew how equity researchers were going to get paid.

Eight years later, Eliot Spitzer's disgraced himself and equity researchers are hot. While headhunters in other sectors are mired in pessimism, equity research is one of the areas where there's a lot of front office hiring right now.

As if to underscore the popularity of research, when UBS appointed a new head of its leading equities business last month, it chose its previous research head for the role.

Why?

How is it that researchers have achieved such popularity?

1) They had it coming

"For the last few years, equity researchers have been under-appreciated and underpaid in the context of investment banks," says Simon Maughan at MF Global (himself an equity researcher). "Historically, too much emphasis has been placed on paying distribution and execution and not enough attention has been paid to research. Banks have been like supermarkets which pay the cashiers, but not the shelf stackers."

2) They are the key differentiators

Bernstein Research analyst, Brad Hintz says the margin for trading equities is half that for trading FICC products, and falling. As executing trades becomes a lower and lower margin business, it's all about attracting customers and gaining 'flow.' This is where equity researchers come in.

"MiFID means I could open a trading shop tomorrow," says Maughan. "But in order to offer the best prices and the best execution, I'll need customer flow. And how better than to get that flow than by offering customers some incisive research?"

3) Prop trading is dead

Under the ever-evolving Volcker Rule, banks have fallen over themselves to pull back from proprietary trading. As prop trading has become less important, flow trading has become more important. Flow trading requires clients and winning clients requires research (see 2).

4) Chinese Walls don't really exist

Cynics, however, suggest that equity researchers are popular mostly because they're still crucial to landing IPO deals and other corporate finance work. One bank claims to have recently done some research showing that only 6% of a rival's research recommendations were a sell, suggesting some degree of partiality.

Last month, the Financial Times highlighted research suggesting Chinese Walls are porous.

And one deeply cynical equity research headhunter says JPMorgan's desperate search for a Spanish banks analyst to replace the team who defected to Credit Suisse in February was inspired by the urge to get in on the business of restructuring Spain's cajas - something it can't do without a team of Spanish banking researchers in place.

Drizzling on the parade

Some people, however, question whether equity researchers are really that desirable. Oliver Rolfe at search firm The Spartan Partnership says there's demand for people in key sectors like telcos, utilities, oil and gas, but that researchers peripheral sectors like real estate are being slashed.

Other headhunters agree. "Nomura just let go of people in real estate and autos," says one. "If you work in key sectors you're fine. If you don't, you're not."