Asia: Why CLSA had to call time on US research
The US always looked a tough nut to crack for CLSA and it’s only getting tougher, so it’s not a shock to see the Hong Kong brokerage heading for the exit.
CLSA’s decision to quit US equity research should come as no surprise to anyone who read February’s interview with CEO Jonathan Slone in Euromoney.
This week, the Hong Kong-based, Citic Securities-owned brokerage said it would lay off 90 staff in the US – by far the most well-known of whom is Mike Mayo, the sabre-toothed banking analyst and scourge of Wall Street banks.
The US operation won’t close completely, but will instead handle equities execution and trading rather than research, and will expand in fixed income trading.
The research operation was always up against it in a market where bigger homegrown bulge-bracket banks dominate research, and where everyone is finding it much harder to earn a living out of researchí anyway.
[Research] is a viable business, but it needs to be sized correctly and it needs to be supported by other cash registers that you can monetize - Jonathan Slone
Margins have come down, partly because asset managers in the US in particular do much more of their research in-house.
However, on top of that, the regulatory winds have been changing for the worse, and this is what Slone was keen to make explicitly clear when he spoke to Euromoney.
“Mifid [Markets in Financial Instruments Directive], payment for research – there are hosts of unintended consequences of regulators who like nothing more than to delve into the private affairs of companies and pootle about with their arrangements on how they pay for information, liquidity and knowledge,” he said in January.
Slone also said that cash equities was the business hardest hit by changing regulation, and, though he identified the UK as the place creating the greatest challenges, the US is affected too.
He spoke of the challenges of making research remunerative: “It is a viable business, but it needs to be sized correctly and it needs to be supported by other cash registers that you can monetize.”
That’s workable in Hong Kong, where CLSA has scale, reputation and history, but was always going to be far harder to maintain in the US.
In CLSA, bolshy independent research offers something different to the mainstream; getting noticed on US calls is a tougher battle to win, and one assumes Mayo doesn’t come cheap.
There is room, though, for a US business that aids US clients on Asian securities, and that appears to be the model the remaining business will pursue.