The Lurkers of Wall Street

Wall Street has supposedly dropped trading activity that could be construed as “proprietary” as part of the new financial reforms that seek to limit gambling at deposit institutions.

But they’re still trading prop to some extent.

Sales guys on The Street are becoming more like a concierge service these days, arranging meetings with company management for the buyside and hedge fund complex. Sure, they distribute the firm’s research pieces each morning but the buyside has their own analysts and can get that stuff electronically. Access and background color and intel about what competitors are trading is the real product being offered these days, along with financing and banking services.

In this context, the institutional trading desks have essentially become ferrymen that enable orders to cross the River Styx that is the global network of dark pools where so many executions get done these days (13.5% of all trading volume this January).

And frequently, as part of this order-facilitating activity, the brokerage firm will go long or short a position for the house. They’re not referring to it as prop, of course. They may take stock from a selling fund and not dispose of it right away, they may put on a position that they think they’ll need to cover a client’s trade and then hold for longer if it looks advantageous to the P&L.

Each of these desks has an analyst sitting next to the traders. This is not a client-facing analyst or someone doing DCF calculations and price targets. No, this guy or gal is known as a “desk analyst”.

The desk analyst is there so that traders dealing with these types of quasi-proprietary positions can make sure there’s nothing about the stock they need to know in advance. The traders, for example, would have no idea if a stock they were holding long for the firm was about to hold an earnings call or an analyst day. The desk analyst is there to inject this color into the decision making process.

Moreover, if the trading desk is in a position for the firm or helping a client into or out of a stock and the action gets volatile, the desk analyst is the person whose job it is to find out what’s going on – maybe there’s some piece of news or a rumor that hasn’t crossed the tape yet.

Increasingly, in these situations, the desk analyst is using Twitter / StockTwits in order to do this job. “I CAN’T FIND ANY NEWS! WHAT ARE THE TWEETERS SAYING?”

The irony is that they aren’t supposed to in many cases – but what choice does a diligent desk analyst have if he or she wants to truly be aware of all facets of market activity? This is like the grade school teacher who goes out and buys classroom supplies with her own money for the benefit of the kids.

When people talk about Twitter being “the new tape” they have no idea to what extent this is actually becoming true. From conversations I’ve had with friends who work on these desks, I see a roadmap that leads toward highly sophisticated analysis of social messaging related to stocks and bonds.

Twitter may be in the 4th or 5th inning, but the way in which Wall Street uses it is not even in the first inning. It’s still batting practice.

Read Also:

Social Engineering: Capturing the Alpha in the Twittersphere (TABB Forum)