Monday, June 05, 2006

Outsourcing securities research

Sorry, don't have the link for the article below as it was sent to me by an intrepid correspondent, but it appeared on Bloomberg today. If you think carefully, it means that it is no longer the birthright of only slightly above average Ivy kids to glide into a cushy ($180k average compensation) analyst job. The really talented analysts (who are they? see the previous posts on the myth of expertise ;-) will still be very well compensated, but now the door is open to sharp kids in India, and eventually other countries.

Speaking of Bloomberg, I recommend a recent podcast (June 1) on Bloomberg On the Economy. They interview Robert Engle, a economics Nobelist in econometrics (ARCH models, volatility, etc). Engle was originally trained in physics. He talks about his transition into economics, vol, quants, etc. He mentions that he left the PhD program in physics (Cornell) because he didn't want to be working on something that "only 10 other people in the world could understand" (at the time he was working in a low-temperature physics lab in the basement). He said when he switched to econ he could "solve every problem they put in front of me," but it took a decade for him to understand which problems were the really interesting ones worth solving. Sounds like a realistic view of the technical advantages (but also economic and business naivete) that physicists and mathematicians bring to finance.

Wall Street Gets `Outsourced' as Analyst Jobs Shift to Mumbai
2006-06-05 00:37 (New York)

By Yalman Onaran
June 5 (Bloomberg) -- JPMorgan Chase & Co. had no analysts in India four years ago. Now, the third-largest U.S. bank has 80, including Naresh Bilandani, a 26-year-old London School of Economics graduate hired last year in Mumbai to help provide clients with investment recommendations on European lenders.

The group accounts for 14 percent of New York-based JPMorgan's research staff and illustrates a growing trend. Niket Patankar, who sells research services to investment banks in less-expensive markets, estimates that India's analyst ranks swelled to 5,700 from 300 in 2002. Merrill Lynch & Co., the second-largest U.S. securities firm by market value, and No. 3 Morgan Stanley employ more than 50 of them.

Securities firms are leaning on India's expanding pool of financial talent for number-crunching so they can afford to keep franchise analysts in New York and London. Wall Street's 2003 settlement with U.S. regulators cut off research departments from the revenue they got for helping investment bankers bring in fees. Now institutional customers such as Fidelity Investments are refusing to pay the inflated trading commissions that subsidized analyst reports for decades.

``We got outsourced,'' said Tom Larsen, who lost his job in London covering U.K. companies when Credit Suisse Group moved five of the seven analyst jobs in his group to India. ``Wall Street is aware that the old model, financed by investment banking, doesn't work any more. So it's trying different new models, including outsourcing.''

Larsen, 45, is now a senior policy analyst at the CFA Institute, the Charlottesville, Virginia-based organization that gives the required Chartered Financial Analyst designation to candidates who pass a grueling three-level set of once-a-year, half-day exams on everything from research ethics to discounted cash flow modeling.

CFA Exams

The number of people taking CFA tests in India climbed fivefold since 2002 to 3,178 this year, according to the CFA Institute. U.S. candidates fell by about 25 percent to 30,384. Patankar, co-founder of New York-based Adventity Inc., predicts India will have more than 20,000 analysts in 2011. That would put it ahead of the 15,229 securities analysts working at brokerages and investment banks in the U.S., according to Thomson Financial, a New York-based firm that tracks Wall Street research. The U.K. has 1,228 analysts.

``Research is probably the easiest investment-banking service that can be duplicated in India, where people are just as smart and educated as here,'' said Nejat Seyhun, a professor of finance at the University of Michigan in Ann Arbor. ``Technology has reduced the need for physical presence.''

The trend mirrors past shifts in industries from computers to automobiles, where companies from Dell Inc. to Ford Motor Co. moved production to low-cost centers such as Malaysia and Vietnam.

3,218 Miles Away

JPMorgan is keeping more-experienced analysts such as Michael Weinstein, ranked No. 1 in Institutional Investor's annual poll for his coverage of medical supply and device companies. Weinstein, based in New York, works less than an hour's drive from the biggest company in that industry, New Brunswick, New Jersey-based Johnson & Johnson.

Bilandini's Mumbai office is 3,218 miles from the headquarters of Athens-based National Bank of Greece, one of the companies that he tracks for JPMorgan.

Investment banks are ``salami-slicing their research activities and separating what needs to be at high-cost centers like New York from what doesn't,'' said Chris Gentle, director of financial-services research at Deloitte Services LP in London.
``Pressure to move offshore will grow as investment banks look for ways to cut costs while their budgets are squeezed.''

High-Cost Centers

Wall Street's research spending fell about 35 percent from 2001 to 2005, estimates Brad Hintz, a New York-based analyst at Sanford C. Bernstein & Co. who tracks the securities industry. Hintz's own firm relies mainly on bundling, or billing clients for research and trade execution in a single commission, for the revenue it needs to compensate analysts.

Total commissions paid for trading U.S. stocks dropped to $11.3 billion in 2005 from $13.4 billion in 2002, according to a survey of 239 fund managers by industry consultants at Greenwich Associates in Greenwich, Connecticut. The proportion allocated to research stayed constant at 40 percent, the survey found.

That decline made it impossible for the securities industry to maintain the same research staff in high-cost centers. The number of analysts working for the 10 biggest firms declined 21 percent to 2,641 as of November from 3,364 in 2001, according to Thomson figures.

India is helping to reverse the trend. Analysts in cities like Mumbai make as little as $20,000 a year, according to Absolute Return, a hedge fund newsletter. That compares with an average of $181,000 in the U.S. in 2005, a survey by the CFA Institute found.


Anonymous said...


Well, India could lose out big time due to its own version of Affirmative Action. See this for instance.

This has caused a great stir in cities in India since it basicaly means half of all univesity AND IIT seats go to people from "lower castes" to redress past grievances(up from about 20%). I am told that standards at IITs are going down since otherwise the affirmative action kids would flunk.

Worse, they are thinking of extending the 50% quota to private sector jobs. This will be disastrous.

I see no such problems in China; so much for the merits of democracy...


Steve Hsu said...

I agree with you -- AA at the university level is a flawed way to solve problems that need to be addressed much earlier in the educational process.

IIT right now has a tremendous reputation. In the future, employers may ask IIT grads whether they were admitted to a reserved spot to determine whether they are any good! Similar considerations apply to underrepresented minorities at our elite schools, unfortunately.

Anonymous said...

The interesting Indian (and Chinese) competition on Wall Street isn't going to be from $20K/year mid-level analysts, it's going to be from $100K/year stars who are just as smart and capable as people making $500K and up are today. The number of them will be small enough that they could easily immigrate to the US, but imagine the interesting option presented to a smart young Indian: come to the US, earn a few hundred thousand dollars a year, and live a nice, upper middle class life in the US, or stay in India, accept $150K/year, and live like a prince...

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