It’s a little to early to auger the demise of the investment bank research department. Yes, they’ve lost their prestige and their ability to move stocks like butter. Yes, independent, buy-side research firm Gerson Lehrman is rockin’. Yes, we’re even beginning to see the early stages of free, collaborative research take hold here and here.
But to anyone who doubts the influence i-banks still retain, I invite you to read an article in today’s WSJ, “Goldman’s Trading Tips Reward its Top Clients“.
While we can debate the merits of providing tiered service to different types of Goldman clients until we get blue in the face, the message is clear: when a firm like Goldman gets incrementally more positive on a stock, they still have a way to make it go up.
According to the article, Goldman holds a weekly powow to determine both how to pitch certain ideas to clients and how to position proprietary firm accounts accordingly. For Goldman Sachs, as the house, they win. For clients, Goldman’s influence still means profits.
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.
Does it matter whether Goldman’s research is good? Not really. It’s the firm’s backing and propagating ideas to clients that provide the real value. It’s also what’s partially responsible for Goldman’s $3 billion + in net income it reported last quarter. It’s also just interesting to note that in the article quoted from above, it didn’t appear that anyone made any real money on the Janus idea. Point here, point there.
In addition to influencing trading, Goldman’s also raising the service levels and closeness brokers and analysts are providing to their hedge fund clients. The WSJ article quotes a hedge fund analyst at Frontpoint who says that he appreciates the banter and finds it useful to hear both sides of a trade as part of a larger conversation.
Don’t count banks out. Their influence comes in how well they can integrate their brokerage units with their prop trading desks to give a full, 360 degree view to the investing process.