We’ve talked a little before about how I don’t understand Wall Street research. Let’s start slow: why publish research? There are I think three, or three-ish, possibilities:
1. To inform your investing clients (asset managers and such) about your best views on how they should manage their money, so that they can manage their money well and thus one day have more of it,
2a. To induce your investing clients to do trades that generate trading revenues for you,
2b. To induce your investing clients to do trades that optimize your book (i.e. slapping a Buy on whatever you need to sell and vice versa), or
3. To induce banking clients (corporate issuers) to pick you as an underwriter.
So, #1, ha ha ha. Choosing between #2 and #3 is harder and if you wanted to be serious about it you might ask questions like how much revenue does trading bring in versus underwriting (more!), how good is that revenue (market making for pennies using your capital: probably not as good as risk-free 7% IPO gross spreads), and how much does research influence trading (meh?) vs. how much does it influence underwriting (meh?).
This weekend, though, we got kind of a strange data point via this FT article about the JOBS Act and the research settlement. In brief, as we’ve discussed, the JOBS Act lets banks basically do whatever they want for research on “emerging growth” companies, including in particular publish research pre-IPO and have bankers and analysts and the company all in the same room pitching business and generally scheming. But there’s a catch, which is that the ghost of Eliot Spitzer, in the form of the global research settlement, still restricts that activity, so all the banks subject to the settlement (the bulge-bracket ones) are disadvantaged vis-à-vis their smaller cousins. But, the FT points out, the big banks have a trick up their sleeves, which is to make all the small banks sign an agreement preventing them from publishing research ahead of the big banks, as a condition of joining the syndicate for any deal: Read more »