#573
Cutting (edge) Research
Published:
Jan 11, 2025
Author:
Sarah Parsons Wolter
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AI to human workers have always acted as a double-edged sword, but are today becoming a reality for some. On Wall Street, equity research - a department already under pressure - is now seeing the entrance of tools like AI-powered analyst chatbots. In and outside of financial institutions that house equity research departments, innovation is happening to make analysts’ jobs more efficient and serve clients more seamlessly.
Compared to the post financial crisis peak, equity research divisions overall have seen headcounts drop by over 30%, according to Bloomberg. Compensation has also remained stagnant, in part due to the flow towards passive investing (like ETF trackers) away from active investing. The other part, however, is related to regulation. MiFID II in the UK and the EU forces buyside clients to segregate paying for research from other markets related services like trading.
The thinning out of research analysts have wider consequences on the financial investment community. As fewer analysts cover more stocks, in-depth analysis and constant updates become more difficult for analysts and their clients. Alternatively, stocks get dropped from coverage lists, which then negatively impacts the number of investors who find interest in them. This could in turn thin liquidity in a name and create market inefficiencies.
In this newest wave of AI innovation, investment banks are exploring AI-led chatbots that could help answer client questions, pull data from available sources and more. This could be a threat and a gift to the thinly-spread equity research analyst community. On the one hand, it could allow them to cover more names with freed-up capacity from chatbots. On the other, a chatbot that is “too good” might just replace their jobs one day. Under the strain of the industry, some former analysts have already turned to social media as bloggers or financial influencers, hoping they’ll appeal this time to the masses.
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