Buy Side Research Articles

Antitrust: What is it Good For?


 
 
 
 For the last forty years, antitrust cases have largely been argued on the basis of consumer welfare. This basis has enabled firms to excuse practices–no matter how pernicious–if they can show that such practices reduce prices or increase the value of the goods and services they offer to consumers. In the fall of 2021, the Department of Justice filed a complaint which alleged that a proposed merger between Penguin Random House LLC and Simon & Schuster Inc. improperly stifled competition in the market for best-selling books and reduced author advancements within the same market. In December of 2022, the United States District Court for the District of Columbia enjoined the DOJ’s complaint. This article examines the threat that monopsonies present in labor markets; it argues that a shift in antitrust enforcers’ focus from the sell side of a market to its buy side can bolster economic output and empower the labor force.
 
 
 

Do buy‐side analysts inform sell‐side analyst research?

AbstractThis paper examines whether sell‐side analysts' interactions with buy‐side analysts influence the quality of sell‐side research output. We hypothesise that these interactions offer the sell side a view of the buy side's private information, which enhances the quality of sell‐side research. Our findings show that analyst earnings forecast accuracy improves with these interactions with diminishing returns. Results are robust to alternative proxies for research quality and information flow from buy‐side to sell‐side analysts. Additional tests rule out endogeneity concerns, strengthening the inference that feedback from interactions with buy‐side analysts improves the quality of sell‐side research output.

The age of collateral convergence

This paper investigates how collateral management is changing as more buy-side firms engage in the practice. Services are being adapted to meet the unique characteristics of the buy side, to ensure regulatory compliance, improve operational efficiency, manage risk, maximise trading opportunities and improve liquidity. UMR has been the primary driver for the increased buy-side focus on collateral management. With phase six being imposed in September, the smallest in-scope firms will need to manage and optimise collateral for the first time. In addition, CSDR means all market participants need to manage collateral to avoid settlement fail penalties. Collateral management is also needed to capture opportunities, by freeing up capital across an organisation. It is becoming engrained in buy-side treasury functions, with the development of pre and post-trade analysis to determine the best use of assets. Buy-side firms, which are less heavily regulated and internally divided into silos, can take a far nimbler, dynamic approach. This means providers must offer a wider range of capabilities, including peer-to-peer arrangements, and counterparty management will become a key differentiator. Technology and digitalisation will play an increasingly key role in services. Smaller firms rely heavily on automation to contain costs and sophisticated data analytics tools to react quickly to alpha-generating opportunities. In addition, the trend for ESG investment means a technological solution is required to allow asset owners to apply the same exclusionary criteria to collateral. Firms may opt to build in-house, select best-of-breed solutions or fully outsource to a holistic, front-to-back provider; smaller firms are demonstrably more likely to opt for the latter.

Market Quality and Short-Selling Ban during the COVID-19 Pandemic: A High-Frequency Data Approach

The recent emergence of COVID-19 and the subsequent short-selling restriction (SSR) imposed on some equity markets provide us with a unique framework to analyze the effects of this kind of measure on market quality in the context of increasingly automated equity markets. We contribute to the literature by analyzing the microstructure and quality parameters of the Spanish equity market during COVID-19 and SSR. We study four subperiods, namely pre-crisis, turmoil, SSR, and first de-escalation periods, by means of a tick-by-tick dataset and the complete limit order book (LOB). We observe the following impact of the SSR on the constituents of IBEX 35: (1) the SSR did comply partially with its aim at an intraday level regarding volatility, but liquidity was reduced; (2) liquidity deterioration affected more the sell than the buy side of the LOB; (3) high-frequency activity (HFT) diminished during SSR, reinforcing volatility; (4) negative effects on liquidity and HFT diminished and disappeared as the ban was lifted; (5) HFT unidirectionally Granger causes 1 min realized volatility while the natural logarithm of the slope of the LOB bidirectionally Granger causes 1 min realized volatility.

Inside the black box of institutional investors in an emerging market: the role of sell side analyst outputs

