“The most valuable commodity I know of is information” – Gordon Gekko, Wall Street
Ever wonder how much information your smart phone is sending out about you? The WSJ is reporting that “federal prosecutors in New Jersey are investigating whether smart-phone applications illegally obtained or transmitted information about their users without proper disclosures“(read article here). The investigation is “examining whether the app makers fully described to users the types of data they collected and why they needed the information, such as a unique identifier for the phone or its location.”
Most people will simply click “I agree” if asked to when downloading an app. But what are they agreeing to? Do they realize that they are basically signing over the right for that app to send out information about them. This is very similar to what exchanges do with your trading data. When you sign up to become a member of a stock exchange, you essentially give the rights of your trading information away to the exchange. The exchange can then sell this information to data providers like Bloomberg and Yahoo Finance. Most people don’t really care since their quote and trade information is public data anyway. But what if the exchange were selling or giving away more discreet information about your trading style? What if they were telling subscribers of their proprietary data feeds more information than just the public quote and the last trade? What if they were telling these subscribers every time an order was cancelled and replaced? Or, what if a unique order id number was being assigned to each order and made available to subscribers of these data feeds so that they can model the behavior of the users. Well, if you read our paper, Data Theft on Wall Street last year read paper here, then you know that this is happening every day.
Just like the creators of smart-phone apps that are siphoning information away from unsuspecting smart-phone users, the exchanges are siphoning away information about investors orders every day. The firms that subscribe to these data feeds will say that the information is publicly available and that anybody can access this information. This is true. But should this information be made publicly available in the first place? Do you realize that almost every keystroke in your order entry process is being tracked and analyzed? Do you realize that sophisticated HFT firms with sophisticated technology are back testing and modeling your behavior so that they can gain a trading edge?
The WSJ article reported that one of the smart-phone app makers had this to say “They’re just doing information-gathering to get a better understanding of the industry. We’re not doing anything wrong and neither is anyone else doing anything wrong.” We hear the same thing all the time from the HFT’s. They say there is no evidence that they are doing anything wrong. Well, the way the industry is structured, we doubt very much that an academic will publish an unfunded study on the siphoning of trading information by HFT’s.