I happened to see an article in the WSJ the other day that both disappointed me and conveyed in a few words how brokers and clients can have diverging interests. Here’s the link.
Goldman’s weekly trading “huddles”…
The article describes the Goldman practice of having short weekly meetings between its research staff and the firm’s proprietary traders–the ones who operate with Goldman’s own money. I assume the article is factually accurate. I haven’t seen a correction or retraction, and the WSJ has subsequently reported that several regulators have begun investigations of the meetings, called “huddles.”
In the “huddles” the analysts and traders discuss stock ideas, including their opinions about near-term prospects for names under Goldman coverage. The Goldman traders obviously have the conclusions the meetings generate, because they take part. From the article, it sounds like the institutional salespeople assigned to Goldman’s most profitable fifty or so accounts relay this information over the phone later the same day.
But nothing is published and most clients don’t even know the meetings exist.
Apparently, Goldman written reports all say someplace on them that “salespeople, traders and other professionals” may act against the firm’s recommendations. I must have read thousands of Goldman reports over the years and never noticed this warning, though.
…are not a big surprise
It shouldn’t come as much of a surprise that Goldman, or any other broker, gives more service to itself and to its best clients.
Nor should it be a shock that the firm isn’t at pains to point this fact of life out. After all, it’s part of a good salesman’s job to try to turn a commercial relationship into an emotional one, where the client ends up paying more than he should.
[An aside: Years ago a friend of mine told me about a portfolio management colleague who fancied himself an expert billiards (actually, snooker) player. He frequently met the brokers he dealt with after work for drinks and a few friendly games of snooker. He routinely trounced his institutional salesmen, until…he left his portfolio management job and became a broker himself. As of the time my friend told me about this, the colleague had yet to win another match.]
…but it’s disappointing
Some things I find disconcerting in the article’s description of the meetings, however. They are:
1. The meetings were attended by compliance people, the in-house experts on adherence to securities laws. There’s no mention that the compliance people were any more than passive witnesses, but the mere fact that they were there indicates to me that Goldman knew it was treading in a delicate area. Notes could easily have been disclosed by posting them on the GS website, but that wasn’t done, either.
2. Someone (the compliance people?) coached (“guided” is what the article says) analysts to use euphemisms to avoid uttering the words “buy” or “sell” in the meetings. Apparently, an analyst who had issued a written opinion of “buy” on a stock would say to a trader it was “overbought” or could “go down,” to suggest the trader should sell it. Although hard to believe, the WSJ makes it sound like Goldman figured that this word trick would get around the necessity of disclosing to ordinary clients the analyst’s most current thoughts. Coincidentally, but luckily for Goldman, these uninformed investors might well end up being the other side of the trader’s sell order.
More worrying, one might easily think that the idea behind the doublespeak is to ensure that the letter of the law was being upheld, although the spirit might well be being broken. Or Goldman might have been thinking that the ambiguity of the language used would make it harder for any third party to figure out what Goldman really intended to do.
3. How did the WSJ find out about the meetings? My guess is that one of the participants, unable to decide how legal/ethical they might actually be, spilled the beans.
1. The regulators will figure out if Goldman has broken any laws. It could easily be that the answer is none. For an investor, the bigger issue is the apparent breach of trust. A client placing a buy order with Goldman for a stock on the recommended list now has to consider that the analyst who wrote the “buy” report may be telling the trading desk the opposite story. Goldman’s rejoinder to a client protest?–read the fine print in the research report.
In a technical sense, that’s right–caveat emptor. I would have anticipated this kind of treatment in a used car lot. But I thought better of Goldman. Small and mid-sized clients probably also thought they had a relationship of reciprocity and fairness with the firm–the “invisible handshake” that Arthur Okun talked about, the idea of “let’s grow rich together.”. Now they may conclude otherwise. Even clients in the inner circle may question what information they are not privy to, or whether they will be able to retain their privileged status for any length of time.
2. The “huddles” also make the Goldman business strategy clear: concentrate on proprietary trading, hedge funds, a few big clients. GS won’t usher everyone else to the door, but they’ll have to be satisfied with the crumbs that fall from the table.
Does Goldman think it may someday need these other clients? –say, as distribution capability in case the IPO market revives? If the WSJ article is accurate, apparently not.
Does it need a retail presence? other than its bank, no.
Will this strategy work? It remains to be seen. It will be easier to judge if the regulators’ probes shed more light on Goldman’s actual conduct and as client reaction is heard. I think that the biggest risk in an aggressive strategy to find the line between behavior clients will accept and what they won’t is that in the search a firm steps over the line without knowing–and damages its business reputation severely as a result.