• 13 Jun 2013 at 10:28 AM

Lots Of People Think Paying For News Should Be Illegal

The Michigan consumer sentiment survey is distributed in three tiers, like so:

  • At 9:54:58 a.m., it is sent to people and robots who pay a large fee to Reuters for “exclusive 2-second advanced feed of results … designed specifically for algorithmic trading.”
  • At 9:55:00 a.m., it is sent to people and robots who pay a smaller fee “for Thomson Reuters’s regular news services.”
  • At 10 a.m., it is posted publicly on Michigan’s website.

There is now a significant brouhaha over the fact that some people who pay more get the news release 2 seconds before people who pay less, with CNBC worrying that “the existence of an elite group that receives early information is likely to attract criticism that it doesn’t square with the principle that market-moving information should be released to all market participants equally.” There is not as far as I can tell any brouhaha over the fact that the people who pay less get it 5 minutes before the people who pay zero.1 No one really cares about a level playing field; they’re just haggling over the price.

Why is the entire focus on the 2-second advantage to high-paying high-speed traders rather than the five-minute advantage to regular paying subscribers? I dunno, but the Wall Street Journal‘s story on the brouhaha contains the telling admission that “Most Journal articles are available only to subscribers.” REALLY? You mean, people pay you, and you give them news that you don’t give to anyone else? News about mergers and economic policy and other market-moving stuff? HOW IS THAT NOT INSIDER TRADING ETC. ETC.

Actually the Journal article is quite even-handed and reasonable, as well it might be, though for balance it quotes a bunch of worriers like “Richard Painter, a former Republican White House ethics lawyer,” who says that people should “not be allowed to selectively disclose market-moving data to people who pay more money—that is not right,” which, again, read literally would outlaw the Wall Street Journal.2

Another amazing worrier is Bloomberg News editor in chief Matthew Winkler, whom you might suspect of having a conflict of interest:

“As an institution that receives public funding, the university has a legal and ethical obligation to be accountable to the public. If such organizations as Bloomberg News, Reuters, Dow Jones and others do not have equal access to information, neither does the public,” Mr. Winkler wrote, in a communication reviewed by the Journal. He said Reuters’s subscribers had “an unfair advantage.” …

Six years earlier—before Reuters acquired distribution rights—Bloomberg itself bid for them, promising it would create a level playing field.

After its offer wasn’t accepted, a Bloomberg executive editor emailed the university complaining that in the deal the school planned to make with Reuters, “you will be guaranteeing that every other news organization—to say nothing of every investor who doesn’t subscribe to Reuters—will be disadvantaged. No wonder Reuters is willing to pay you so much more than Bloomberg: While we were offering money to help the University create a system that is fair to everyone, they are paying you to guarantee an unfair one!”

Do you know how much a Bloomberg terminal subscription costs? You probably do. (It’s $2,000 a month, give or take.) $2,000 a month for a level playing field! Oh and many real-time data feeds cost more. Weird huh?

Who else?3 Paul Krugman argues that this is a case of “real resources being devoted to the socially useless task of getting an economic number slightly before the hoi polloi” but that’s not really right. This is a case of real resources being devoted to the socially useful task of getting the economic number in the first place; the university is using price discrimination to fund the creation of a public good. The finance arms race is subsidizing the production of economic data that can then be provided free to the hoi polloi. From the Journal again:

[Reuters] will pay the University of Michigan $1.1 million this year for rights to distribute the findings, according to the university. Next year, it will pay $1.2 million. … Richard Curtin, an economist who runs the university’s survey, said he knows the deal gives an advantage to select investors.

“Hardly anyone would pay for it if they didn’t see a profit motive,” Mr. Curtin said. Later, he added: “This research is totally funded by private sources for the benefit of scientific analysis, to assess public policy, and to advance business interests. Without a source of revenue, the project would cease to exist and the benefits would disappear.”

If everyone had to get it at the same time, no one would pay for it, and then no one would get it. Sound familiar, news industry?

