There’s so much potential for conflicts of interest when investment banks give out these recommendations. For example, what if they already own the stock, then tell the public to buy it or say the price should be higher? Just yesterday, Bank of America raised its price target for NVDA, and the stock jumped over 4%. NVDA is the second-largest company in the world by market cap! How is this allowed when investment banks have such influence? Isn’t this just market manipulation waiting to happen?
In theory, the different departments within the bank are supposed to be kept separate, so equity research and investment banking shouldn’t be communicating. But does this always work in practice? I’m not sure, but there are fines when people get caught.
@Noel
Yep, this is the simple answer. The compliance officers are supposed to make sure that ‘walls’ between departments are in place, and most of the time, they are. Also, the people who are responsible for monitoring trades within the company are supposed to watch for this sort of behavior.
@Vic
Right, and when they screw up, they probably get a fat severance package and retire quietly. It’s just the cost of doing business for the big guys.
Skyler said:
@Vic
Right, and when they screw up, they probably get a fat severance package and retire quietly. It’s just the cost of doing business for the big guys.
Can you give an actual example of this happening? Saying ‘probably’ and ‘guessing’ doesn’t really prove anything.
@Vega
Here’s something that kind of lines up: Wall Street Investment Bank Hit With $16 Million Fine in SEC Messaging Probe | Finance Magnates. It talks about fines related to using unapproved communication methods.
But sure, it doesn’t lay out exactly what was said, so I guess we’re left to infer how they might’ve bypassed compliance.
@Skyler
I read both of those articles. The fines were for unapproved messaging, but nothing specifically linked to what we’re discussing, like insider trading or price manipulation. So, yeah, compliance gets broken, but it’s not the same as saying there’s rampant insider trading.
@Vega
True, my comment was just me speculating. There’s a lot that goes on behind the scenes that never gets documented. But you’re right; there’s no solid proof of what I initially implied.
Skyler said:
@Vic
Right, and when they screw up, they probably get a fat severance package and retire quietly. It’s just the cost of doing business for the big guys.
These ‘speculative’ comments don’t really contribute much. It’s just more guessing and not really offering anything solid to the conversation.
@Noel
Just to add, yes, it does happen. I work in compliance, and the bigger institutions do take this seriously.
@Noel
I used to work in the industry, and the ‘wall’ between departments is very real. I remember we had a ton of restrictions, like where we could go in the building and who we could talk to. There were even rules around dating and relationships between employees.
The ol’ Chinese wall… or maybe it’s more like a Chinese curtain these days?
Pretty much every professional service has conflicts of interest. Investment banking is no different, and while there are firewalls in place, there will always be bad actors who try to abuse the system.
I don’t buy the idea that NVDA went up just because BoA raised their price target. Stocks don’t move that much from one report.
That doesn’t really answer my question, though.
Should it be illegal for someone to recommend a stock they own? Isn’t it just a matter of whether or not it’s considered market manipulation?
Isn’t it manipulation if you own a stock and then tell people to buy it, hoping the price goes up because of your recommendation?
Should that kind of speech be illegal, though? Wouldn’t there be freedom of speech issues at play?
But there’s a big difference between a random person saying they bought a stock and one of the largest banks in the world doing it, right?
Do you really think Bank of America analysts just wake up one day and decide to raise price targets? They have some of the best research on the street, and when they speak, the market listens.