Conviction notes; practical details a problem?

It was a new one on me I have to admit. In discussion with an interesting group this week, we chatted about ‘conviction notes’ from sell side analysts, and whether / how the prop desks of the investment banks issuing them can support the note without crossing the Chinese wall.

Going back one step. By definition, a conviction buy or sell note from an analyst means that that bank’s proprietary trading desk is backing that analysis by buying or selling that stock. The bank is committing its own money, giving the note a more than usual forceful impact on the share price.

For the analyst to give his note a “conviction tag”, he has to know that the prop desk will be supporting the note by trading in line with its recommendation, which surely means that the analyst and the bank’s traders need to discuss the analysis ahead of publication?

And of course, the conviction note itself can have a significant effect on the market, given how much money is invested. And the returns from trading (at least) immediately after the note is much greater, so it must be tempting.

Hopefully, compliance departments are policing any connections between those on the prop desk who agreed the conviction tag with the analyst ahead of publication.

Surely this is not a return to the bad old days? And of course completely unconnected to discussions about trading huddles in the FT back in August.

As always, this highlights again the need for IR teams to follow trading patterns in their stock, and to be aware of those investment banks in the habit of issuing conviction notices, or membership of the highly influential investment banks’ preferred stock lists.