Why Regulation Will Never Fix Sell Side Analyst Shenanigans
- Posted by Leigh Drogen
- on July 16th, 2012
It’s not like sell side analyst shenanigans have ever been a secret, everyone is aware of it. Our government and regulatory agencies have made veiled attempts at cutting down on the blatant law breaking, but it’s never really worked.
Why? It’s very simple.
You can’t write laws to outlaw the fundamental purpose for someone’s existence. Well, you can, but they aren’t going to be abided by as we’ve seen. The purpose for the existence of a sell side Wall Street analyst is not to publish research and never has been. Wall Street analysts exist to provide corporate access to their buy side trading clients, at the same time they are beholden to making the companies they do investment banking business look good. Nowhere in this equation does the firm or the analyst get paid for putting out quality research, nowhere.
And that’s exactly why you’ll never get these guys to play by the rules, because if they did, they’d all be out of a job. The rules as they are currently written don’t provide the analyst any real way to make money for his firm. This is partially why you see sell side analysts getting fired en mass right now, they provide little to no value to the firm outside of doing things they aren’t supposed to be doing.
And the sad part is that it’s not the fault of the analyst. These are some of the smartest guys out there, but their incentive structure is bent in a way which does not reward them for producing quality research or playing within the rules.
Structural economic incentives will always trump laws, unless the penalties are high enough, and I think its blatantly obvious that no one is really regulating this space and handing out punishment. You will never fix the misdeeds of these guys via regulation, because that regulation would wipe out their reason for existing. Good luck getting that bill through congress.
The cure here is to make these guys irrelevant by providing the market with another source of information which is open and democratic. One where everyone gets the same information at the same time. Where contributors of analysis do not have the same conflicts of interest as the sell side. That’s what we’re building at Estimize.
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Leigh Drogen is the founder and chief investment officer of Surfview Capital, LLC, a New York based investment management firm employing an intermediate term long/short momentum strategy. More »
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