A Blog by Jonathan Low


Feb 13, 2014

Time, Money - and Data: High Speed Traders Paying for Early Access to Market-Moving News

As a society, we continue to confront choices presented to us by technology. These usually have financial implications but at their root are often ethical, philosophical and moral questions for which there is no universal answer.

There has been growing concern about the ability of high speed securities traders to get early access to information that can help make them money. This activity is legal - at least so far - and is driven by technology. The traders claim it is just the intelligent application of knowledge, capital and strategy. Others aren't so sure about that and wonder whether this has created an unfair advantage for those with the wherewithal to buy advantage.

An even broader question is whether consumers, recognizing that this sort of unequal market access makes for disadvantageous returns, have contributed to the decline in the numbers of those investing. That, in turn, raises questions about the efficiency and efficacy of the markets themselves.

The latest eruption concerns 'direct access' to news for which high speed investors pay. The computers and algorithms employed then 'push' the news to the computers of those willing to bear the cost, providing them with what can often be a few seconds' crucial head start.

The algorithmic or high speed trading industry have hired PR firms and lobbyists to frame their position. One early outcome of this is that they are insisting on being called 'speed' rather than 'high speed' traders, in deference to what is clearly the perception that they have an unsavory advantage. Whether that concern will translate into a broader set of concessions - or will thwart legislative redress - remains to be seen, but it is apparent that both the advantage and its implications are becoming a matter of greater societal and economic concern. JL

Scott Patterson reports in the Wall Street Journal:

"The faster you want the data, the more it costs. I guess this is capitalism."
High-frequency traders have been paying to get direct access to market-moving news releases, a practice that can give firms the ability to trade fractions of a second ahead of less fleet-footed investors.
The traders are getting news releases from Business Wire, which distributes corporate-earnings releases and economic reports such as the Philadelphia Federal Reserve's monthly manufacturing survey, and from Marketwired, a Toronto company that distributes earnings releases and the ADP monthly employment report.
Such direct access isn't illegal. By paying for direct feeds from the distributors and using high-speed algorithms to crunch data and enter orders, traders can get a fleeting—but lucrative—edge over other investors, according to traders and people familiar with the practice. The reason: tiny lags between the time the distributors release the news and when media outlets send them out to the public, including other investors.
Investors typically receive earnings reports and other news releases from media companies such as Bloomberg LP and Dow Jones & Co., a unit of News Corp which owns The Wall Street Journal, or websites such as Yahoo Finance. Those financial-news outlets get most of these releases from distributors such as Business Wire, which is owned by Warren Buffett's Berkshire Hathaway Inc., and Marketwired, majority-owned by OMERS Private Equity Inc., an arm of the Ontario Municipal Employees Retirement System.
Business Wire says it doesn't discriminate between clients in the interest of fair access.
"Anyone can get a direct data feed if they want," including high-speed trading firms, said Tom Becktold, a spokesman for Business Wire, which also distributes releases to financial companies such as fund-management firms, Wall Street banks and retail brokers, according to its website. Company spokesman Neil Hershberg said what happens after Business Wire hands off releases is "beyond our control."
Some high-speed firms have had direct access to news releases for at least the past few years, according to people familiar with the situation. These firms typically are paying thousands of dollars a month to get the news releases.
The trend, previously unreported, could help explain what happened on the afternoon of Dec. 5, when Ulta Salon Cosmetics & Fragrance Inc.,  a cosmetics retailer based in Bolingbrook, Ill., released its earnings. At 4 p.m. EST, Ulta's stock was changing hands for about $122 a share. Business Wire issued the company's earnings, which missed analysts' forecasts, about 150 milliseconds after 4 p.m., according to a person familiar with the timing of the release. A millisecond is one-thousandth of a second.
Within about 50 milliseconds, nearly $800,000 of Ulta's stock was sold on stock exchanges in a series of rapid trades. But major news wires hadn't yet distributed Ulta's earnings, according to the news wires. Bloomberg News issued the release 242 milliseconds after 4 p.m. Dow Jones issued it 464 milliseconds after 4 p.m. Thomson Reuters Corp.  issued the release about one second after 4 p.m.
About 700 milliseconds after 4 p.m., Ulta's stock reached its closing price of $118 a share on the Nasdaq Stock Market which incorporated the orders placed immediately after Business Wire and other news services distributed Ulta's earnings, according to data analyzed by Nanex LLC, a market-data provider, and people familiar with the trading. Stocks often settle a few tenths of a second after 4 p.m. as Nasdaq's computer systems seek to reconcile all trades.
Such delays between the time Business Wire distributes releases and when wire services send them to the public are standard. Market experts say it typically takes from a hundred milliseconds to several seconds between the time news wires receive a news release and when it is published.
Market volatility in the seconds after the 4 p.m. Eastern time stock-market close has increased in recent years as high-speed firms race to trade on market-moving information such as earnings reports, which are often released immediately after the closing bell, according to Eric Hunsader, founder of Nanex. Swings of at least 0.3% in Nasdaq stocks within the first second after 4 p.m. rose about 30% in the two years ended Dec. 31, 2013, from the previous two years, according to Nanex data.
The ability of high-speed firms to trade on market-moving news before other investors highlights how gaining an edge in today's lightning-fast markets can come down to a split-second advantage. It also shows how trading fueled by state-of-the art computers and communication networks is challenging regulators whose rules were largely carved out in an era dominated by human traders.
The Securities and Exchange Commission's fair-disclosure rule, Regulation FD, requires that public companies issue material information about their businesses to the broader public at the same time it is disclosed to market professionals. The SEC passed the rule in 2000 amid concerns that companies were selectively revealing material information to Wall Street analysts and certain privileged investors. The rule, written before the era of high-speed trading, doesn't address whether fractions of a second matter in terms of when information is distributed.
While public companies use news-release distributors such as Business Wire to help fulfill their disclosure obligations, the distributors aren't directly overseen by the SEC.
Marketwired says it provides clients with "a service that enables them to comply with their Reg FD and associated regulations, which require full and fair simultaneous disclosure of information."
Business Wire's competitor, PR Newswire, says it doesn't provide trading firms access to its "Disclosure Feed" despite frequent requests. The company says it provides the news feed to clients with the understanding that information provided won't be used for trading purposes.
"Though it might be a 'wish-list item' for many, we don't supply the Disclosure Feed to any stock trading portal, high speed or otherwise," said Bradley Smith, director of marketing at PR Newswire, a unit of U.K. media company UBM  PLC.
Business Wire's clients include Chicago's Chopper Trading LLC and Spano Trading LLC, a Miami Beach, Fla., high-speed trader. Chopper Trading declined to comment.
Public companies typically post releases on their websites at roughly the same time the information is distributed to Business Wire clients. While anyone can grab that data from a company's website, traders say getting the information through a direct feed is faster.
Joseph Spano, founder of Spano Trading, said an advantage of subscribing to Business Wire is that news releases are "pushed" to his firm's computers, which he said is much faster and more reliable than getting the data from a company's website. "The faster you want the data, the more it costs," he said in an email. "I guess this is capitalism."


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