Last month the bank established a sector specialist desk, which comprises analysts taken from the fundamental research team. It has been set up to provide certain clients and the bank’s fixed income desk with trading ideas. The word desk analyst springs to mind but Rick Deutsch, formerly head of credit research and now head of the desk, is quick to dispel that notion. He says he will be talking to clients, and publishing notes – research that the bank makes clear is done in its interest.
The bank is by no means the first to downsize its fundamental research capacities and place more emphasis on supporting its trading desk, now that regulation requires Chinese walls between research departments and the trading desk, unhinging the cost-benefit equation. Although there is no denying that the restructuring will address this issue, as the sector specialists will support the trading desk, Deutsch points to other reasons. “The buy side has evolved more towards short-term profitable trades,” he says. “Hedge funds are obviously big traders themselves but they have also pushed real money investors to become more active traders.” A research department designed to focus exclusively on fundamental research would thus not be in tune with market developments.
In addition, it has become “challenging to make money in the plain vanilla bond business.” Demand for quicker and higher return comes at a time when this is getting more difficult to achieve.
Best execution regulation is also a motive behind creating a sector specialist desk that only provides research to “selected” clients. Deutsch says: “Best execution regulation has led to situations where we have provided a client with great research but he has taken the idea and traded elsewhere, as he is required to trade at the lowest price. In this case, BNPP didn’t get any reward for its research.”
Whatever the rationale for the restructuring, the implications for the quality of BNPP’s fundamental research remain to be seen. The sector specialist desk took 10 analysts out the fundamental credit research team, which has now been reduced to 16 members. While explaining that this loss will be partly compensated for by the fact that the remaining analysts will be able to concentrate on fundamental research to a greater degree than before, Paul Hearn, BNPP’s co-head of global fixed-income client origination and distribution, acknowledges that “at the margins, there may be a reduction” in the team’s output. He also concedes that although BNPP aims to remain a leading publishing research house, “it might not be possible to be number one every year”. Next year’s credit research poll will provide the answers.