Information As Commodity

Matt Levine at Bloomberg writes,

If a client thinks a research analyst is a genius, he rewards her by sending commissions to her bank’s salespeople and traders, who may well be dolts. But they are dolts with a P&L; she is a genius cost center. That is not great for her compensation, or her career prospects. It is not unique to her, of course; a lot of bank employees are rewarded out of trading revenue despite the difficulty of tying them directly to that revenue. But it seems especially acute for research, and it is not surprising that banks have long tried to figure out better ways to quantify the value of research analysts.

And, he quotes from another article,

Wall Street banks may have finally hit on a way to pinpoint the value of analysts and squeeze more money from their research: Stop making it so easy to share.

Bank of America Corp. has started embedding analysts’ reports into web pages, so it can more easily restrict access than with PDF files that are widely shared with people who aren’t paying clients, said Candace Browning, the firm’s head of research. It’s joining rivals Morgan Stanley and Citigroup Inc. in limiting access, and more plan to follow. The approach also makes it easier to track analysts’ readership and customize products for specific types of clients, according to bank executives and consultants.

This might seem a little thing, but it is not.

Despite the fact that markets exist to trade on businesses and commodity, one must ask oneself, what is it exactly that these flows are representing? From rates forecasts, to how profitable a mine is, to whether a project is going to succeed, these flows represent information on the fundamentals including expectations of the subject being traded.

Asset managers rely on analyst reports, algorithms have even been written to read these reports and score them. This gives analyst reports the potential power to influence opinions of the big players in the market.

The analysis does not even have to be accurate. It is enough to observe the consensus and use any reason to nudge the analysis towards agreeing with the consensus. That, or for the brokers who have more influential readership, to influence the readers towards a uniform consensus.

If enough major players follow the recommendation, this too can lead to uniformity of allocation. It wouldn’t even be surprising if this may contribute towards the momentum phenomenon.

It is not the same observing a river from ground level as opposed to sending up a drone that can chart the width of the river, doppler-wave the depth of it. The trades of investment bank clients move the market by the sheer volume and self-perpetuating cycles. On the ground, you might be able to measure the purity of the water, but only the drone can chart the direction of the flow from above.

For the very same reason that anti-competitive behaviour is monitored and price-fixing is frowned upon, the ability to gate and trade information, especially between major participants of the market must be looked at carefully.

I do agree that the effort to research should be financially rewarded, but the way it is employed has to be taken into consideration. The potential of this facility being used to gain unfair advantage over other market participants is there, and shouldn’t be underestimated.


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