The latest version of regulatory and Wall Street whack-a-mole is, as usual, going to miss the target.
In the “never-ending battle for truth, justice, and the American way” – and, oh yeah, profits – big investment and trading banks announced a major new change. All the big banks you know and love are about to charge the money managers they execute trades for, and service in ways most of you have no idea, an arm and a leg for research.
It doesn’t matter if the research is ineffective, which most of it is. It doesn’t matter if it’s valuable insider-type information, which some of it sometimes is. Banks are going to charge a pretty penny for it.
Why? Because it’s worth it, darn it.
And because new regulatory rules will force them to hold their hands out.
Just How Much is Research Worth?
Wall Street research is gamed. Sometimes the recipients of that research are gamed, or the whole public is gamed, or it’s worth a lot more than what anyone’s paying for it.
That’s because research is “free” and has been used to benefit the banks that disseminate it.
Of course, their research isn’t really free. There’s just no direct charge for it.
Typically, money managers pay for research by directing their trade orders for execution to bank desks whose analysts’ research they receive. Sometimes flat commissions incorporate the cost of research.
Other times, and quite often, research or other services are paid for when a money manager executing trades tells the desk executing their orders, “put an extra (something) on it.” Translation: Charge me more in commissions on this trade.
Shortly, because of European rules going into effect on January 3rd, banks will have to charge separately for the research services they offer.
What’s known as MiFID II (Markets in Financial Instruments Directive) requires European research providers to bill clients separately for research services. Because many big European banks do business in the U.S. and big American banks do business in Europe, American banks plan on following MiFID.
Morgan Stanley is reportedly considering charging as much as $2500 an hour for one-on-one meetings with their top analysts. That’s more than double the hourly rate charged by the most prestigious and expensive law firms in America.
The actual hourly price will likely be determined by the analyst’s track record, seniority, and ranking, and the level of access sought.
Another model has Morgan Stanley charging $25,000 for five users’ access to the bank’s basic research.
Other banks are negotiating pricing with prospective clients too.
Bank of America Corp. is supposedly quoting up to $80,000 per user for premium research. Nomura Holdings Inc. has quoted $134,000 for premium research. Barclays Plc may charge $455,000 for its “gold” equity research. And JPMorgan Chase & Co. is proposing a $10,000 entry-level charge.
The real question is whether or not clients will be essentially throwing that money away.
New Rules, Same Game
The top ten U.S. banks employ almost 7,000 analysts who spit out research. There are lots of facts and figures coming out of company SEC filings and statements in research reports that money managers use to support their trading and investing decisions.
Most of it is useless. Securities prices move up and down, regardless of research reports. They base it on market conditions, first and foremost, and secondly on investors’ and traders’ expectations. Research helps some traders form their own opinion, but ultimately their decisions to buy, hold, or sell are based on profit and loss.
If research reports were always correct, they’d be hugely profitable. Banks themselves would be trading on them, and only after they are making money disseminate them to clients, for free, so other traders would follow-on and make the bank’s positions more profitable.
And, of course, that happens.
But most of the Street’s research has been the “source of comic relief for many of us over the years,” according to Zero Hedge. Historically, it is that hysterical.
What isn’t funny is how research has been used by banks to get IPO business, to curry favor with investment banking clients and prospective clients to make money for banks while screwing public investors.
The Global Analyst Research Settlement was reached in the United States in 2003 between regulators and ten of the country’s largest investment firms based on an inappropriate influence of their research analysts by their investment bankers. Banks were alleged to have engaged in spinning “hot” IPOs and issued fraudulent research reports in violation of various rules.
Besides teeing-up the public to buy into bad stocks, banks tee up other trading desks with manipulated research reports.
In 2006, Goldman ran “trading huddles” so research analysts could meet on a weekly basis to share trading ideas with the firm’s traders, clients, and salespeople. Analysts would discuss specific securities in huddles while they were considering changing published research ratings or the conviction list status of the security. Clients participated in trading huddles and had access to the huddle information through research analysts’ calls which included discussions of the analysts’ “most interesting and actionable ideas.”
Research is about making money. Sometimes it’s for the client’s benefit, but it’s always for the bank’s benefit.
New rules aren’t going to change that.
Banks are going to charge upfront for their research to comply with new rules, but do no doubt that they will find backdoor ways to manipulate research efforts for the benefit of their own profits.