This all seems to have been spawned by Mark Rosenblum, the data salesman who sued Reuters in April for firing him after he accused them of insider trading for this.4 For the two-second advantage, I mean: his job was to sell data, i.e. sell the five-minute advantage. (And the two-second one for that matter.) The fact that this is not insider trading is so obvious that it’s not worth discussing: the information here consists literally of asking a bunch of random people how they feel about the economy and then writing it down. It is as outside as information gets.5 It doesn’t become inside information just because you get it two seconds earlier.

Traders Pay for an Early Peek at Key Data [WSJ]
Thomson Reuters Gives Elite Traders Early Advantage [CNBC]
Thomson Reuters and Jumping the Gun on Wall Street [NetNet / John Carney]
Earlier: Former Thomson Reuters Data Salesman Not Really Comfortable With The Whole Selling Data Concept

1. Though to be fair that’s an exaggeration because some of the people who get it at 9:55 republish it:

At that point, it swiftly becomes widely available through other news providers as well, including Wall Street Journal publisher Dow Jones, a News Corp. unit that is a Thomson Reuters competitor.

2. Unless you read it in the trivially literal sense of “you can selectively disclose market-moving data to people who pay you money, but you can’t selectively disclose it earlier to people who pay you more money.” Which actually is probably what he means, though it’s also obviously unprincipled and nutty.

3. Other worriers include Kevin Drum and Karl Smith, who think that this allows big evil Wall Street traders to take advantage of the little guy. Smith:

When Joe Sixpack invests in the market he – if he’s realistic – diversifies heavily and expects to earn the average long term return for a retail investor. That return, however, is very lumpy. Some days, Joe Sixpack’s savings will happen to go into the market right before a big correction. Some days it will go in right before a big rally. When the ups and downs are averaged out, that’s Joe’s buy-and-hold return.

When traders take advantage of paid early information they shift that balance. Now, when there is a surprise rally coming traders with access to early information jump in en masse. This means that buyers in the queue just before a big run-up will be disproportionately pro traders. They’ll receive a greater share of the low early prices and Joe will be more likely to pay the later high price.

“Joe Sixpack” is a terrible name for a market-timing retail investor. The model here is not median U.S. household – who has zero dollars of equities! – getting screwed by Steve Cohen investing in his personal account or whatever. The model here is big professional investors who run your pension and 401(k) – the Journal notes Wellington Capital Management among the early-data-feed subscribers though, fair, also the SAC quasi-family-office and a lot of prop high frequency trading firms – having an advantage over rich hobbyists who think they can time the market. Joe CaseOfLafite, really.

4. He also told Simone Foxman that Thomson Reuters salespeople had access to the data even before 9:54:58, and might have been distributing it to favored clients. He “could produce no evidence of it. But a look at trading on the markets backs up that suspicion,” with a spike in trading 820 milliseconds before the release in December. This is an interesting worry because, if Reuters employees were leaking data ahead of the release in violation of Reuters’s contract with Michigan, then that probably is illegal insider trading.

5. Former SEC chairman Harvey Pitt is sensible on this:

“A nongovernmental and noncorporate individual’s generic data analysis can be market moving, but if so that is merely a reflection solely of the work product of that individual,” Pitt said. “The insider trading laws can’t—and shouldn’t—be read to deprive the progenitor of personal analyses of the potential market uses that person can make of the data.”

Though he also says (also sensibly):

“I worry that there’s both a fairness and a disclosure issue,” said former Securities and Exchange Commission Chairman Harvey Pitt. “If I’m paying a lot of money, I should know whether I have the best deal possible. If there was no disclosure of the tiered structure, that would be a serious problem.”

Reuters assures everyone that it disclosed the 2-second advantage broadly. Which seems right since it, y’know, advertised it. To, like, make money off it and stuff. You can’t sell that advantage if you keep it secret.

