Advertisement

SKIP ADVERTISEMENT

Common Sense

Fair Play Measured in Slivers of a Second

Eric T. Schneiderman, New York’s attorney general. His investigation is the latest effort to reduce both the reality and the perception that securities markets are rigged to favor those who already have money, power and special access.Credit...New York State Attorney General's Office, via Reuters

On Friday morning, Thomson Reuters released the latest University of Michigan Consumer Sentiment Index, as it does twice a month. But this time was different. As a result of a settlement Thomson Reuters reached this week with New York’s attorney general, Eric T. Schneiderman, a select group of its customers didn’t get the two-second advance release they’d been buying.

Two seconds may not seem like much, but for high-speed traders with supercomputers, it’s plenty.

The difference was arresting. On Friday, just 500 shares of a leading Standard & Poor’s 500 exchange-traded fund traded during the first 10 milliseconds of the two-second window before the release of the University of Michigan data to Thomson Reuters’ regular clients, according to the market research firm Nanex. A year ago, on July 13, 2012, 200,000 shares traded during that 10-millisecond period, Nanex said.

Friday’s trading was all but “nonexistent,” said Eric Hunsader, founder of Nanex. “It was all about gaming the news, not the news itself.”

As an attempt to level the playing field for all investors, Mr. Schneiderman’s action clearly had an immediate effect. And he has said the settlement with Thomson Reuters is only a first step. While Thomson Reuters agreed to suspend the two-second advantage while his investigation continues, its regular clients get a five-minute jump on the general public, which gets the data at 10 a.m. Thomson Reuters pays the University of Michigan close to $1 million a year for the right to distribute the data.

The five-minute edge may well be the next target, since either everyone gets the information at the same time, or they don’t, whether the gap is seconds, minutes or hours. And Mr. Schneiderman has made it clear that Thomson Reuters isn’t the only target of a wide-ranging investigation.

The University of Michigan index falls into a broad category of private data that can move markets, or stocks in individual companies. About a dozen indexes compiled by private sources regularly affect markets; some of those are also released early. Other data is more industry-specific, but can also move sectors and individual stocks. Media companies have been trying to generate revenue and increase profits by charging fees for early access to all kinds of information.

All of this raises the question: Should everyone have access to market moving information at the same time? It turns out the answer is hardly self-evident.

For some market experts, the attorney general’s move is long overdue. Mr. Schneiderman is “a mile ahead of the Securities and Exchange Commission, which has to be dragged slowly and grudgingly toward raising the standard of behavior,” said John Coffee, a professor and expert on securities law at Columbia Law School.

The Securities and Exchange Commission is also collecting data on Thomson Reuters’ practices, although officials at the agency have said their jurisdiction is limited. An S.E.C. spokesman declined to comment.

Mr. Schneiderman’s investigation is the latest in a long series of efforts to reduce both the reality and the perception that the nation’s securities markets are rigged to favor those who already have money, power and special access. A vast network of laws and regulations is aimed at creating a more level playing field for investors, like criminal laws that ban securities fraud and the S.E.C.’s Regulation Fair Disclosure, which requires companies to widely disseminate market-moving information about themselves. Consider also the simultaneous public release of government information like employment data and the Federal Reserve minutes.

The goal is not just fairness, but to make capital markets more robust by encouraging the public — not just professional speculators — to invest.

“The reason America’s markets are the best and strongest markets in the world is that individuals always believed they could get a fair trade,” Mr. Schneiderman told me this week. “If you did your research well, you weren’t at a disadvantage because of information you couldn’t possibly access. It wasn’t a rigged casino.”

This is a theme that has been championed by many in Congress, and this week Senator Charles E. Grassley said: “Generally speaking, anyone who sells information to clients should face the same set of regulatory rules. The rules are meant to keep markets fair.”

Senator Grassley, an Iowa Republican who is a former chairman of the Senate Finance Committee, said he was especially concerned about the University of Michigan’s role, given that it’s a public university.

“A publicly funded university should operate for public benefit,” he said. “If a university is helping a subset of investors and acting like a private business, that’s contrary to taxpayer expectations. I intend to look at this situation more closely.”

The Conference Board, a nonprofit research organization financed by its members, which include many Fortune 500 corporations, recently moved to address its own concerns that its consumer confidence index and index of leading economic indicators might leak into the hands of high-speed traders or other investors ahead of the general public.

The board’s president and chief executive, Jonathan Spector, a former vice dean of the Wharton School at the University of Pennsylvania, said it was examining ways it might generate more revenue from its influential indexes, which cost millions of dollars to produce. The board considered but quickly rejected the idea of selling early access.

