Fisher Investments Editorial Staff

Swatting the Fly on the Wall

By, 03/26/2010

Story Highlights:

  • This week, a judge ruled in favor of "big banks" and against a little website, barring the site from releasing analyst recommendations before market open.
  • So far, this ruling applies only to the website, but some worry banks will use this as grounds to limit other organizations from distributing news about their research.
  • While we're all for transparency, we don't see why it's a crime for firms to receive some economic benefit and gain competitive advantage for the research they create.
  • In the grand scheme of things, a slight trading delay, if one even exists, likely makes no difference for long-term capital.


Early this week, a judge ruled in favor of "big banks" and against a little website, (which has about 3000 paying subscribers), issuing a permanent injunction requiring them to delay releasing news on the big banks' analysts' stock upgrades and downgrades. As such, some are taking this as another win for the "big guys," where the "little guys" are swatted out of a fair investing game. 

The lawsuit, filed in 2006 by several banks, claimed the site was, in effect, stealing the banks' proprietary research. The injunction orders to wait until 10 a.m. to report on research issued before opening bell (9:30 a.m.)—ostensibly giving clients of BofA's Merrill Lynch unit, Barclays, and Morgan Stanley a whole 30-minute head start to the trading day. Additionally, any research released after markets open cannot be published until two hours after being made available.

So far, the injunction only applies to, but some worry banks will use this ruling as grounds to limit other major news organizations from distributing research and analyst news (e.g., buy and sell recommendations)—crying foul on fair disclosure. But banks say that, in addition to protecting themselves from even the slightest hint of insider trading, they have a right to distribute proprietary research to clients internally and to profit from it.

Makes sense to us: If research is disseminated for free to the general public, then what incentive would firms have to continue producing said research? Not much, and they just might stop—and less information can't be better for markets and investors overall. Sure, heaps of economic data is freely and widely available (courtesy of the US government) and released to everyone at the same time—but proprietary data is proprietary. No one finds it odd Google keeps its search algorithms shrouded in secrecy or that Microsoft and Apple stay mum on developing products—that's in their shareholders' best interests. If investors want the information badly enough, they can always become a client of the firm producing it.

To us, the worries surrounding this injunction is similar to the fears about "flash trading" and other benefits investors may get from working with big firms. But truth is, many of the "big guys" utilizing firm research (and proprietary trading tactics) are actually investing on behalf of the "little guys" through mutual funds, pensions, etc.—so who exactly benefits most from this ruling?

When you get right down to it, for this ruling to mean something, you must believe both of the following statements: 1) The average amount stock prices move in 30 minutes can have material impact more often than not when you're investing long-term capital, and 2) analysts' buy/sell recommendations are more right than wrong and predictive—particularly over very short time periods. (Hint: 1) They don't, and 2) not really.)

Don't get us wrong, we love transparency—but there's nothing illegal about having competitive advantage and issuing proprietary research. So was the ruling right or fair? This is one instance where we'd have to say, "Meh. It doesn't much matter."


*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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