Wall Street hates a level playing field. What it loves is an edge, an inside track, that extra something — especially when it comes to information that moves markets.
So it’s not surprising that big banks would go to court to keep ordinary investors from getting their hands on hot stock research. What is a bit surprising is that the court would actually side with the banks.
It’s one of those maddening, ‘can’t a little guy catch a break?’ moments.
Here’s what happened: A while ago, a group of banks sued a Web site called theflyonthewall.com to prevent the site from publishing news headlines about their stock upgrades and downgrades. Last week, Judge Denise Cote, of the United States District Court in New York, ruled in favor of the banks. The decision could have big implications for who gets Wall Street’s hottest tips, and when.
The banks — Barclays, Bank of America and Morgan Stanley — argued that even publishing a headline about an upgrade or downgrade amounted to stealing intellectual property. As such, their paying customers — which means big-money investors — should get to see this sort of research before everyone else.
The ruling came as a shock to many on Wall Street. Judge Cote issued an injunction against theflyonthewall.com that will essentially give Wall Street’s big clients a head start each trading day. The site must wait until 10 a.m. to publish news about research that was issued before the 9:30 a.m. opening bell — giving select investors 30 valuable minutes to act before the rest of the investing public. During the day, the site must delay its headlines by a full two hours. (To be clear, theflyonthewall.com published headlines about the research reports, never the entire reports.)
While the ruling applies only to theflyonthewall.com, a small Web site with several thousand subscribers, the decision could presage a larger effort by Wall Street banks to limit the distribution of news about their research.
News organizations like Bloomberg, CNBC, Dow Jones and The New York Times routinely report on stock upgrades and downgrades as soon as they get their hands on the reports. The research often breaks news or can turn into news.
By the logic of Judge Cote, the next time Intel’s stock price spikes as a result, let’s say, of an upgrade by Morgan Stanley, the press should have to wait several hours to report on what was behind the big move.
In that spirit, the decision seems contrary to rules about fair disclosure (not to mention fair play) that have long applied to public companies. For years, the Securities and Exchange Commission has tried to stamp out “whisper numbers” about earnings and other “guidance” that corporate executives pass along to friendly analysts, who then pass that information to select clients. The S.E.C. even adopted Regulation Fair Disclosure, or Reg FD, to put a stop to the whispers.
Indeed, research reports, before their release, have sometimes been considered inside information because of their ability to move markets. The S.E.C. has filed dozens of suits against people who have tried to trade ahead of the release of research reports. (In fairness, a Wall Street research report is a very different animal from a company’s earnings report, but it can have the same impact on the markets.)
Judge Cote, however, seemed to regard this case as simply one of copyright and intellectual property. Banks spend a lot of time and money on research. Why should everyone be able to get it? Theflyonthewall.com cited the “fair use” doctrine, allowing it to provide summaries of other entities’ news. The judge cited the “hot news” doctrine, which is meant to protect organizations from theft by competitors.
Judge Cote seemed to acknowledge that the whole objective of Wall Street research is to give select investors an edge. If you’re not in the club, of course, you may think otherwise.
“Timely access to recommendations is a valuable benefit to each firm’s clients, because the recommendations can provide them an early informational advantage,” Judge Cote wrote. “Some sophisticated clients, such as hedge funds, seek to act on the recommendations before other investors do so.”
That is not to suggest that research should be free or required for public distribution, but restricting reporting on research in a timely way seems contrary to good public policy.
Glenn Ostrager, a lawyer for theflyonthewall.com, argued in court that the company was singled out because it was a small, easy target. Theflyonthewall.com, which is based in Summit, N.J., isn’t exactly a titan of business news. It has a few thousand clients and charges $50 a month for access to its site. The banks’ goal, Mr. Ostrager said, was to swat theflyonthewall.com, get the courts on their side — and then take a swing at the giants.
“The plaintiff’s plan or stratagem to deal with what they see as troublesome to them is to select probably one of, if not the smallest, player on the Street, with the most limited resources,” he told the court.
Of course, it’s hard to keep a lid on news of any stripe in this Internet age. “The genie is not going back into the box. The Internet is here,” Mr. Ostrager said.
On that point, few disagree. When information appears in one place, it moves quickly to another and then another, via Web sites or Twitter or the old-fashioned telephone. The problem is that on Wall Street, the information usually doesn’t trickle down to the retail investor until the pros have had a chance to trade ahead of the unsuspecting masses.
Near the end of her decision, Judge Cote wrote, “Research plays a vital role in modern capital markets by helping to disclose information material to the market, to price stocks more fairly and, as a result, to produce a more efficient allocation of capital.”
She may be right — particularly if most investors don’t have to wait hours to hear the news.