“We were aware that others were benefiting from early release of their data,” Mr. Spector told me this week. “We immediately decided never to release information earlier to one group than another. That would undercut trust in the markets, and trust in business, and that’s contrary to our mission.”

The Conference Board last month ended its longstanding policy of releasing the data to news organizations 30 minutes ahead of the public release, with a proviso they can’t report it until then, to prevent any inadvertent early releases.

“Our view is we’re entitled to do with this data as we like without violating any laws,” Mr. Spector said. “We believed we could release it early. But every person we talked to, including people in finance, said it would be wrong — even though there’s no law that says it’s wrong. But if the man in the street had it explained that certain people could pay to buy data in advance, he’d conclude that markets were rigged against the small guy. Collectively, this hurts business and markets. It’s a matter of trust.”

But Thomson Reuters, the University of Michigan, news organizations and other providers of data may have other priorities, including making money.

Like the Conference Board, Thomson Reuters has stressed that it doesn’t believe releasing the information early violates any law. It’s certainly not insider trading, although it bears a superficial resemblance to it. But people who trade with superior information aren’t engaging in insider trading if they come by the information legitimately, which may well include buying it. (If, on the other hand, a Thomson Reuters employee stole the data and sold it to someone who traded on it, that would probably be insider trading.)

“Thomson Reuters strongly believes that news and information companies can legally distribute nongovernmental data and exclusive news through services provided to fee-paying subscribers,” said Lemuel Brewster, a Thomson Reuters spokesman. “How private, nongovernmental data, like the University of Michigan survey, should be released is a universal industrywide issue that impacts all news and information companies and needs to be addressed in consultation with the market.”

The lack of any explicit legal prohibition hasn’t stopped the S.E.C. from broadly interpreting its mandate to regulate markets (there’s no law specifically banning insider trading, either). But the agency has yet to identify any fraud or deception involved in early disclosure of private data.

The New York attorney general has a broader mandate — some say too broad — under the state’s Martin Act. The act outlaws fraud, which the state’s highest court has interpreted to mean “all deceitful practices contrary to the plain rules of common honesty.” Even that presumably requires some kind of “deceit,” and Thomson Reuters says it’s always been upfront about its approach to disseminating the data.

Legal standards aside, many market experts worry that the attorney general’s crackdown may go too far and discourage the kind of enterprising research that has long made markets more efficient, whether undertaken by short-sellers hoping to profit directly on it, Wall Street investment banks that sell research to their clients, or investigative journalists.

“The notion of a level playing field is important, and it’s important to aim for it,” said Harvey Pitt, a former S.E.C. chairman and now the chief executive of the consulting firm Kalorama Partners. “But a level playing field can’t mean everyone has the same information. People need financial incentives to dig up information, and the marketplace benefits.”

He noted that the University of Michigan data moves markets because the university has years of experience and credibility behind it.

“People ought to be able to profit from their reputation for excellence,” he said. “If they can’t do that, we have destroyed capitalism in this country.”

Even though it disdains the early release of data itself, the Conference Board worries that regulating the timing of the release of information could have damaging consequences.

“If we do develop a set of principles, or even a set of laws, we don’t want to run into the law of unintended consequences,” Mr. Spector said. “You can see how practices or regulations could go awry. We need to think very carefully.”

He said the Conference Board may hold a discussion of the issues with a wide array of participants, from high-speed traders to Wall Street firms, news organizations and regulators, later this year.

Professor Coffee said he was sensitive to the issue as well, but said a principled line could be drawn that both protects markets and promotes fairness.

“You should be able to sell priority access to information that you are creating and would not create but for such payment,” he said. “But selling a differential in access to data that would be created anyway has no efficiency justification and is subject to fairness criticisms.”

Nonprofit institutions like the University of Michigan have long produced their indexes as part of their public mission, and presumably the university would continue doing so whether or not Thomson Reuters paid for it.

Mr. Schneiderman said that worrying about where lines might be drawn shouldn’t obscure the merits of the Thomson Reuters settlement.

“None of these critics is objecting to us ending the practice that gave a massive competitive advantage to a small group of high-paying traders with early access to valuable information,” he said. “Let’s take each case on its own facts.”

A correction was made on 
July 12, 2013

An earlier version of this column erroneously included an index from the Institute for Supply Management among those that are released early to some users. The I.S.M.’s manufacturing data is released at 10 a.m. eastern time to all users, including clients of Thomson Reuters.

How we handle corrections

A version of this article appears in print on  , Section B, Page 1 of the New York edition with the headline: Fair Play Measured In Slivers Of a Second. Order Reprints | Today’s Paper | Subscribe

Advertisement

SKIP ADVERTISEMENT