If you’re thinking of a career in equity research, you may be interested to read this week’s SEC ruling on equity research huddles at Goldman Sachs.
The huddles have now stopped, after Goldman was fined $22m for failing to implement procedures transferring inside information to hedge funds, but the ruling is nonetheless replete with information on what a career in equity research is really like. This is what you need to know:
Huddles and asymmetric information
The huddles at Goldman stopped in 2011, but the SEC outlines what they were like until then.
It says the weekly huddles were, “a practice where Goldman’s equity research analysts provided their best trading ideas to firm traders and a select group of Goldman’s top clients.”
During the huddles, it adds that Goldman’s analysts met with traders and salespeople to discuss their, “high-conviction” short-term trading ideas and other “market color.”
The bank also had a program called the, ‘Asymmetric Service Initiative (“ASI”)’, in which analysts shared information and trading ideas from the huddles with select clients. All of this is now banned.
The SEC’s ruling refers specifically to Goldman’sUSequity research group.
In America, says the SEC, Goldman’s research group is divided into six subject matter sectors. Focusing on their sectors, its equity research analysts provide the banks’ clients with investment recommendations and analysis of public companies through research reports.
Equity researchers don’t just write reports
At Goldman Sachs, they also:
- publish an investment rating (buy/sell/neutral) for every stock they cover
- estimate the target price they expect each stock to reach in 6-12 months
- estimate the expected earnings per share for each stock they cover
- publish a ‘coverage view’ for the investment outlook relating to all the stocks in their sector
- publish a “Conviction List,” or “focused list of Goldman’s best trading ideas.
Working in equity research at Goldman isn’t about writing what you think
If you work in equity research at Goldman Sachs, you can’t simply decide that all the stocks you cover or great, or all are bad. On the whole, you must err on the positive side, but mostly you must be neutral.
Hence, the SEC says Goldman’sAmerica’s research group limits buys to 25-35% of its total recommendations and sells to 10-15% within each sector group.
If you work in equity research at Goldman, you won’t simply be evaluated on the accuracy of your predictions
The SEC says analysts at Goldman are also evaluated according to their ‘commercial impact.’
The bank runs a ‘scorecard’ which allocates points based upon: the accuracy and quality of research; evaluations of researchers from internal Goldman personnel, including sales persons and traders; feedback from Goldman clients through a ‘broker voting’ process. Researchers who provide clients with commercially useful, accurate research, will therefore be paid better than those who don’t.