A recent court decision allowing an online financial newsletter to report analysts’ ratings changes on stocks may have a larger negative impact on independent boutique research firms than the big Wall St firms that originally brought the suit.
In Barclays Capital vs Theflyonthewall.com, decided earlier this week, a three-judge panel of the US Court of Appeals in New York reversed an earlier ruling that had required the online newsletter to wait until 10.00 am, 30 minutes after the New York markets open, before reporting on sell-side analysts’ ratings changes, and to wait two hours before reporting ratings changes that occur intraday.
The Appeals Court found that reporting a ratings change without distributing the underlying analyst report did not violate existing copyright laws.
‘It’s certainly clear that this is not a good thing for research providers,’ observed Michael Mayhew, CEO and founder of Integrity Research Associates, which advises institutional clients on the research industry.
But the decision may not hit all research firms the same. Mayhew said the ruling is ‘not that damaging to larger firms.’ Rather, the negative impact will be felt more by smaller independent research houses that distribute their proprietary research to a limited number of clients. When small firms issue a ratings change to a limited distribution, the market value is higher, he said. ‘The value of the rating goes away for boutique providers if a change is communicated more broadly.’
Mayhew believes the larger firms were upset with Theflyonthewall because broadcasting ratings changes ‘eliminates the reason for a call between the salesperson and the customer… Sales is always an important part of the research product, so if you eliminate a reason for the call you reduce the value of sales,’ he said.
Also, the actual rating is less important to institutional clients than the rationale behind the rating change, which is contained inside the research report and not distributed by Theflyonthewall, he added.
Three banks, Morgan Stanley, Merrill Lynch (now part of Bank of America) and Barclays, originally brought the suit against Theflyonthewall.
