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Sunday, October 2, 2011

Anon Analytics-the new Wikileaks of Equity Research?

Sell Side equity research has been critiqued for its inherently conflicted business model, where issuer pays. Unlike credit rating agencies, there is no statutory mandate for equity research, nor is there a fair dealing provision for access to company. Therefore, any sell side analyst,even if objective, will think twice before giving a SELL rating/publishing bad news because that may cutoff access to the company, and 'disadvantage' him in relation to the other analysts. Whether more access to management is an advantage(better insight) or a demerit(familiarity bias) is a value judgement I leave to the reader. But despite the delinking of investment banking mandates to equity research compensation, the fact remains that 10years after the 2001 Spitzer settlement, things have not improved much. Research on herd mentality does state that crowds tend to go berserk, because each member of that crowd revels in anonymity, and thus allows the animal spirits/suppressed side to come out. Given that published equity reports are likely to err on the optimistic side, anything that encourages the negative side to be more extensively published/reported, is only a good thing. But don't short sellers anyway plant news articles, talk down the stock and 'manipulate prices'? What new can an anonymous equity research report accomplish? For one, the report mentioned here(http://anonanalytics.com/pdf/Chaoda.pdf) is 100% based on public information. They have creatively used a mosaic of reports, transcripts, primary research, public filings etc to weave together a damning indictment of that company. And in that sense, it is simillar to Wikileaks(in terms of audacity, novelty), but different in the sense that no confidential information is disclosed initially. Perhaps to prevent a Wikileaks type attack on their servers, they have warned that if their identities are ever compromised, they would release the (for now) non public information password on the internet, which would presumably raise even more furore. So why will this succeed? I'm sure that several equity research analysts have a conscience, which is hardly slaked by having to sugar coat reports to avoid seeing their bonus pools shrunk/relationships harmed. Given the facility to submit reports anonymously, with the editing/fact checking being done by that website, I can almost visualize a Wikipedia type crowdsourcing of work, culminating in a series of reports. Of course, it would be negatively biased, but we have enough positive stuff out there! Relying on 100% public(or verifiable) information may seem restrictive, but as websites like footnoted.org show, there is often gold hidden away in those filings which analysts miss due to information overload or just lack of interest/training. Hence, this scope should permit scalability(easier to verify/fact check reports) and make markets more efficient.

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