27 comments (hidden to protect delicate sensibilities)
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Comments (27)

  1. Posted by Guest | June 13, 2013 at 10:46 AM

    The biggest factor arguing against this being insider information is that the data is completely useless. Maybe a "surprise" can move the market for a day – fine. But the fact is that consumers are always at their most bullish right before a recession starts and their most bearish right as the recession is ending. They are just as clueless as everyone else.

    It would actually be funny to see a case brought against Reuters or the Uof M. Their best defense would be that the data they are selling has absolutely no predictive value.

  2. Posted by Marissa Mayer | June 13, 2013 at 10:49 AM

    Obviously everyone just needs to stick with Yahoo! Finance for all financial information. It's the fair thing to do.

  3. Posted by Guy w idea | June 13, 2013 at 10:50 AM

    Dealbreaker Gold Member ($100): Receive Bess, Matt and Shazar posts 5 min before general readership and be the first to comment.
    Platinum Member ($101.50): as above but receive Matt posts with Excel links
    Iridium Member ($250): as above, but no Shazar posts, or sponsored content

  4. Posted by Windy City Guest | June 13, 2013 at 10:53 AM

    Defending themselves by trying to convince people what they have has no value, seems like something Michael Dell might be able to help with.

  5. Posted by Bess' Nightmare | June 13, 2013 at 10:56 AM

    Congrats on reporting CNBC's leftovers a day late. This blog has gone to the shitter.

  6. Posted by Hmm | June 13, 2013 at 11:24 AM

    So hopefully that means you'll be leaving.

  7. Posted by Guest | June 13, 2013 at 11:25 AM

    Best $1.50 I've ever spent

  8. Posted by Puzzled | June 13, 2013 at 11:41 AM

    I also don't understand why The Economist sells so much, when everything they report on is stale by a week.

  9. Posted by Ray Dalio | June 13, 2013 at 12:13 PM

    This kind of shit is why my only subscription based information provider is the Dealbreaker Gold Pass.

  10. Posted by Henry Blodget | June 13, 2013 at 12:15 PM

    Hmm, wish I thought of that defense a few years back. Now if I told you I could show you a slideshow of data with absolutely no predictive value, is that something you might be interested in?

  11. Posted by Guest | June 13, 2013 at 12:41 PM

    Only if I can view it as one page. I hate all that click-through shit you guys put up there, Hank.

  12. Posted by Ad Man | June 13, 2013 at 12:52 PM

    I thought the Shazar posts *were* sponsored content. You mean they're just letting him post those things for free?!?!?!

  13. Posted by Guest | June 13, 2013 at 12:54 PM

    Best $150 I've ever spent

  14. Posted by william | June 13, 2013 at 2:28 PM

    Trading private information for money is no different then buying any other kind of research. The big question is the use of HFT what is the value of this in providing equity to industry to grow. I question how you can have anything even close to a level playing field with the existence of HFT.. To me as a longtime individual investor I think I am now at a real disadvantage and just wonder how this is hurting me but helping our economy.

  15. Posted by Guest | June 13, 2013 at 4:09 PM

    Nobody really reads The Economist. You subscribe to leave it on a table in your apt so people THINK you read it.

  16. Posted by ThugLIFO | June 13, 2013 at 4:10 PM

    Believe it or not, there are articles past "The world this week"…

  17. Posted by Guest | June 13, 2013 at 4:14 PM

    I get Iridium access with my Platinum Amex. Helps offset the $450 annual fee.

  18. Posted by Intelligent People | June 13, 2013 at 4:57 PM

    I'm shocked – Paul Krugman and Kevin Drum are spouting dumb arguments about shit they don't understand.

  19. Posted by guestisaurus rex | June 13, 2013 at 4:58 PM

    hilarious,

    WSJ devotes countless pages to this just as its Hilsenrath article, leaked to many early, causes mayhem in the fixed income markets.

    no need to send in the clowns

  20. Posted by PermaGuestII | June 13, 2013 at 5:08 PM

    You mean the same Hilsenrath to whom the Bearded Wonder of 20th & Constitution often leaks his market-moving musings?

