Brokerage research

Published July 30, 2015
There should also be limits on what a brokerage can say about stocks that it holds in large quantities. —Reuters/File
There should also be limits on what a brokerage can say about stocks that it holds in large quantities. —Reuters/File

IT has long been necessary to provide some oversight, and guidelines, to the in-house research floated by brokerages about the economy and the stock market.

All over the world these in-house research efforts are recognised to be suffering from serious conflicts of interest, and are thereby the subject of very stringent regulatory oversight.

Here in Pakistan, the brokerage houses operate in-house research departments that function largely without any serious oversight, and provide analysis that is designed more to serve marketing needs than providing any serious economic insights.

Know more: SECP issues research analyst regulations

Many lay investors place a great deal of trust in these reports, which often contain buy calls and advice to hold certain specified stocks.

The role that these research reports play in goading small investors to make investment decisions is very large, and as such it is important that the enterprise of creating and disseminating these reports be regulated to ensure that it does not end up resembling some elaborate marketing ruse.

Research designed to mislead the lay investor into placing their money in stocks that management is preparing to offload, for instance, must be identified and laws must exist and be implemented to ensure that those engaging in such unethical practices can be penalised.

Producing unethical research is tantamount to misleading advertising. This is why it is a good thing that the Securities and Exchange Commission of Pakistan (SECP) is gearing up to tighten regulation of in-house research.

The task will not be an easy one. Many brokerages use their in-house research efforts as marketing support, with analysts fed the company line appearing on TV shows to talk a particular stock up or down.

Not all the research is necessarily tainted, but greater guarantees of the independence under which it is produced are required. Just like the HEC lays down guidelines for universities, the SECP should also start by first emphasising the educational credentials required to work in an in-house brokerage research department, and demand appropriate procedures in place to ensure autonomy for the researchers.

There should also be limits on what a brokerage can say about stocks that it holds in large quantities. At the end of the day, this practice of misleading in-house research will be difficult to restrain.

The lay investor should be educated about the risks of relying too heavily on these documents, and should know the many conflicts of interest that lie behind them.

Published in Dawn, July 30th, 2015

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