US Taxpayers Pay For SEC to Arrange Early Release of Data to High Speed Trading Firms
The SEC reportedly does not like trading on information that is not yet public. Just ask SAC Capital, or if you prefer, watch the plethora of insider trading SEC news conferences in general.
Why, even this morning there is a WSJ story about the SEC’s investigation into the early leak and release of Medicare cancer related funding data , which is an investigation into a different government agency!
And remember last year, when the SEC began investigating Thompson Reuter’s early release of ISM data to certain high speed subscribers. While the SEC brought no charges against Thompson Reuters, the data firm did subsequently suspend its “tiered release” practice:
On Monday, Thomson Reuters announced that it was suspending a so-called “tiered release” of market moving data to elite clients. The data and news service had been selling the University of Michigan’s consumer sentiment numbers to paying clients at 9:54:58 on release days—two seconds before the information went to a broader set of clients at 9:55 am. That created an opportunity for high speed trading firms to rake in profits before the rest of the market knew which direction the impending news would propel trading.
(As an aside, AG Schneiderman brought public attention to that story, before the SEC began “looking into” Thompson Reuters’s practices, just as his office brought attention to the dark pool practices before the SEC began investigating those.)
Let’s fast forward, shall we?
Yesterday evening Scott Patterson, author of Dark Pools, published a Wall Street Journal story titled Fast Traders Are Getting Data From SEC Seconds Early. Apparently, two separate academic studies (University of Colorado / University of Chicago, and Columbia University) have found a lag between when paying subscribers received SEC Edgar filings, and when the public did on the SEC’s own website.
What Does This Mean? Does This Affect Anyone?
Any time a company files a report with the SEC, noting insider buying or selling by its officers for example, that document becomes public and viewable on the SEC’s website, EDGAR (Electronic Data Gathering Analysis and Retrieval). From the WSJ article:
When a company submits a document, the contractor forwards it to the Edgar subscribers and to the SEC website “at the same time,” according to the SEC. But the studies suggest that the SEC website can take anywhere from 10 seconds to more than a minute to post the documents, giving an advantage to the Edgar subscribers or their customers, who are often professional investors.
The SEC contracts an outside firm to run this database. This outside firm is currently Attain LLC, but it used to be NTT Data at the time the academic studies were conducted. These firms have about 40 subscribers who pay $1500 /month or $720,000 per year in revenue, in addition to the revenue these data firms receive from the SEC (US taxpayers). One of their subscribers is a firm called The Washington Service, and they even advertise the “speed and availability benefits of a value-added EDGAR or real-time insider data feed” on their website. Subscribing firms like the Washington Service in turn sell the fast access to other firms, like high speed trading firms, for undisclosed amounts.
Anyone trading in the market place during any of the thousands of company releases on EDGAR is of course affected. Prices move quickly and volumes surge as the early recipients get the information and trade ahead of the public.
What does the SEC say about this?
“We have reviewed the working paper and are taking the issues raised by it seriously. We are conducting a thorough assessment of the dissemination process, including timing increments, and will make any systems modifications that may be necessary to optimize the dissemination of information to investors and the markets.”
1) How could the SEC investigate early release of University of Michigan data last year while this practice is going on with their own data?
2) How can the SEC investigate a competing government agency about the early release of Medicare payment policies, while they are a stakeholder themselves in the “selling data early” game?
3) Does the fact that the agency is a stakeholder in the high speed trading / market structure debate color their objectivity and role as top cop?
4) Could we have imagined anything more far-fetched and unlikely as this practice by the SEC itself?
We’ll answer the last question. No.