It was 1997, or maybe 1998, when I first heard of the Art Collector. I was working as a research analyst at a large New York investment bank. The broker at our firm whose responsibility was serving the Art Collector told a gathering of the bank’s research analysts that the Art Collector’s hedge fund was now one of the top payers of brokerage commissions to the bank. He may have said the top payer. It was an awakening: a hedge fund, five or six years old at the time, could now pay as much—or more—in commissions than the mutual fund giants that had always been our most important clients. The math, however, was straightforward. The mutual funds had a lot more money. The Art Collector traded many more times.
Even if I had heard of the Art Collector’s hedge fund before then, I still would have been surprised by the salesman’s purpose that day. The Art Collector’s firm, we were told, would happily continue to generate huge revenue for the bank. It was asking for only one thing in return. It was not for us to do better research on companies or their stocks, or to do the research more quickly, or in greater quantities. That would be too literal. Or figurative. The Art Collector wanted something more abstract: not better information, just early information. When we interpreted an event in the life of a company, we distributed a note to all of the bank’s clients. We also called the more important ones to provide context difficult to fire as bullet points. We had to call one client first. Why shouldn’t it be the one that paid us the most?
It was a startling request. The Art Collector wasn’t that interested in what we thought about companies or industries, competitive advantages or long-term growth. No, the Art Collector’s trading strategy was based on the thesis that one could make money trading stocks by anticipating whether Wall Street’s equity research analysts, collectively, were going to increase or decrease their estimates of how much a company was going to make the next quarter. The Art Collector didn’t invent the estimate revisions strategy. But the Art Collector had figured out that even if one worked tirelessly to discover the patterns of analysts’ opinions (or of the companies themselves), one still had no fundamental edge over other smart traders doing the same thing. What one could do—brazenly, unprecedentedly—was to pay the banks as much—more—than than any other client to get information first. This would potentially allow the Art Collector’s traders to hear some nuance from the analysts or the broker that would move a stock a sixteenth or two when the information was better propagated. This was not a restaurant’s biggest customer demanding a better table. This was a restaurant’s biggest customer demanding that other patrons get worse food.
I still can’t understand why the quid pro quo did not generate more outrage. (I never implemented it, nor was I asked to. I was young, without influence, and soon would leave the firm.) Equity research departments were not as regulated as they later would be. There was no clear understanding that research analysts’ opinions were public information—something that needed to be told to the entire public simultaneously. After all, research analysts did not have access to inside information (except, alas, when they did). They were just citizens with private opinions on stocks. If my dentist wanted to tell his barber to buy more shares of McDonald’s because he really liked Quarter Pounders, that was his private opinion too.
Over the next fifteen years or so, as hedge funds became larger and more tentacular and more important, Wall Street would learn hard the differences between hedge fund managers like the Art Collector who took 20 percent of the profits and the old-school mutual fund managers who worked for 0.75 percent fixed fees. It would get used to the spectacular velocity of trading like his, which has nothing to do with corporate capital formation or capital allocation or all the reasons we claim we believe in the market. But at the time, in the Art Collector’s strategy, we saw something slightly unseemly rather than illegal, blackjack instead of chess. Maybe that is because it was as interesting as it was new. The Art Collector was trying to corner the market on an edge.
The Art Collector, Steven Cohen, is in the news a lot lately. Prosecutors have accused seven former employees of his firm, SAC Capital, of insider trading. Three have pled guilty. Six others have been accused of insider trading while at other firms. The Times reports that more subpoenas are out. For a lot of people, this is all quite fun. Wall Street’s schadenfreude is as limitless as its greed.
by Gary Sernovitz, N+1 | Read more:
“Stranger Being Eaten by Hirst’s Shark” Copyright (c) 2008 by Anthony Easton
