Ooh, so there is gambling in Casablanca! I’m shocked, shocked!
An excellent bit of sleuthing comes at the Wall Street Journal, on how Goldman has for the last two years has had “trading huddles” that lead to ideas being presented to clients before analysts changed their grades on a stock. Proprietary traders also attend the meetings.
Now the funny bit about this is that this is an ongoing not so keen practice that Goldman that Goldman has pushed pretty far, in typical Goldman propensity to exploit any ambiguity in the regs.
One of the differences between big accounts and everyone else is access to the analyst. The idea that this article fails to highlight is that the written research report is much less meaningful than believed, except in the cases when an analyst does a big revision of earnings forecasts. Goldman seems to have played those changes to its key accounts, and maybe its own advantage.
But a second bit is that within a seemingly static rating, an account can get tremendous insight from talking to an analyst that a mere low level client who gets only the written product and participation in conference calls misses.
In other words, the two-tier system (or even three, since top accounts can get to analysts any time, but other institutional accounts will not get the same priority) has long been in effect. But Goldman appears to have pushed the boundaries yet again. Putting the prop traders with the top accounts onto hot trading ideas (by implication, everyone knows GS intends to pile in, hence it is safe for the big accounts to throw their weight int) smells like tan organized ramp of a stock.
From the Journal:
Every week, Goldman analysts offer stock tips at a gathering the firm calls a “trading huddle.” But few of the thousands of clients who receive Goldman’s written research reports ever hear about the recommendations.
At the meetings, Goldman analysts identify stocks they think are likely to rise or fall due to earnings announcements, the direction of the overall market or other short-term developments. Some of their recommendations differ from ratings printed in Goldman’s widely circulated research reports. Some Goldman traders who make bets with the firm’s own money attend the meetings.
Critics complain that Goldman’s distribution of the trading ideas only to its own traders and key clients hurts other customers who aren’t given the opportunity to trade on the information….
Since the trading huddles began about two years ago, Goldman has supplied “trading ideas” on hundreds of stocks to the traders and top clients, according to internal documents reviewed by The Wall Street Journal.
Yves here. Goldman defends this practice as merely giving “market color” and contends this practice is simply to cater to accounts with a short-term trading focus, versus long-term investors. Please, is anyone an investor any more? Average holding time for NYSE stocks is well under a year. Back to the story:
Goldman was looking for a leg up on rivals when it started the trading huddles in 2007. That year, Goldman ranked ninth in Institutional Investor magazine’s annual list of the best equity analysts, as determined by a survey of big institutional investors. Goldman was rated eighth in last year’s competition.
The huddles began in earnest around the time Goldman’s research department got a new boss, Mr. Strongin. He came to the firm in 1994 from the Federal Reserve Bank of Chicago, where he had been director of monetary-policy research. At Goldman, he had run the commodities-research operation, then was co-chief operating officer of the whole research unit, before being asked to run it in April 2007….
Compliance officers sit in on almost all the meetings, Goldman says. Research analysts say they have been guided on what language to use in the huddles. Words like “buy” and “sell” are to be avoided, while “run up,” “give back” and “oversold” are encouraged. Internal documents reviewed by the Journal initially tracked the trading-huddle tips as “buy” or “sell,” but now refer to them as “up” or “down.”
Yves here. You know when compliance sits in the practice is pushing the margin. And everyone on the calls understands the coded message. Complete form over substance.
Some other firms are more conservative:
At least one competitor discloses such trading tips much more broadly. Morgan Stanley’s research department sends blast emails with short-term views on various stocks to thousands of clients, and posts the information on its Web site. It doesn’t call customers to convey the tips, because Morgan Stanley officials decided that could expose the firm to questions about selective disclosure, according to people familiar with the matter.