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Saturday, 23 September 2017
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A Machiavellian Plot

There have been a lots of articles written about how broker research is not independent advice but is in fact corporate marketing on behalf of the company. Broker research presents as independent advice but because the company may be one of the broker's corporate clients or future corporate clients (they are hoping to get a deal one day) it is often tainted by corporate purpose (sucking up to the company). 

But you should also be aware that in the Mid-Cap space where the biggest issue for a fund manager is liquidity (getting in and out) the broker will also serve the purposes of the fund managers who are also their clients

For instance if you were a fund manager or fund manager analyst in a stock called XYZ, a Mid-Cap company with liquidity issues, you would be in close contact with the one or five broker analysts that cover the stock in detail. You might in fact have a very close relationship with those analysts. 

If you were to then try and sell that stock you would probably pick one of those brokers you thought you could trust and through the analyst tell them in confidence that you were looking to sell a large line of stock. 

That analyst would then go to his dealing desk and tell them. The dealing desk would then strategise on how to shift a large line of stock without smashing the market. 

Part of that strategy might well be to write a positive piece of research on a stock, find buyers, and slot the friendly fund manager's stock into those buyers. This is after all what a ‘broker’ does, facilitates the orderly movement of stock from one place to another. 

So when you look at research on a Mid-Cap stock that you are interested in, you really need to look at the top 20 holders and see whether anyone is selling or not. 

Then wonder whether the broker writing the positive research is involved in handling the selling and is writing the research to generate buying interest. Bottom line – broker research may not be serving the company (and the broker’s) interest alone, it may also be serving the institutional shareholder’s (and the broker’s) purposes as well and when it does the likelihood is that they will tell you to do exactly the opposite of what a large shareholder is trying to do.  

A plot so cunning you could put whiskers on it and call it a Fox.  

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