PurposeIn the backdrop of emerging market setting of India, this study aims to attempt to identify how Institutional investors use sell side analyst outputs for their decision-making processes in light of inherent biases in their forecasts and recommendations. The study also conceptualizes the role of internal buy side teams in the process and try to figure out the key attributes and services provided by sell side analysts, which provide maximum value to the investors.Design/methodology/approachThe study is centered upon in-depth semi-structured interviews of ten institutional investors from top Indian asset management companies covering a wide range of topics tied back to theoretical explanations. The data collected was transcribed, coded and analyzed using content analysis to ensure a systematic synthesis of point of view.FindingsThe findings show that internal analyst teams of institutional investors play a dominant role in terms of validation of sell side analysts’ outputs (given the inherent biases in sell side analyst forecasts). Further, the engagement of sell side analysts by the investors are determined not only through profitable recommendations but also on the basis of soundness of the investment rationale along with other services provided. Finally, this study puts into perspective, the critical role of analyst industry knowledge and access to company management (as opposed to analyst pedigree and forecast accuracy) for institutional investors decision-making.Practical implicationsThe findings of the paper have profound implications for various stakeholders such as companies, sell side analysts, policy makers, researchers and students of finance in terms of detailed understanding of investment processes of institutional investors in the context of emerging markets like India, which have a different legal and regulatory set-up compared to developed markets. The authors also provide a critical perspective through an intriguing paradox that exists between finance theory and its relevance for actual practitioners.Originality/valueTo the best of the authors’ knowledge, this is the first study in India which look inside the “black box” of institutional investors and their decision-making process, especially with respect to how they use sell side outputs.

Buy together, but recycle alone: sentiment-driven herding behavior in oceanic dry bulk shipping

PurposeThe authors employ the vessels that comprise the dry bulk segment of the maritime industry and examine how market sentiment affects the herding behavior of shipping investors in a real asset market.Design/methodology/approachThe authors employ a threshold regression model to examine how changes in market sentiment can affect herding behavior in oceanic dry bulk shipping.FindingsThe results show that the behavioral aspect of investing, measured through intentional and unintentional herding, contrary to the results for financial markets, is affected by sentiment on the buy side (newbuildings) but not on the sell side (scrapping). Furthermore, the authors provide evidence that when market sentiment is negative, investors tend to follow market leaders (intentional herding), while, when sentiment is positive, unintentional herding leads to common investment practices among shipping investors.Originality/valueThe results have significant implications both for academics and for practitioners since they reflect a clear distinction of the pattern of investment decisions for real assets, compared to financial assets.

Do algorithm traders mitigate insider trading profits?: Evidence from the Thai stock market.

This paper asks whether algorithm traders (AT) mitigate insider trading profits in the Thai stock market over the period of 2010–2016. We find that in general it does but not in the case of buy side, big trades nor the executive trades. Our findings suggest that, to some extent, AT can take important role to increase an efficiency in stock market by processing the public information and incorporating it into price at ultra-fast speed. Additional robustness checks based on the instrumental variable approach confirm our findings.

Investor feedback: impact on analyst biases and investor critical evaluation

AbstractFinancial analysts (‘sell side’) face incentives that result in biased information for investors (‘buy side’). We examine whether a feedback channel from investors to financial analysts (comparable to the broker vote system) reduces these biases and thereby enhances information efficiency. In a controlled experiment with a monetary payment structure, 344 graduate students assume roles as analysts or investors, with the analysts making earnings recommendations for the investors in the presence of biased incentives. Under the treatment condition, the investors provide feedback to the analysts. Consistent with the monetary incentives built into the broker vote system and psychological theories, the presence of this feedback: (i) reduces bias among analysts; and (ii) enhances investors’ critical evaluation of information. Given the informational benefits of investor feedback, we highlight an unintended consequence of the European Union’s decision to abolish indirect payments to analysts from 2018 onwards.

Buy Together, but Recycle Alone: Sentiment-Driven Herding Behavior in Oceanic Dry Bulk Shipping

We employ the vessels that comprise the dry bulk segment of the maritime industry and examine how market sentiment affects the herding behavior of shipping investors in a real asset market. Our results show that the behavioral aspect of investing, measured through intentional and unintentional herding, contrary to the results for financial markets, is affected by sentiment on the buy side (newbuildings) but not on the sell side (scrapping). Furthermore, we provide evidence that when market sentiment is negative, investors tend to follow market leaders (intentional herding), while, when sentiment is positive, unintentional herding leads to common investment practices among shipping investors. Our results have significant implications both for academics and for practitioners since they reflect a clear distinction of the pattern of investment decisions for real assets, compared to financial assets.

Did Wirecard ever matter? Reflections on the structure of the German e-commerce payment service provider market

The scandal-ridden collapse of Wirecard AG in June 2020 raises three important issues regarding the German e-commerce payment service provider (PSP) market. First, what do we know about the structure of the PSP market and, more specifically, its concentration when Wirecard was still ‘in the game’? Secondly, in the light of the evidence on market concentration, was the disruptive fallout following Wirecard’s demise based on realistic concerns? Finally, would linking company reporting to market data have allowed for a more precise gauging of Wirecard’s market relevance ex ante? To explore these questions, this paper draws on a data-driven market survey, expert interviews and confirmational reverse data engineering. The paper concludes that market power on the supply side of the market is not only limited but also sufficiently counterbalanced by market concentration on the buy side — among other factors. Simply put: Wirecard was not a systemically important PSP; indeed, it was not even a major one. The insights provided by this paper should invite further forensic analysis to better understand why many market observers got it wrong.

