Thread by @therorymurray

I'm gonna let you in on a little secret that few still understand fully:

The 'analysis' that Wall Street produces used to be a revenue generator, but now it's a cost center. That means it's treated as a loss leader and categorized as marketing. It's not meant to be correct.

Back in the day, the bulge brackets would hire hundreds of new analysts every year. Those analysts would primarily fetch coffee and lunch for a few years, but they had a real career path. Stick around and they could run a desk or a research operation, and make millions.

On the other side were lots of small operations. Most hedge funds and asset managers were small teams, and couldn't afford to send a team out to Taiwan to do things like supply checks. So the banks had their analyst army handle it, and that brought in business.

Funds would pay for this business with trading commissions and prime brokerage. When spreads were a nickel and the pits were full of specialist insiders, the banks could make a TON of money on both commissions but ALSO prop trading because they had all the info on flow.

Post-GFC, Dodd-Frank regulatory reform essentially made prop trading illegal, so it (mostly, kinda) stopped.

Then, the proliferation and development of electronic trading drove spreads to zero or sometimes worse.

So banks weren't making the money back on high quality research.

This lead to a massive degradation of research quality. Meanwhile hedge funds got bigger and bigger as pension funds and endowments started to allocate. When you're sitting on $10bn AUM instead of $50m, you're making $200m on 2% mgmt fee before you even WALK IN THE DOOR on Jan 1.

So the hedge funds and asset managers, responding to lower quality and higher budgets started bringing all the quality analysts in house, paying the street less and less.

As you can imagine, Wall Street responded.

I mean, in some ways it's a tale as old as time. Research has never truly been independent, but the last 10 years it's completely eroded. So now it's the exact same story but to a smaller, private audience as we see with media. Narrative and clicks.

So as you read these horrible, erroneous takes from legacy economists past their prime, just remember that their job is not research. It's marketing. And while at one point it may have been both, now it's firmly the latter.

Fin.