Wall Street insiders are similar to casino owners in that neither are really in the gambling business. Rather, they are the “house,” making rules for the suckers who either don’t understand they’re playing a rigged game or are just hoping to be one of the lucky few allowed to win.
Each house traditionally has had inherent advantages it can utilize to maintain its edge. Casinos ply gamblers with free drinks and reserve the right to eject blackjack players who are “cheating” (that is, trying to even up the stacked odds) by counting cards.
Wall Street bigwigs, meanwhile, are always first in line for large share allotments of hot public offerings at favorable prices. But most important, investment analysts and preferred investors have long benefited from an exclusive pipeline of information running directly from public companies.
This investor’s version of a virtual private network has given the Street Elite an early heads-up regarding important information about a firm’s financial performance or other material events. In other words, days or even weeks before the public finds out that one company will miss its earnings projections, for example, or another company’s largest customer plans to cancel a multimillion-dollar deal, the major investment analysts and their clients already have heard (and, no doubt, acted upon) the news.
That’s all supposed to end starting Monday, when a new rule by the Securities and Exchange Commission goes into effect. Regulation FD (Fair Disclosure) prohibits companies from selectively releasing information to analysts and large investors. Instead, such information must be made public all at once.
Of course, the Street hates it when meddling do-gooders try to create a level playing field, so we continue to hear self-serving warnings that the new SEC rule will cause even more market volatility than we’ve seen in recent weeks.
The condescending argument is that releasing material announcements directly to the public will trigger either panic selling or feeding frenzies because average investors, to quote Jack Nicholson in “A Few Good Men,” simply “can’t handle the truth” – unless it’s filtered and spoon-fed to them by Wall Street’s wizards.
Which, to be honest, probably is accurate in many cases. There is no shortage of investors who over-react or blindly follow the herd. So what? They still should have equal, timely access to information that could affect their investments.
Some Wall Street analysts say many companies, rather than issuing monthly financial updates to the public as they’ve routinely done for the tight-knit analyst community, will merely withhold information until their quarterly reports come out. So be it; at least everybody will be equally in the dark.
I think the real fear in the Wall Street investment community – besides having to give up the “house’s” edge – is that analysts will lose their considerable clout as market opinion-shapers. No longer will they be able to slip early information to favored clients. Nor will they have the opportunity to subtly recalibrate forecasts when it becomes clear that their initial predictions were way off.
And perhaps worst of all, it could mean less time on CNBC.