We're putting up a column Thursday in our Soapbox section on the current state of Wall Street research. The piece, by John Merriman of Merriman Curhan Ford & Co. and William Febbo of Panel Intelligence LLC, will run in the Feb. 18 issue of The Deal newsweekly and provides data and insights into a situation that's been anecdotally apparent for years: Research is withering on the sell side and moving to the buy side, particularly the hedge funds.
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Why is this important? Well, although the authors don't go there, it is a commentary on the analyst scandals that were so consuming after the tech bust. Back then, then-New York Attorney General (now New York Governor) Eliot Spitzer and a host of media camp followers argued that they were making Wall Street safe for retail investors by cleaning up conflicts and restoring "the even playing field." Instead -- and not excusing the antics of Henry Blodget or Jack Grubman -- Spitzer succeeded in eliminating any economic basis for Wall Street sell-side research. Instead, research has increasingly migrated toward the kind of wholesale institutions that can afford it, notably the hedge funds.
The bottom line: Research goes to the highest bidder, meaning there's a more uneven playing field than ever before.
As sell-side research declines, retail investors are increasingly forced to avail themselves of the resources of the Web, the personal finance media or television shouters like Jim Cramer. This is pretty inadequate. Despite the manifest conflicts and abuses of the old sell-side research, sophisticated investors could read past the conflicts and biases for insight and data. While most retail investors -- and the media -- fixated on recommendations (usually to buy), sophisticated investors, meaning institutions, focused on content. The underlying structural flaw here is that we've got a mass of investors with neither the time nor the training nor the money to effectively research stocks. Now we're left with "privatized" research for the buy side and "public" research from the press, with all its inherent conflicts and problems, for the sell side. You can debate Wall Street's greed, or wheher retail investors should even buy individual stocks, but the fact is the market remains open and retail investors play the game with tools that are more inferior than ever to that of professionals. We should remember this when we begin to "remedy" the mortgage crisis. - Robert Teitelman
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