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?3Paul 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.
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.