The University of Michigan Consumer Confidence Index is one of the most trusted gauges of consumer sentiment, and its monthly release is followed closely by investors all over the globe.
Any single piece of information that can move markets on its own is going to be extremely valuable to Wall Street traders, especially if they can get their hands on that information before everyone else. That’s why some firms were reportedly willing to pay Thomson Reuters — the exclusive distributor of the University of Michigan survey — $6,000 per month in order to get their hands on the information a mere two seconds before other Thomson Reuters subscribers.
This two-second advantage is of particular use to high-frequency trading firms, who use high-powered computers to make thousands of trades per minute, based on data piped in from various sources like Thomson Reuters. By the time these computerized traders have processed the data, much of the advantage the average investor could reap from the information has already been rung out of the market.
Not surprisingly, then, many were outraged by the idea that Thomson Reuters was selling market-moving data to select clients before the rest of us. And one of those bothered by the practice was New York Attorney General Eric Schneiderman, who forced the company to agree to stop the practice at least until his office has finished an investigation. Said Schneiderman in a statement:
“Promoting fairness and avoiding distortions in the securities markets is an important focus of this office. The securities markets should be a level playing field for all investors and the early release of market-moving survey data undermines fair play in the markets.”
At first blush, this argument makes perfect sense. After all, company insiders aren’t allowed to trade on nonpublic information, a practice known as “insider trading.” Insider trading is banned in the U.S. based partially on the theory that insider trading is a type of fraudulent behavior: Traders with inside information are defrauding other market participants who don’t have access to that information, just as a company that sells a product and conceals its defects might be accused of fraud. Furthermore, insider trading is said to erode general trust in the market, reducing the desire for ordinary people to participate in the market and therefore reducing overall market efficiency.
But if you follow Schneiderman’s logic to its conclusion, the business models of numerous financial news services might be deemed invalid. After all, a newspaper that requires online readers to pay for its articles is, in effect, releasing information early to those paying customers. And Wall Street is littered with research firms that provide exclusive information, which if widely distributed might very well move markets. Of course, if these firms weren’t allowed to sell this information, then there would be no economic incentive to produce the information, and we’d all be poorer for it.
Because this sort of information peddling goes on everyday on Wall Street, one has to conclude that the widespread outrage against this particular form is due to the fact that it was being sold specifically to high-frequency traders. After all, Reuters will continue to reveal this information to its paid subscribers five minutes before its wider, public release, and the Attorney General appears to have no problem with this practice.
But is there anything more egregious about selling the data to traders using super computers than to other paid subscribers? To be sure, there is plenty to be concerned about when it comes to high-frequency trading. There is evidence, particularly after the 2010 “flash crash,” that high-frequency trading leads to less stable markets. And the fact that exchanges like the NYSE and NASDAQ cater to high-frequency traders by creating new order types and selling them special trading data is troubling because, unlike news services, exchanges provide a utility-like function. They must be held to a higher standard because they’re the forum through which everyone must conduct their trades. But while stock exchanges should be expected to treat investors fairly, do financial news services have the obligation to disseminate privately gathered information to everyone at once?
Schneiderman believes that it’s his job to promote “fairness in the markets.” This is a noble goal, as the economy benefits when investors feel like they’re not getting ripped off. But non-professional investors should also know that the stock market isn’t a perfectly level playing field and probably never will be. Compared to the average investor, big time hedge fund managers are always going to have advantages, whether it’s their highly paid analysts or their powerful computers.
In other words, a sense of fair play is important — but most investors should recognize that they’re not likely to win the rough-and-tumble game of short-term investing. That’s a game is usually won by superior information, which doesn’t come cheap.