Sell-Side Research: Like Trees Falling in the Forest

There’s a 3000-word article in the New York Times that asks whether or not trading within a firm based on a soon-to-be-announced analyst ratings change on a stock constitutes inside information.

I don’t need 3000 words to answer it.  Just a handful.

1.  No it is not insider trading.  A firm should be able to use its own research in any manner and timing that it wants to provided there is no material, non-public information from a public company contained within it or inspiring it.  If a Credit Suisse analyst plans to upgrade Disney on Thursday and they want to give their institutional clients a chance to scoop some up the day before, why shouldn’t they be allowed to? IT’S THEIR RESEARCH.  Felix Salmon agrees with me here.

2.  It doesn’t matter anyway.  The Times piece is built around an incident from 2005 – a time when sell-side research actually moved stocks other than for a few minutes.  Now the majority of it barely moves stocks, if at all.  It’s like a tree falling in a forest, no one is there and no one is listening and so it does not produce a sound, as it were.  Nor does it register on a chart.  Because people don’t buy upgrades and downgrades from Wall Street anymore, they barely even hear of them.  There is currently a project underway at firms like BAML where their research customers on the buy-side are asking them for datafeeds and they’re trying to figure out a way to sell that to hedge funds and mutual funds and asset management firms.  Because the buy-side is not interested in getting calls or research reports from The Street anymore.  They don’t want idea generation or product or relationships – they just want the data. This is a nascent trend but one that is picking up steam.  In this context, can you imagine anyone giving a damn about whether or not such-and-such releases a report saying you should buy Intel because they might earn 25 cents instead of 20 cents?

Let Wall Street use its analyst research however and whenever it wants.  At least someone may get some value from it.

Read Also:

Is Insider Trading Part of the Fabric?  (NYT)

Sell-Side Research Isn’t Inside Information (Reuters)