Technical analysts see bumpy ride ahead on new regulations

While a Sebi note on the new research analyst regulations addresses a number of stakeholders, one set of analysts could see a bumpy ride initially

While a regulator’s note on the new research analyst regulations addresses a number of stakeholders, one set of analysts could see a bumpy ride initially.

Technical analysts, who earlier had one-page recommendation notes issued multiple times a day, will now have to come out with a full-fledged report each time they respond to the market on an intra-day basis. The regulator clarified on Tuesday that the research analyst norms will also apply to technical analysts, though their recommendations are not based on a fundamental research.

Recommendations by technical analysts are often contradictory to the views given by fundamental analysts, since the former examine price and volume information to make recommendations; while the latter depend on changes in the company’s fundamentals. Senior officials in the industry said the variance with the fundamental research analysts was the main reason for the confusion.

“Unlike fundamental analysts, whose view on a stock is more long-term, these are short-term recommendations and change during the day. The regulations have clarified the issue and now we are working on streamlining our disclosure process,” said Vimala Jose, head of compliance of Geojit BNP Paribas Financial Services. The firm is expected to complete its registration process before the end of this month.

According to industry officials, technical reports, which were often nothing more than an e-mail recommendation, would now become full-fledged research reports running into pages with required disclosures.

“The industry will eventually manage to create a template but till then there will be some pain. The process of disclosure is now more complicated and could push up costs as well,” said the head of compliance of a domestic brokerage firm.

By sector estimates, the cost of compliance could go up by as much as five-10 per cent for brokerage firms.

Domestic firms in particular could be hit more than their foreign counterparts.

This would apply to those who provide technical analysis, as well as fundamental research.

For larger firms with clients in the US and the UK, the disclosure requirements are already in-line with those required abroad, making the transition to the new regulations relatively easier for them compared to smaller brokerages, according to sector officials.

Industry officials said regulations issued by Sebi earlier in the year were not very clear on whether technical analysts qualified for registration. Multiple analysts that this reporter tried to reach out to refused to respond to queries as per the company mandate to keep media interactions at bay until the completion of the registration process.

Firms have been given time till May 31 next year to comply with the new norms. In the meanwhile brokerages continue to issue reports to clients but for many interactions with the media is still out of the question.