Wall Street firms may be giving hedge fund clients an early indication when the firms’ analysts change their views on the stocks they cover.
The analysts’ research reports are legally supposed to be released to all investors at the same time. But hedge fund clients may gain an advantage through questionnaires in which analysts’ answer the fund’s queries, The New York Times reports.
The questions include ones about possible unexpected earnings changes at the companies the analysts follow. Those answers may allow hedge funds to discern a change in analysts’ views about a company.
Editor's Note: This Wasn’t an Accident — Experts Testify on Financial Meltdown
Those changes can push a stock’s price up or down substantially, so the hedge funds would have an unfair advantage to trade on that information before it’s public.
The Times says its documents showing that “the hedge fund practice of trawling for analysts’ shifting views is systematic and growing on Wall Street.”
To be sure, it’s not clear Wall Street firms are doing anything illegal. The problem would be if they are using the questionnaires to hide the transmission of non-public information, Lewis Lowenfels, a securities law expert, tells The Times.
In the case of Facebook’s IPO, Wall Street banks face heavy criticism for warning some of their biggest investors of the company’s flaws before the IPO.
"We don't get the information that these institutional fund managers are getting," individual investor Jennifer Kohne tells The Wall Street Journal. "We're at a disadvantage."
Editor's Note: This Wasn’t an Accident — Experts Testify on Financial Meltdown
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