Prudential Securities, which has been shifting its emphasis to retail financial services, said Wednesday that it is getting out of the institutional fixed-income business.
A spokesman said the New York subsidiary of Prudential Insurance Company of America said it wants no part of the sector's volatility. Also, the business is unprofitable for Prudential Securities.
Prudential plans to focus on retail fixed-income brokerage, which is generally profitable, the spokesman said. The company also plans to build up its retail fixed-income operations and its portfolio modeling capability, and to hire more research personnel.
The company will lay off about 425 traders and salespeople as a result of the shift but has no plans to depart other segments of institutional investment banking, the spokesman said.
Industry observers said they are not surprised Prudential is calling it quits.
"Prudential has been trying for years to become an A-list investment bank, but it's always been a second-tier player" in the institutional bond business, said Charles Wendel, president of Financial Institutions Consulting in New York.
Several observers, in fact, said retail brokerage is the company's strong suit, thanks to the parent's large retail insurance network.
Many companies have left the institutional fixed-income brokerage business over the past decade as spreads have narrowed and the risks of holding bonds for long periods have increased, said James Dugan, president and chief investment officer of Cavanaugh Capital Management, an institutional fixed-income firm based in Baltimore.
The risks associated with the institutional fixed-income business probably will force out other players, said Glenn Migliozzi, managing director of fixed income at Fleet Investment Advisers. Single trades on the institutional side are sometimes as large as several hundred million dollars, which can expose a firm to huge losses, he said.
Still, some firms are expanding their institutional fixed-income businesses. Last week Fidelity Investments' institutional brokerage group announced the creation of a Web platform to help advisers.
Prudential is preparing to become a shareholder-owned company, which probably had something to do with its getting out of fixed income - it wanted to jettison any division that did not make money, Mr. Wendel said.
The decision came three weeks after the resignation of Hardwick Simmons, who had headed Prudential Securities. He has been succeeded by John Strangfeld, who previously headed the asset management division.