Sense on Cents

Huddle up!!

Goldman’s play calling in regard to the dissemination of short term trading tips is receiving increased focus. The Wall Street Journal highlights Regulators Examine Goldman’s Trade Tips:

Securities regulators are examining weekly meetings at Goldman Sachs Group Inc. in which research analysts give tips to traders and then to big clients, as the Wall Street giant considers disclosing these so-called trading huddles to all its clients.

The Wall Street Journal reported Monday that analysts at Goldman sometimes shared with traders and key clients short-term trading tips that sometimes differed from the firm’s long-term research.

Examiners at the Financial Industry Regulatory Authority, the industry self-regulatory body known as Finra, and the Securities and Exchange Commission intend to ask Goldman for more information on these weekly get-togethers, people familiar with the matter said.

Internal documents show that at times, these short-term trading tips differed from Goldman’s long-term research. Critics complain that Goldman’s distribution of the trading ideas to Goldman traders and major clients hurts other Goldman customers who aren’t given the opportunity to trade on the information, and may be relying on the firm’s longer-term research to make investment decisions.

The huddles, and what is discussed during or after them, currently aren’t disclosed in Goldman’s long-term research. On Monday the firm internally discussed adding information about the service on its client Web site. Some firms, such as Morgan Stanley, also give stock ideas to clients, but disclose the service in their longer-term research and on its Web site.

My gut instinct tells me this business practice at Goldman may present regulatory issues at times but not necessarily always. The fact is there are times when a research analyst may feel a security is slightly overbought or oversold based on some short term technical dislocations. As such, he may share that assessment with traders and select clients.

However, there may be other times when a security is undergoing some fundamental changes and a research analyst is thinking about changing his call but does not immediately act upon it. The analyst will still highlight the short term mispricing.

Welcome to the very gray world of Wall Street research and trading.

Based on my experience on the fixed income side of the business, Goldman actually stopped publishing research around 2003 because they felt they were not being paid for it. Goldman actually had research analysts on the trading desk for the sole purpose of talking to clients. They did not publish written research.

At Bear Stearns in the mid 1990s, we would have weekly trading and research calls broadcast to all our clients. We screened clients from competitors by requiring clients to provide a passcode for the call. We still felt there were times when other Wall Street dealers accessed our calls.

Will any regulatory issues come from Goldman’s trading huddles? In my opinion, nothing big will develop. Goldman will likely post on its website a more explicit statement highlighting that short term trading tips are at times provided to capture market anomalies. The regulators will sign off on it and life will go on.

Be mindful, though, that Goldman is an aggressive short term trading shop. Given the lay of the land on Wall Street now, clients have to talk to Goldman whether they truly want to or not.

As is often said, if you are wondering who the pawn is, it’s probably you.

LD

This entry was posted on Tuesday, August 25th, 2009 at 4:20 PM and is filed under General, Goldman Sachs. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.