10.5. Whisper Numbers—Ruined by Success

All of the previous message tales were about anticipating volatility and large one-day moves, not about decoding the direction of those moves. For John Mulheren and Codexa's other market-making clients, this was invaluable in keeping them out of trouble, since they had firm obligations to participate on both sides of the market in all their stocks, but not necessarily to hold inventory of any significant size. For them, avoiding those nasty one-day losses was well worth the cost.

Most investors wanted to know which way the stock would move, and they were poring over the message boards for clues as well. In the late 1990s, people had begun to use stock message boards to discuss earnings; some of them seemed unusually sober and well informed on the subject. These earnings messages came to be called "whisper numbers," borrowing a term that had been used on Wall Street for years. It used to mean that an analyst would issue one set of numbers for the general public and whisper another estimate to the firm's best clients.

This behavior was due to the conflicts that big Wall Street firms had across their various lines of business. There's a lot of pressure on an analyst to keep an earnings forecast high when his colleague upstairs is trying to close a large bond deal or M&A transaction for the firm he's analyzing. This kind of shenanigan led to many of the reforms in the Sarbanes-Oxley Act, unbundled research, and the now-required disclosures of ...

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