Small investors lose again

Wall Street fighting to keep the little investor in the dark.

By Jamie Dlugosch Mar 24, 2010 1:12PM

Score another one for the big banks.

 

Last week a United States District Court in New York ruled in favor of large banks fighting to keep website www.flyonthewall.com from publishing analyst report headlines as quickly as they can.

 

You know Wall Street. The big players can’t simply make money on good ideas. They have to preserve their edge over the rest of us.

 

 

Simply said, analyst reports often move stocks in a predictable way.

And Wall Street wants to make sure its biggest and most profitable customers can get into a very profitable position before the rest of us get the word and follow along.

 

Apparently, the federal court is all in favor of giving them that edge.

 

Here's how it works. Let’s say a few weeks ago, Wall Street started to suspect that Palm (PALM) was badly losing the smart phone war. A bank analyst does the research and finds that Palm’s phones are not selling.

 

So the bank decides to report the news and issue a "sell" rating on the stock. That report goes to the bank's big customers first, who can then sell the stock short -- assuming the news will bring it down.

 

Eventually that news goes public, and the stock starts falling. Those who sold short first make the most money; stockholders who dumped fastest lose less than those caught waiting.

 

What the Fly was doing was trying to get the news to the rest of us as quickly as possible -- a pretty basic function of delivering the news, right?

 

But with the court's ruling, according to The New York Times, the site must wait until 10 a.m. to publish news about research that was issued before the 9:30 a.m. opening bell. That's a half-hour advantage to the banks' select investors, an eternity in market time that translates to huge amounts of money.

 

Yes, that probably sounds like front-running, and you probably thought there were rules against it. Not for these guys, apparently.

 

Yes, we all know how the game works, and the banks do fund the research. But aren’t the rules also supposed to make sure there's a level playing field? Doesn't this invite the sorts of conflict of interest that make analyst reports and risk ratings suspect? And hasn't the SEC spent years trying to eliminate "whisper numbers" and other ways of playing favorites?

 

It's also a bit scary to think about this might hamper the many news organizations who report on earnings reports and all sorts of other company news, as soon as they learn it. How long must they now sit on news to keep this court satisfied?

 

I’m not sure what the solution is here, but something just isn't right.

 

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