New York – An article in the New York Times this morning entitled “Analyzing Wall Street’s Research” discusses comments made by Frank Quattrone at a recent conference. In short, Quattrone suggests that the Spitzer settlement be repealed. The settlement, among other things, prohibited analysts from receiving payment from any investment banking activity. This means that the research must be paid through the execution window of the trading desks.
Quattrone’s logic is that the forces that are exerted on the sell-side research shops by the settlement serve only to reduce the quality of the research—as senior analysts move to the buy-side—and to reduce the coverage of the sell-side shops—as they move into more lucrative and liquid stocks. His point—which is not lost on many in the field—is that small cap research will suffer, leading to less investment in these firms, less innovation and ultimately a less competitive US financial system and economy. Indeed, we have seen the volume of IPOs launched in the US falling and those launched in London and Hong Kong rising.
Quattrone suggests that conflicts still exist and that better disclosure be required to offset the removal of the settlement. While we agree that conflicts still exist and that the small cap sector is getting beat up, we do not see how allowing the research departments to be paid by investment banking groups can possibly be a progressive move in the management of conflicts in the research industry.
One stark irony of today’s markets is that the Spitzer settlement was put in place essentially to ensure that Wall Street analysts did not issue overly optimistic research to help woo investment banking business. Recently, the SEC has had to enforce new rules on shorts, to ensure that the Wall Street analysts are not too pessimistic on share prices.