FIIs herding in energy sector of Indian stock market

PurposeThis paper investigates herding behavior and its persistence among foreign institutional investors (FIIs) in the individual stocks of the energy sector of Indian stock exchange by focusing on post turmoil period. The study also examines the relation of herding with the individual return, market return, trading volume and conditional volatility of individual and market return.Design/methodology/approachThe presence of herding is investigated by Lakonishok et al. (1992) model, value-based and count-based herd ratio measure among FIIs in individual stock of energy sector post turmoil period. Further, run test was employed to check the persistency in herding and multivariate distributed lag to investigate the relationship with the market determinant.FindingsThe result indicates the existence of herding in most of the companies and strong persistence in all the companies. The intensity of buy side herding is higher than sell side. Herding and individual return both are significant driving forces of FIIs herding, while trading volume and market volatility in few companies exhibit inverse relationship.Research limitations/implicationsThis study is limited to investigation of energy sector stock.Social implicationsStock market is significantly influenced by FIIs and their propensity to herd may generate instability in the stock market. Therefore, regulatory authority should continuously monitor the flow of fund by FIIs.Originality/valueHerding in the individual stock of the energy sector was not previously performed.

Stock Recommendations from Stochastic Discounted Cash Flows

We present two stock recommendation systems based on stochastic characterization of firm present value that extends the conventional discounted cash flow analysis. The single-stock quantile recommendation system compares the market price of a company's stocks with the estimated distribution of the company's fair value to obtain an individual measure of mispricing, while the cross-sectional quantile system builds a relative measure of mispricing using the fair-value distribution of all firms. Both systems use mispricing information to build sell side and buy side portfolios. Statistical tests show that these portfolios consistently deliver significant excess returns even when rebalancing costs are accounted for. Moreover, we show how analysts' indications can be improved by using the first two moments of their recommendations following the same procedure of the cross-sectional quantile system.

Solving the legacy technology conundrum: Successful strategies for back-office transformation

The challenges of post-trade cost have persisted for over a decade, as the aftermath of the 2008 crisis led to a fundamental restructuring of the capital markets industry. This restructuring impacted all of the post-trade value chain, with banks looking to reduce in-house TCO (total cost of operations), custodians pressured to reduce margins and emerging vendors looking to deliver innovation in response. But the cost journey that banks have taken still leaves many with a back-office infrastructure that limits innovation — be that through time to market for product enhancement or the limited ability to leverage emerging technology — effectively leaving them between a rock and a hard place. Overlaying the additional cost of regulations onto this infrastructure has meant that for most, success has only been running to stand still — offsetting this incremental cost through traditional cost levers such as delayering or offshoring. Against this backdrop of industry restructuring, however, the costs of production continue to be significant across the back office. Out of an estimated end-toend cost base of US$700bn, the capital markets industry spent over US$130bn on asset servicing alone (in areas such as settlement, clearing, reconciliation, corporate actions) in 2017,1 which appears unsustainable against a macro backdrop of ongoing cost pressure. This pressure is not just focused on the corporate and investment banks (CIBs) — whose cost challenges are well publicised as a segment — but all through the value chain as the buy side also comes under increasing pressure on margins. So although running to stand still may have been a focus in the past, it will not be enough to futureproof business models into the next decade. To survive in the future, capital markets organisations will have to ultimately address this cost of inefficiency and, having largely exhausted traditional cost levers, can only succeed through technology-led transformation. This paper will explore strategies for successful technology transformation across the back-office environment and how organisations should respond to the challenge.

Institutional Industry Herding in China

This paper examines the effect of institutional herding on future stock returns in China A-share market at both the market and industry level from 2003 to 2012. Using a unique institutional holding database, we test the herding effect at different time horizons. The results suggest that institutional herding has a significantly positive effect on future excess returns for A shares in the short, medium and long periods of time. In China A-share market, institutional herding is more significant on buy side than sell side due to short sell restrictions. At the industry level, manufacturing and construction sectors experience institutional herding effect at all time horizon. Financial industry is found to present significant institutional herding effect only in the long term. The institutional herding has a positive and significant impact on the medium-term and long-term excess stock returns in the rest of ten sectors.

Trading Transparency: At What Speed and Cost?

This paper summarizes the discussions that took place at a recent one-day listening conference on this and related questions hosted by Columbia Business School's Program for Financial Studies and sponsored by a grant from Norges Bank Investment Management under the Norwegian Finance Initiative (NFI). It was held on June 14, 2018 in New York. The conference was structured as a series of panels that were moderated by academics and comprised regulators, researchers and market participants from the buy side and sell side. There were separate panels on the fixed income markets, equity markets, public versus private markets, technology and innovation, clearing and settlement, and regulation, and the discussions took place under Chatham House rules.

