Competition and razor-thin margins have the stock research and trading business on the ropes, says Mike Mayo, senior bank analyst and managing director at
became the latest Wall Street firm to drop out of that rat race early Wednesday, when it announced plans to shutter its Prudential Equity Group, dismissing about 420 staffers.
The news comes as other shops such as regional broker
have opted to team up with deeper-pocketed partners -- in A.G. Edwards' case,
"Commission rates have become increasingly commoditized, so brokerage firms need to have a few extra arrows in their quivers," Mayo says.
And the Wall Street veteran should know.
About six years ago, Prudential tapped Mayo amid some fanfare to lead the Newark-based company's shift away from investment banking and into pure research via Prudential Equity Group. At the time, heady competition from other investment firms was already eroding market share at Pru, and the firm felt that it could gain a better footing if it focused on research and trading.
Mayo was hired to be the face of Pru. The analyst, hired from UBS, became a part of Prudential's campaign to tout its research in print publications and on television. Mayo emphasized Prudential's no-nonsense ratings -- buy, sell and hold, rather than the waffling "market overweight" and "strong hold" nomenclature sometimes seen elsewhere.
But after years at the firm, the veteran decided to leave Pru about two months ago in favor of a broader research platform at Deutsche Bank.
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Declining to comment on his former employer, Mayo says financial institutions need to be able to leverage research and trading operations with other products in order to survive amid the wave of consolidations that have overtaken the business.
pulled out of institutional equities two years ago, and
acquired Ryan Beck from
in a deal completed in February.
"Firms need to be able to sell more products to more customers and more asset classes in more regions," he says, speaking generally about a sea change in the brokerage space.
Commissions have been steadily declining for the past six years, and the drive toward electronic brokerage to encourage best execution of trades -- a move set in motion in large part by New York Gov. Eliot Spitzer, former New York attorney general -- has eaten into the bottom line of smaller financial firms that cannot offset those expenses in other business lines.
"You can't be a one-trick pony," Mayo says.