I blew this piece and I wanted to abuse my rewrite privilege to go back and set the record straight, as the conspirators among you totally misinterpreted both the facts and the motivation behind this dispatch. I am going to rewrite it with an eye toward explaining the way the institutional business works. As someone who runs $270 million, I am considered an institutional account at Morgan Stanley Dean Witter and other brokerage firms around the Street.
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Here's another place where the do-it-yourselfers with their faceless anonymity can beat the trading daylights out of me. A half-hour ago, my excellent
broker came out and said that the company was reiterating its buy on
. I think Broadcom is a terrific company, but an expensive stock. Still I felt that it would work if I took 10,000.
(Morgan Stanley routinely does a midday research call where analysts can come on its public address system and emphasize or re-emphasize buys and make helpful suggestions about what to do. Understand that these firms are trying to generate commissions and use research analysts as catalysts to taking action. That's what the whole upgrade/downgrade thing is about -- taking action, soliciting transactions. That's how these places make their money. There is nothing sinister, or insidery, or even special about it. In fact, often you hear about it on CNBC from Maria Bartiromo at the same time I get it. My broker simply relayed the call to me as part of his course of business. Unlike what some of you charged, he did not call me before the call was made. He did not give me an early call. Whether he called me before he called others, I have no idea. But what he did, make a call after a research analyst had spoken, is what the institutional business is about. If you think that's wrong, I can't help you. I can't speak for my Morgan Stanley broker, but when I worked at Goldman Sachs I would try to call as many of my clients as fast as I could so they wouldn't yell or scream at me that they heard it from somewhere else, whether it be the TV or the news wires. Did some people get the call earlier than others? Yes, because I couldn't get all my clients on some sort of conference call. I had to call them one at a time. Fact of life.)
That's the problem, of course. Let's say I go into Goldman Sachs and say I want to take 10,000 Broadcom at 121, where the stock was when I got the call.
(Oh man, people were furious about this one. Why didn't I go to Morgan Stanley, where the call was made? Perfectly logical question. The answer is that there were probably so many people going to their trading desk at once that I could not get a meaningful amount of stock in at a level that was desirous. If I rang their trading desk, they would tell me that they did not have any stock for sale but that they would try to work my order along with others. I could have done that, but it is almost always futile. I should have said that in the first go-round, but it is so ingrained in me that you can't get any stock from the firm making the call in those situations. Remember, this is a Nasdaq stock where Morgan Stanley is making a market in it, and has to find sellers to sate the buyers or has to short the stock to me if I want it badly enough. That's why I didn't give an order to Morgan Stanley.)
I say, "I would like to buy 10,000 shares of Broadcom." If it has Broadcom in inventory, then you are fine. But if it doesn't, it would have to short the stock to me. I don't know if it does or not, but odds say it doesn't have it. Goldman's not an OTC department store, you know.
(Hidden in this paragraph is another subtle point about the way our business works. Market makers are not in cahoots with each other -- at one time some were, but the Justice Department busted it up. Goldman doesn't know what Morgan is saying. That means you can "pick off" Goldman. This whole piece is not about how I could have gotten 2,500 shares of Broadcom at an average of 123 from Morgan Stanley. It is about how I chose NOT to beat up on Goldman by taking them knowing that, extremely short-term, this was going higher because Morgan Stanley had huge buyers of it. I knew that the analyst, Mark Edelstone, has a lot of clout. I knew he could move the stock. Goldman would know that I knew. Goldman, rich firm that it is, is as defenseless as a chicken with a fox loose in these situations. Again, I am certain that many of you simply can't believe that to be the case. If you beat Goldman up, so what. Me, I have to live here. These Goldman people helped teach me the business. They live in my neighborhood. They help make a judgment about my character and good name. I don't want to be known as a "pick-off artist." That means you are a scummer in my book.)
So it sells me the 10,000 shares. Ten minutes later, the stock is up 4. I would have made $40,000. But unless Goldman were totally nimble and recovered the stock immediately, its trading desk would have lost $40,000 as it was short the stock to me.
(A "bad guy" could have done this without a problem.)
Now Goldman calls me. "Did you know anything? 'Cause I am hurting."
(Some of the savvier among you argued that if you told Goldman that Morgan had positive comments while you asked him for stock that you would be "okay." Sure, but they would still lose money. I don't like the zero-sum aspects of this game sometimes. I am not a softie. But I don't like beating up on market makers.)
Remember this is a guy I trained with and have become friends with over the past 18 years. I can't lie. And if I say, "Yes, Morgan Stanley was bulling it right before I bought the stock," I am a total jerk in his eyes. So, I didn't do it.
(Some of you emailed me about this and said, hey, you sanctimonious jerk, you are lucky to even get that call. They didn't get that call. Look, I don't control the system. We run a firm that we have built and have developed a good reputation and we don't want it spoiled. If I were an individual who bought 100 shares of a stock once from Morgan Stanley, maybe I shouldn't be entitled to the early Broadcom call. Let's walk through this. Someone has to pay the hefty bills of the research department. Most of the bill-paying at Morgan is done by institutions like mine. It is fair that we get the call. Should Morgan put it up simultaneously on its Web site? That's none of my business.)
And the 40 Gs left on the table?
In my book, it was never there for the asking. Not unless I wanted to put a dollar sign on my reputation. That's not for sale.
(I'll tell you a story. About a decade ago when I traded with my wife, we took a vacation and left an employee in charge of the desk. That employee in an identical situation to this one, involving Lotus, took stock away from an impact research call while the stock was running. The firm he took it from got beaten pretty good. My wife demanded that we fire the guy when she heard about this etiquette violation from the firm that got crushed on the Lotus take. Fortunately, he quit before we could do it. I never forgot the rage in my wife's voice when she heard about what happened. We had just started out in the business and she was so afraid that we would get a reputation as bad guys. The offended firm was thrilled when the employee left, and I am certain would have never forgiven us otherwise. That's just the way the Street works. And I am glad it does.)
James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long Goldman Sachs. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at