Option Implied Stock Buy-Side and Sell-Side Market Depths

This paper investigates option valuation when the underlying market suffers from illiquidity of price impact. Using option data, I infer trading activities and price impacts on the buy side and the sell side in the stock market from option prices across maturities. The finding displays that the stock market is active when the stock prices plummet, but becomes silent after the market crashes. In addition, the difference of option implied price impacts between the buy side and the sell side, which indicates asymmetric liquidity, increases with the time to maturity, especially on the day of the market crisis. Moreover, investors have different perspectives on the future liquidity after liquidity shocks when they are in a bull market or in a bear market according to the option implied price impact (or market depth) curves. I also calibrate three market indices simultaneously and reach the same conclusion that the three markets become erratic on the event date and calm down in the aftermath.

INSIDER DEMAND AND INDUSTRY TRENDS

AbstractWe investigate the time‐series patterns in industry return predictability conditioned on insider demand from 1996 to 2016. Current insider demand within an industry is positively associated with higher future industry returns. This relation is primarily driven by the buy side of insider trades and is more pronounced during periods of economic recession and high market volatility where uncertainty and information asymmetry are relatively high. Our results are consistent with the notion that corporate insiders have an informational advantage that can be used as an indicator for industry portfolio selection.

The impact of endogenous and exogenous cash inflows in experimental asset markets

Previous studies report a robust positive relationship between cash endowments and asset prices in experimental asset markets. Higher cash endowments generally increase the proportion of riskless versus risky wealth at the individual and aggregate level as well as the capacity of market participants to seize investment opportunities, i.e., their transactional liquidity. In this study, we vary the size and composition of riskless endowments in order to analyze the impact of different types of “cash” on trading behavior in experimental asset markets with randomly fluctuating fundamental values. In all treatments except the baseline, we allow subjects to control the liquidity of their cash endowment endogenously by providing some proportion of their riskless endowment in a physical store of value, which can be converted into experimental currency for trading. We observe that most subjects retain a large proportion of their wealth in the physical store of value. Inconsistent with rational choice theory, average trading prices and trading volumes are lower when “cash” is provided in a convertible store of value rather than experimental currency. Surprisingly, the price effect manifests asymmetrically on the buy side but not the sell side. Moreover, we control for potential changes in risk appetite resulting from higher riskless endowments. Our results suggest that transactional liquidity not a risky demand shift drives the relationship between cash endowments and asset prices.

Earning the “Write to Speak”: Sell‐Side Analysts and Their Struggle to Be Heard

ABSTRACTThis paper explores the ways in which sell‐side (SS) financial analysts seek to position themselves advantageously within the wider field of investment advice in spite of widespread skepticism over the value that their forecasts and recommendations add to investment decisions. The field of investment advice has been characterized in recent years by a number of regulatory and technological changes that have forced SS analysts to reconstitute the ways in which they influence the investment decisions of buy‐side (BS) actors. Faced with existential threats, SS analysts have responded to the disruptive impact of technology and regulation by struggling hard to ensure that their services are still valued by fund managers. Key to this ongoing process is the recalibration of professional expertise, which previous research has alluded to but not explored in detail. Central to the persistence of SS analysts in processes of investment decision making are activities revolving around the production and use of analyst reports which, our findings indicate, are less valuable for their informational content than their role as “relational devices,” ascribing legitimacy to SS analysts and earning them an entry ticket to more substantive, value‐adding interactions with companies and BS actors. We also show that economic considerations in the area of investment advice are influenced by social ties, the motivations of various actors in the field, and their relative position vis‐à‐vis other actors. More generally, we contribute to the literature on professional projects by showing how professional groups are constantly engaged in attempts to reposition themselves in the social space, but that field‐level changes can restrict the outcomes of these strategies to mitigation rather than advancement for the professionals concerned.

Regulations and Brain Drain: Evidence from Wall Street Star Analysts’ Career Choices

The Global Settlement, along with related regulations in the early 2000s, prohibits the use of investment banking revenue to fund equity research and compensate equity analysts. We find that all-star analysts from investment banks are more likely to exit the profession or move to the buy side after the regulations. The departed star analysts’ earnings revisions and stock recommendations are more informative than those of the remaining analysts who followed the same companies. To the extent that star analysts are superior to their nonstar counterparts in terms of research ability and ability to inform the market, the exit of star analysts represents a brain drain in the sell-side equity research industry. These results are consistent with the view that the regulations introduced to protect equity investors have unintended adverse effects on the investors due to a brain drain in investment banks. This paper was accepted by Suraj Srinivasan, accounting.