A very interesting story yesterday by the fantastic Gretchen Morgenson in the NYT that harkens to the "trading huddle" scandal (that quietly went into the night after a $22M fine i.e. tiny cost of business) [Aug 27, 2009: Goldman Sachs Trading Huddles]. Apparently big boy clients (i.e. Blackrock, some big fish hedgies) have been sending out "surveys" to analysts to get their "opinions" of companies out in the market. While this is a gray area i.e. are these companies getting non public info or not? what is fascinating is the internal documents Morgenson somehow obtained that explicitly state some of these firms are seeking to "front run" analyst opinion changes. Anyone who has been in the market for a while knows how when analysts' wave their wands stocks can often dive or rise 3-4-5%+ overnight. So a "survey" that hints at such a change would be incredibly valuable. Just another day in crony capitalism.
- They are supposed to be among Wall Street’s most closely guarded secrets: changes in research analysts’ views, up or down, of a company’s prospects. But some of the nation’s biggest brokerage firms appear to be giving a handful of top hedge funds an early peek at these sentiments — allowing them to trade on the information before other investors get the word.
- The signals come from questionnaires that analysts answer and submit electronically, either monthly or quarterly, to some of their firms’ largest hedge fund clients. Chief among the questions posed to the analysts are those about possible earnings surprises at companies they follow.
- What analysts tell investors about the companies they follow — and when — is central to the concept of a level playing field on Wall Street. When disseminated, analyst downgrades and upgrades can make a stock sink or soar. Getting that information early can be very profitable for traders. As a result, regulatory rules require brokerage firms to restrict the information flow from research departments to prevent the potential for trading ahead of research reports.
- …..documents obtained by The New York Times indicate that the hedge fund practice of trawling for analysts’ shifting views is systematic and growing on Wall Street. Questionnaires completed by analysts that can telegraph their thinking are being used by hedge funds run by….
- The funds say they ask only for public information, but in at least four cases, documents from Barclays Global Investors, now a unit of BlackRock, state the goal is to receive nonpublic information. Two documents state that the surveys allow for front-running analyst recommendations.
- The BlackRock surveys are careful to ask that analysts supply only those views that they have already stated publicly. But in various confidential documents describing the surveys, company officials state that nonpublic information is what they are after. “We expect the earnings surprise direction to be able to capture the information not released to the market,” stated a confidential BlackRock memo from November 2008, detailing its analyst surveys of nine brokerage firms in Asia. A 2009 document on the firm’s analyst surveys is even more explicit. “We are trying to front-run recs,” it said, referring to trading ahead of analysts’ recommendations.
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