Common Sense: Fair Play Measured in Slivers of a Second

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 article has been revised to reflect the following correction:

Correction: 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.

Article source: http://www.nytimes.com/2013/07/13/business/the-ethics-of-a-split-second-advantage-for-traders.html?partner=rss&emc=rss