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In spite of the increasing importance of the Internet as a primary source of gathering information, I hadn’t really given much thought about its influence on how analysts form opinions and/or build their models around a specific sector or company to generate research reports.  That was until I listened to Robert Passarella’s webcast “Equity Research in the Age of the Web”.

Robert has spent about 20 years on Wall Street in various roles in equity research, trading operations and sales.  In light of the current economic meltdown (and some inquiries from his family and friends), he put this presentation together to answer the question “What is happening on Wall Street?”

In the past, the market was driven by speculation – people were making decisions whether to buy or sell a stock based solely on the information they had.  However, this prompted the need to find out and ask “If I am making a buy,  why is someone else selling?”  Does someone have access to proprietary information that I don’t?  There has to be a reason why they are taking the opposite stance.  With the Internet in its infancy access to proprietary information sources such as Bloomberg terminals were limited to a select group. Others were making decisions based on what they were reading in the newspapers.

When the Internet became important some information was actually trustworthy – one could find out the “intrinsic value”  of a company by visiting their website and accessing material information.  As a result, a complete picture could then  be formed based on their initial speculation and the additional tidbits picked up through an internet search.

Three questions then become evident:

1) What financial instruments do I buy?
2) Why should I buy these particular products?
3) How should I transact?

These questions were then framed from both a retail and institutional investor standpoint.  For example, a retail investor could call his broker to get their recommendation and execute a trade through them.  Similarly, an institutional investor would also make a phone call but it would be to the sales desk or trader to conduct the trade.

Whether a retail or institutional investor, the common denominator is the initial idea generation for why to buy or sell,  and where they access news about the company to make an informed investment decision.

As we know there are two sides on Wall Street:

1) Buy-side – such as Fidelity who have portfolio managers who manage client money; and
2) Sell-side – pitches ideas to buy-side, generate research reports, and trade execution.

Robert identified some industry wide trends that began to emerge between the buy side and the sell side as the reliance  on a firm’s research or access to proprietary information (such as Bloomberg) decreased in value and instead relied more  and more on outside sources of information such as the internet.

Trends between buy and sell-side:

1) Decreasing company coverage by sell-side firms;
2) Rise of independents, experts and the professional blogger;
3) News is everywhere, abundant and in many cases, free; and
4) Buy-side was challenged to do their own primary research.

As a result, there are not as many analysts as there were 10 years ago and the ones who are around have changed their behavior.   As the typical equity analyst now accesses the Internet more often as Google and other search engines make finding information quite easy.  In addition, other tools such as Capital IQ and RSS feeds are also being used.  In general, web 2.0 has made people want to contribute their ideas and share them with others through Twitter, LinkedIn and almost any other social network out there.

I can relate to everything that Robert has to say, in particular the way information was gathered to make investment decisions before the internet took off.  The reason being is that I worked on an institutional trading desk for a discount broker as a  trading support officer from 1996-97.  So I know first hand that the main tools used to gather information were reading the  Financial Times, Wall Street Journal, Globe and Mail and watching what transpired in the markets throughout the day on CNBC.

It has been a long time since I have worked on a trading desk.  Since that time, I have gained nine years of experience in investor relations as both a consultant and in-house IRO.  So as I progressed through the presentation I began tailoring  my thoughts in the context of Investor Relations and why it is important to understand how equity research is changing.

Implications for Investor Relations:

It has implications for IRO’s and IR consultants alike, as gaining analyst coverage is an important goal for companies, especially companies who don’t have any.  Or for companies with coverage, who want to begin targeting new institutional investors by expanding into international markets.   It was also pointed out that speaking with management is now over-rated.  So if you are in the midst of reaching out to the sell-side to get coverage, this is something to consider.  You now have to think  of other ways to get their attention…I think the answer is to make your company’s information more accessible through your Investor Relations website and the web at large. There a quite a few social media avenues to take, so figure out what works best for you client or company and test it out –  it is gaining in popularity and some have had initial success.

Related posts:

1. Equity Research Analyst Weighs in on the Social Web – podcast
2. Institutional Investors and Analysts Increasingly Using Blogs and Social Networks for Research
3. Social Media and IR Trends Webinar Wrap-Up
4. NIRI Cleveland – Social Media and IR Wrap Up – Top 5 Take Aways

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Analyst Research, Social Media investor relations, Research, Social Media