Prudential shuts down stock research, trading arm

The Prudential building in Newark, New Jersey in an August 2, 2004 file photo. Insurance company Prudential Financial Inc. said on Wednesday that it will shut down its institutional stock research and trading business, Prudential Equity Group.

NEW YORK (Reuters) - Prudential Financial Inc. (PRU.N) said on Wednesday that it will shut down its stock research and trading business, in the insurer's latest pullback from a rocky 26-year stay on Wall Street.

The company said it is closing down Prudential Equity Group's offices and trading operations in nine U.S. cities as well as in London, Zurich, Paris and Tokyo. Prudential dropped research coverage immediately and said 400 employees will be terminated as operations are wound down during the quarter ending June 30.

"Prudential's strategy is to be in businesses where we have significant scale," said Prudential spokeswoman Theresa Miller. "The research and trading markets are really competitive, really challenging, and are not an area where we've been able to achieve that scale or success for our clients, for our shareholders and certainly our employees."

Shrinking commissions and regulatory changes have crushed equities trading profits and weeded out dozens of brokers. Meanwhile research reforms pushed through by then-New York Attorney General Eliot Spitzer banned Wall Street from funding research with banking fees, prompting cutbacks in coverage.

Stock trading for big institutions has been under pressure since 2000, as decimal pricing squeezed margins and advances in electronic trading slashed commissions. Sell-side research also was hurt by fair disclosure rules, which mean analysts no longer had inside information to share.

"All these things turned cash equities into a loss leader: you don't make money on it, but you've got to have it," said Fox-Pitt Kelton broker analyst David Trone, who joined Prudential in 2001 when it was founded as an independent research provider.

The problem with Prudential Equity Group was it didn't have other businesses to offset these weaknesses.

"Research and cash equities at the other firms aren't making money, either, but at least they are components of a broader institution," Trone said.

Prudential estimates shutting down the research arm will cost $110 million, or $72 million after taxes, which will be reflected in the June quarter.

The spokeswoman said Prudential will retain Edward Keon, the equity unit's chief investment officer and the head of its quantitative group, along with his team.

HISTORY

Prudential Life Insurance Co. of America ventured onto Wall Street in 1981 when it acquired retail brokerage Bache Halsey Stuart Shields to form Prudential-Bache, at the time one of the largest U.S. brokers. But the securities unit generated its fair share of headaches over the years.

In 1993, the insurer paid about $371 million to settle allegations that it improperly sold $8 billion of investment partnerships to hundreds of thousands customers in the 1980s.

Prudential, meanwhile, struggled to break into the top tier of investment banks. It acquired boutique investment banks Volpe Brown Whelan & Co. and Vector Securities just before the bull market peaked in 2000.

The post-bubble meltdown fueled concerns about the independence of analyst research and prompted Prudential in 2000 to shut down its fixed income and investment banking businesses.

Prudential kept the brokerage, yet industrywide commission pressures has made the business less profitable and encouraged dozens of firms to seek buyers. Prudential by 2003 sold its retail brokerage arm to Wachovia Corp WB.N, retaining a 38 percent stake in joint venture Wachovia Securities.

Prudential Equity last year generated $260 million in revenue and $34 million in pretax income. It managed $137 million of assets, versus Prudential Financial's $630 billion.

Earlier this year Michael Mayo, one of Prudential's best known stock analysts and an outspoken critic of research conflicts, quit to join Deutsche Bank.

Whether Prudential completely abandons Wall Street won't be known until the end of this month, when it decides what to do with its 38 percent stake in Wachovia Securities, which last week announced a $6.8 billion takeover of A.G. Edwards. Prudential can sell its stake to Wachovia for a big gain or buy more shares to keep its ownership interest unchanged.