The Components of Investment Bank
Research
Research analysts study stocks and bonds and make recommendations on whether to buy, sell, or hold those securities. Research analysts review companies and write reports on their prospectus often with buy or sell ratings. Stock analysts (known as equity analysts) typically focus on one industry and will cover up to 20 companies' stocks at any given time. Some research analysts work on the fixed income side and will cover a particular segment, such as high yield bonds or Govt. Treasury bonds. The research department on its own does not generate a lot of income. What it does is influence trading volume, which results in more fees for sales and trading. When a research analyst changes his or her recommendation on a stock, many investors will then act on that recommendation and the sales and trading team earns more in trading fees. Salespeople within the I-bank utilize research published by analysts to convince their clients to buy or sell securities through their firm. Corporate finance bankers rely on research analysts to be experts in the industry in which they are working. Reputable research analysts can generate substantial corporate finance business as well as substantial trading activity, and thus are an integral part of any investment bank.
There exists, however, a conflict of interest between research and other parts on the investment bank. If an investment bank were about to issue new shares of stock for a company, for example, the research analyst could put out a strong recommendation for the stock just prior to the offering, and the bank could get a better price and potentially earn more fees.
Likewise, if the proprietary trading division wanted to boost the return on their holdings, they could have research analysts recommend some of the stock they held as a buy. There are a number of areas where the research department could be used to mislead investors and earn more profit for the investment bank.
To circumvent these conflicts of interests, regulators have insisted that investment banks implement a “Chinese wall” in their firms. The Chinese wall keeps information about the investment bank’s corporate finance and sales and trading activities from passing through to the research department.
A Chinese wall also exists between the corporate finance and sales and trading divisions because many corporate finance activities involve non-public information that could be used to profitably execute trading strategies.
Research analysts study stocks and bonds and make recommendations on whether to buy, sell, or hold those securities. Research analysts review companies and write reports on their prospectus often with buy or sell ratings. Stock analysts (known as equity analysts) typically focus on one industry and will cover up to 20 companies' stocks at any given time. Some research analysts work on the fixed income side and will cover a particular segment, such as high yield bonds or Govt. Treasury bonds. The research department on its own does not generate a lot of income. What it does is influence trading volume, which results in more fees for sales and trading. When a research analyst changes his or her recommendation on a stock, many investors will then act on that recommendation and the sales and trading team earns more in trading fees. Salespeople within the I-bank utilize research published by analysts to convince their clients to buy or sell securities through their firm. Corporate finance bankers rely on research analysts to be experts in the industry in which they are working. Reputable research analysts can generate substantial corporate finance business as well as substantial trading activity, and thus are an integral part of any investment bank.
There exists, however, a conflict of interest between research and other parts on the investment bank. If an investment bank were about to issue new shares of stock for a company, for example, the research analyst could put out a strong recommendation for the stock just prior to the offering, and the bank could get a better price and potentially earn more fees.
Likewise, if the proprietary trading division wanted to boost the return on their holdings, they could have research analysts recommend some of the stock they held as a buy. There are a number of areas where the research department could be used to mislead investors and earn more profit for the investment bank.
To circumvent these conflicts of interests, regulators have insisted that investment banks implement a “Chinese wall” in their firms. The Chinese wall keeps information about the investment bank’s corporate finance and sales and trading activities from passing through to the research department.
A Chinese wall also exists between the corporate finance and sales and trading divisions because many corporate finance activities involve non-public information that could be used to profitably execute trading strategies.
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