A Blog by Jonathan Low


Jan 29, 2015

Dangerous Data: The Battle Between Sources and Uses

The perception that data is neutral, objective and somehow harmless continues to pervade the thinking of too many enterprises.

The fact that they will wage expensive battles to defend the means by which bond ratings or accounting conventions or sales figures or customer satisfaction reports are constructed should disabuse us of this notion, but we cling to the beliefs that give us comfort.

As the information age has morphed into the era of big data, we are finding that these differences are becoming sharper sources of conflict. As the following article explains, those who provide data want to know when it is used and by whom, presumably so they can ascertain which sources they provide attract the greatest audience and then create more of it so more people will use it and they will garner more attention, make more money and so forth.

Which would all be well and good except for the fact that those who are using the data are discovering that doing so signals their interest to competitors, potential victims and other sources of economic opportunity. And that puts them at a disadvantage.

So whose interests will prevail. One would assume that paying customers will get their way. And to some extent they will. But it is one of the curiosities of this economy that as sources not just of information but of revenue diversify, traditional conventions fade just as the devices that are used to communicate them have done. JL

David Benoit reports in the Wall Street Journal:

Tensions can arise for information providers that find themselves operating between subscribers such as hedge funds, which want total secrecy, and banks and brokerages, which want to track the usage of the reports they prepare.
In the hedge-fund world, there is no more closely guarded secret than what stock a firm is preparing to target.
But recently, a few fund managers have discovered that their plans may not be as secret as they thought.
The reason: Bloomberg LP and other data providers inform banks and brokerages after a subscriber reads their research reports. The information can be as detailed as naming the firm and even the person inside the firm who viewed the report.
So any hedge-fund manager boning up on a potential target using research supplied by Bloomberg, McGraw Hill Financial Inc. ’s S&P Capital IQ and others may be unwittingly alerting banks and brokers to their intentions.
While that practice has long been in place, and is disclosed by the data providers, it isn’t widely known, some hedge-fund managers said.
The discovery led the funds to complain about the practice, and in some cases Bloomberg and others have agreed to give longer time lags between when the report has been viewed and the research firm alerted, according to people with knowledge of the matter. Sometimes those lags have been extended from 30 days to as long as 90 days.
The issue highlights the tensions that can arise for information providers that find themselves operating between subscribers such as hedge funds, which want total secrecy, and banks and brokerages, which want to track the usage of the reports they prepare.
Bloomberg has already come under pressure over how it handles customer data. The company in 2013 stopped allowing its reporters to access some private information about clients’ usage of its pricey data terminals following complaints over the practice.

People close to the data providers said the research reports are the property of the banks, which gives them the right to know who reads them.
There is no indication that the disclosure has caused the information leaks some hedge funds fear. But hedge funds say it raises questions about what and how much information banks and brokers can glean from getting such reports from data providers.
One hedge fund learned of the practice when it received a call from a broker offering to set up a meeting with a company the hedge fund had been researching, said people familiar with the situation. The brokerage firm knew the hedge fund was interested in the company because the firm had seen the hedge fund accessing its research, via a data provider, the people said.
Robert Jackson, a professor at Columbia Law School and a hedge-fund expert, said he has received calls from three or four funds seeking advice on the issue. He has advised them to push for longer delays and for the reports to the brokers to be less specific. “If hedge funds begin to feel like they can’t use those resources without revealing their investments to the world, it’s going to be a real problem for hedge funds,” Mr. Jackson said. Still, given that the practice is disclosed, there is little recourse for hedge funds, he said, other than to stop reading research or cancel their subscriptions.
“Our standard customer documentation states that we can share with each data provider information regarding our customers’ use of data contributed by that provider,” a Bloomberg spokesman said.
S&P Capital IQ, a subscription-based provider of corporate data and other information, said it discloses the practice to its customers, pointing to language in a roughly 3,000-word user agreement to which customers must consent. S&P Capital IQ and some of the banks involved said the usage data only goes to a small group of people within brokers’ research departments, who use it to gauge readership.
Thomson Reuters Corp. , which also provides research reports among its offerings, declined to say whether it makes similar disclosures.
Dow Jones & Co., owner of The Wall Street Journal, competes in various areas with the data providers. It doesn’t provide similar third-party research services, however.
For the hedge funds, many of which are shareholder activists, the revelations come at a time of heightened concern over secrecy. Activist hedge funds, which buy stakes in companies and push them to make strategic and other changes, have become an increasing force in corporate boardrooms and the markets, and other investors often try to anticipate their moves.
Activists go to great lengths to camouflage their trading and investment ideas, often building positions using derivatives and through several brokerage firms. If their plans leak ahead of time, share-price increases could cost the funds profits or even potentially derail their campaigns. Leaks may allow target companies to put in place defenses that could make it harder for activists to succeed.
Some activist funds said they had been using the data services to access research in part because they believed it was more private than directly reading reports on the websites of brokerage firms, which in some cases get real-time usage data.
Some hedge funds say they are less concerned about the practice. Identifying their planned investments based on the limited information data providers pass on would be difficult, in part because the investors download many analyst reports on companies whose stock they never end up buying, people at these funds say.
Activists, however, tend to have fewer investments than other hedge funds.
The information banks get isn’t standardized. In the case of Bloomberg, for example, one large research house typically gets an aggregate count of how many users read a report on the day it is released. Then, 30 days later, it gets a list of firms that accessed the report; after another 30 days, it gets the names of individuals, according to a person familiar with the matter. Hedge funds can negotiate different agreements and restrict some information from being passed on, the person added.
When a hedge fund wants a longer delay than 30 days, the brokerage firm has to approve it.


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