  21. Posted by Algorithmycs | June 13, 2013 at 5:35 PM

    Yeah all that added liquidity sure sucks…

  22. Posted by guest | June 13, 2013 at 8:17 PM

    Of course they do:

    In [third world kleptocracy], an new trend is emerging: Harvard law-educated [exotic name] is considering challenging [scarier-sounding exotic name] for city council in [5th largest city in said kleptocracy] in the upcoming 2015 elections. Her platform is expected to focus on ensuring local schoolchildren have universal access to iPads. This is one of many hopeful signs in [kleptocracy] where access to electricity has increased 2% to 16% in the past six years, literacy is up to 19%, and quinine was introduced in 2005. She faces the prospect of a tough fight with Mr. [scary name], who won last election with an 89%-11% and whose last opponent recently sought asylum in Belgium. Nonetheless, she is clearly at the leading edge of a liberalising wave that with any luck will take [kleptocracy] from 104th to 98th in Transparency International's rankings. This compares quite favorably with [Arizona/Kansas/Alabama/Austria/Poland/UKIP Party], where [tastefully oblique reference to left-wing cause celebre du jour] raises questions as to whether they can still be considered part of the civilised world.

  23. Posted by Dope Threat | June 14, 2013 at 5:35 AM

    This is an intriguing debate, and the further we extend it, the more slippery the slope. Many of us casually pay for things every day that give us preferential access to information that may or may not be valuable, but is not available to non-payers. CNBC via our cable box or a subscription to the Wall Street Journal seem harmless, because the information probably isn’t valuable anyway. What about paying the FT for a sneak peak at the Lex Column, or paying commissions to the sells-side and receiving broker upgrade or downgrade notes? Maybe valuable, maybe not. What about paying a lot of commissions and getting calls from the broker about those upgrades or downgrade notes before they come out? What about paying a lot of commissions in exchange for 1:1 meetings with company CEOs at broker conferences? What about paying exchanges for real time fees? The money the NYSE collects in order for us to see quotes twenty minutes before everyone else makes the University of Michigan look like a lemonade stand. What about paying an expert network $25K to get a consultant to help you understand the dynamics of application development on Windows Mobile? What about paying the expert network $25K to get that same consultant to tell you that Instagram is developing for Windows Phone? What about outright paying for access (a la Galleon or SAC) for information that will almost surely move prices?

    Subscribing to the Journal seems and feels harmless, but paying a McKinsey consultant to find out the next deal seems and feels criminal. At what point between the two do we draw the line?

  24. Posted by guest | June 14, 2013 at 9:36 AM

    There's a pretty obvious place to draw the line: executives of companies are not allowed to selectively disclose information about their companies, becuase he is putting a subset of his own shareholders at a disadvantage and is thus violating his obligations to them.

    This doesn't apply to third-party devloped data/information, since the creators and disseminators of that knowledge have no obligations to people who aren't paying them for their work.

    The gray zone is the low-level employees. They don't have a legal fiduciary obligation to the shareholders, but damaging their interests is at minimum a firable offense, and getting paid to do so is arguably theft.

    The core of the difference is the source of the information- do they have an obligation to the people at a disadvantage? Execs, yes. Employees, maybe. Third-party news vendors? Not at all

    You can't approach it from the "right to a level playing field" standpoint, because you pretty quickly end up forbidding newspapers to charge money despite having costs. You don't have a property right to anything produced by someone else with whom you have no contracual arrangement.

  25. Posted by FredSalbo | June 14, 2013 at 10:47 AM

    Yep , DJIA down 200 points in 2 seconds sure brings in tons of liquidity , eh , Einstein

  26. Posted by FredSalbo | June 14, 2013 at 10:48 AM

    See ya , CHIMP

  27. Posted by Dr. Strangelove | June 14, 2013 at 10:56 AM

    “You can’t sell that advantage if you keep it secret”

    “The whole point of the doomsday machine is lost if you keep it a secret!”