Sell-side analysis wants to be free!

Merrill Lynch is worried that too many people are reading its research.

Yes, too many. Reports DealBook:

Merrill Lynch said it plans to eliminate all access to its research from nonclients and to put new restrictions on the media’s access to the research. It will also replace some licensing agreements that “erode the value of our written product” with new arrangements that put a fairer price on its reports.

[Update: The statement is here.]

In other words, Merrill is trying to put the toothpaste back in the tube. Rather than embracing the digital era, Merrill is trying with all its might to pretend that nothing has changed, and that it can distribute digital copies of its research to tens of thousands of clients while still somehow ensuring that no one else gets to read it.

How silly.

As for the “fairer price”, does anybody, anywhere, actually pay for Merrill Lynch research? As in a simple cash-for-research transaction? I doubt it, somehow. This is a classic example of something being free to those who can afford it, and utterly inaccessible — at any price — to those who can’t.

What Merrill should be doing is to follow the example of, say, Morgan Stanley’s Global Economic Forum, which has been freely available online for over a decade now. The problem is that sell-side shops like Merrill like to think of their stock research as being actionable: if Merrill puts a “buy” rating on the stock, then the idea is that a large number of Merrill’s clients, impressed with Merrill’s analytical expertise, will rush out and buy the stock. If that’s true, then they would rightly want the research to go to as few people as possible, so that the inevitable uptick in the wake of the rerating wouldn’t move the stock too far. Or something.

The problem, of course, is that sell-side analysts aren’t used as outsourced stock-pickers by buy-side clients. They’re used as sources of information — analysts often have better access to corporate executives than the buy-side has — and as sources of interesting ideas. But the headline “buy” and “sell” ratings are largely ignored. Besides, the few sell-side analysts who do prove particularly adept at picking stocks usually find themselves lured to the buy-side sooner rather than later in any event.

I look forward to the day when the first large investment bank is bold enough to put all its research online for free. That would be the really smart move. Merrill, on the other hand, is simply wrong when it says that the value of its research goes down the more people who read it. That’s not true of the Wall Street Journal, and it’s not true of sell-side research either. Good information is often actually more valuable if it’s widely read.

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3 Responses to Sell-side analysis wants to be free!

  1. Yes yes yes Felix …

    I am at a loss to understand why these research institutions (which in essence they are too) have not seen the ligth yet. Morgan Stanley’s GEF is a major advantage for the MS organization as a whole; I mean Roach, Jen and Chaney are virtually super stars now :).

    You definitely got it right on this one and Merryl Lynch is bound to revert this decision at some point, it is simply inevitable in my opinion.

    Meanwhile and on a similar note I know you are an RSS man and so am I. I have been collecting RSS feeds from different sources and putting them in

    an archive over at my blog … here is the link;

    Of notable new additions to the are the Bank of International Settlements and the Peterson Insitute.

    But again, your analysis and view of web 2.0 / the digital era is spot on in my opinion.

  2. murray says:

    You’re missing several key points:

    1) We can all bash sell-side research till the cows come home. But there is a big gulf between the potential actionability of economics and stock research – the latter can be rather useful at times, even to sophisticated investors

    2) Merrill doesn’t just send this research to the likes of Fidelity or Citadel. It has a huge retail brokerage operation. Even after the scandals, the firm’s research still has a role. Fees on those brokerage account help pay for the research, I think. Mr Affluent ML retail client who uses that research has every right to feel pissed off if some website is taking away what he might see as an advantage that he is paying for.

    3) IBs are starting to charge buyside for research. Slowly, v slowly. But it’s happening.

  3. simian says:

    Very few sell side analyst reports are literally paid for, other than in soft dollars. But many large buy side shops vote on how to direct their trades to the sell side based on a combination of factors including the general quality of the bank’s research (and, of course, on trade execution quality). Some buy side firms have embraced this approach more vigorously, and others have reduced or completely eliminated their use of soft dollars.

    Generally, of course, sell side research can’t pay for itself, which explains the relative scarcity of quality independent research firms. But the research does have some economic benefit to the bank.

    None of the above tells us whether it’s better for the research to be widely distributed or kept to a few select clients. But the safe harbor provisions for soft dollars initially required that research NOT be made too widely available to the public if it is going to qualify for soft dollar payment, which explains why sell side research was originally not widely distributed to the public. The equity research industry changes slowly.

    As for recommendations moving stocks, well, they do. Buy side institutions do, measurably, act on recommendation changes, often without actually reading the reports; the recommendation changes are distributed through several third parties including First Call (and even Yahoo Finance). Some banks are unhappy with this situation – some briefly pulled their recommendations from the data feeds – but they do depend on the redistributors to a large degree.


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