The Selective Access Edge for Institutional Investors
Before we dive into today’s post, a quick update on the Bloggers for Charity drive. The Cynical Investor kicked off the bidding process with a $88.88 bid. Dale Rathgeber quickly topped the initial bid with an offer of $200. Do I hear $250?
A recent study provided some insight into yet another way the deck is stacked against small investors: selective access to management. The study’s authors analyzed data on conferences organized by brokerage firms to which select institutional clients were invited. These conferences feature a series of presentations by company management. The presentations themselves are often made public but the conferences also feature breakout sessions or one-on-one meetings with management. The discussions that occur behind closed doors are not made public. The researchers wondered if institutional investors are (a) making trades based on information gleaned from private access to management and (b) whether these trades were profitable. They determined that trade sizes increased significantly during the periods when selective access was provided to investors and also that these trades offered significant potential gains to investors.
The authors figure that selective access provides significant advantages to investors because (1) managers may intentionally disclose material information in violation of Reg FD — a SEC rule that mandates that all material information must be disclosed to all investors at the same time (2) allow investors to glean information that while not material on its own results in profitable trades and (3) gather valuable non-verbal cues in less formal settings.