New York – The Wall Street Journal reports that the Financial Industry Regulatory Authority has launched an inquiry into how Wall Street firms disseminate stock ratings and research to clients:
The industry-funded regulator of securities firms doing business in the U.S. recently sought information from Citigroup Inc., J.P. Morgan Chase & Co. Morgan Stanley and other firms, including details of any meetings where unpublished research opinions or trading ideas were disclosed to nonresearch employees or clients.
The probe follows an article in The Wall Street Journal in August about gatherings at Goldman Sachs Group Inc. known inside the company as “trading huddles.” During the meetings, Goldman analysts gave short-term tips to traders, followed by big clients. The tips sometimes differed from Goldman’s long-term research.
Finra’s examination of the trading huddles at Goldman was expanded last month to include about 10 other firms, according to people familiar with the situation. Responses were due earlier this month.[…]
In its letter to securities firms, Finra asked for lists of all meetings held since July 2008 where “any non-published research opinion and/or information … regarding a company under research coverage by the Firm was disclosed … to non-research personnel or current or potential customers of the firm.”
In an article published in August 2009, we wrote:
Of course, sell-side analysts have always needed to serve multiple masters, including corporate issuers, investment bankers, traditional “long-only clients”, active hedge funds, and their own proprietary traders. However, the pressure to serve the prop desk (and certain profitable hedge fund clients) must be particularly strong at a firm like Goldman Sachs which generates close to 10% of its profits by trading for its own account.
The question that came to mind after reading last week’s Wall Street Journal story is, “Have the pressures of serving these masters in a difficult market environment created new conflicts of interest for sell-side research departments to put the firm’s own interests ahead of the interests of their clients?”
Today’s Journal article suggests an affirmative answer to this question:
Such meetings highlight the demands on research analysts as trading desks become even bigger engines of revenue and profits for Wall Street firm. While large clients routinely get extra attention and service, Finra officials want to determine if the gatherings give an unfair advantage to certain customers.
One long-term solution for this conflict would be to unbundle and increase disclosure of research and trading costs. It is also worth highlighting the following suggestion from a commenter:
I for one have no problem with any firm or analyst having two different views on a stock at any given point in time or for that matter an industry i.e. a current trading view and a longer term view. I don’t see that as inconsistent in fact I see it as fairly logical and normal.
It’s really how it is managed and disseminated that is the issue. The real problem for GS is that the analyst changed a rating within a week of the Trading Huddle. Absent new material information on the company the analyst had to have an evolving view. As to ’selective disclosure’…I don’t know if there is a legal standard for the sell-side like there is for corporate issuers…but it seems to me if I have a good client and a very good client ( who pays me more) there has to be some differentiation on the product or service. I tend to like the MS method of formally releasing trading ideas as suggested by the article. Why not formalize something like a trading idea? The reasons for the trading idea can be many…for instance, a stock just dropped for no reason, what was a buy is a bigger buy, that can give rise to a trading idea for the buy-side that may not be looking at that particular stock as a long term hold. But a trading idea simply in advance of an analyst changing opinion is simply wrong.