A two-second head start on market-moving news can be an eternity for a high-speed trader using an algorithmic super computer program, and many companies pay handsomely for the advantage. Now regulators are pushing to level the playing field and keep information providers from releasing important news early to select clients.

If it sounds familiar, it should. The effort is similar to the Securities and Exchange Commission's Regulation Fair Disclosure, which outlaws the practice of companies providing select disclosure of material information to favored analysts or investors. This time, the target is private information providers that have early access to government statistics, such as jobs figures or other economic indexes, and even data generated by private institutions.

Last month, Thomson Reuters released the latest University of Michigan Consumer Sentiment Index as it has done twice a month for the past year, except this time, without a two-second advance release to selected clients who paid a premium for the advance notice. The more uniform release time seems to be having an effect on high-speed trading.  On July 12, 2012, 200,000 shares of a leading Standard & Poor's 500 exchange-traded-fund (EFT) that would be affected by the news were traded during a 10-milisecond period following the pre-release. A year later, only 500 shares were traded during the same period once New York Attorney General Eric Schneiderman put the brakes on the practice through a settlement agreement designed to level the playing field for all of Thomson Reuters' regular clients.

Thomson Reuters has been paying close to $1 million a year for the right to provide its clients a jump on the University of Michigan data, information that most experts agree is proprietary information that isn't law-breaking when it comes to insider trading. Yet, it is private data that can move markets or stocks in individual companies.  There are about a dozen sources for privately developed information, some of which are released early and can move individual stocks or sectors.

Columbia professor and securities law expert John Coffee says Schneiderman is “a mile ahead of the SEC, which has dragged slowly and grudgingly toward raising the standard of behavior.” While the Commission has refused to comment on this situation, it is known that its staff is also collecting information on Thomson Reuters' practices. Some attribute Schneiderman's motive to reducing the perception and, at times, the reality that the U.S. securities markets are rigged to favor those with special access. The SEC's Reg FD, however, is designed to require companies to widely disseminate material market-moving information and provide equal access to this information to the investment community.

If the smoke leads to fire, then the Department of Justice may have its work cut out for it. But, it may well suggest the SEC should take a closer look at the news dissemination process where two seconds can be highly profitable for traders using sophisticated high-speed trading super computers.

 “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,” Schneiderman told New York Times columnist, James Stewart. “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.”

The Conference Board president and chief executive Jonathan Spector, a former vice dean of the Wharton School at the University of Pennsylvania, says the Conference Board was examining ways  to create more revenue from their influential indexes that can move markets and cost millions to produce. However, Spector told the New York Times, “We were aware others were benefiting from early release of their data, but we immediately decided never to release information earlier to one group over another. That would undercut trust in the markets, and trust in business, and that's contrary to our mission.” Instead, the Conference Board took steps to keep others from profiting from the early release of its information. In June, the Conference Board ended its policy of releasing its indices' data to news organizations 30 minutes ahead of public release.

The Conference Board and Thomson Reuters are not saying that they believe releasing information early is a violation of any law, but they seem to agree that it's the perception that those with superior information are gaining a market advantage and that hurts the credibility of the U.S. markets they would like to end.

Getting a Head Start?

Samuel Jones Jr., former chief investment officer for socially responsible Trillium Asset Management Corp., finds that some institutional investors are paying information providers for a jumpstart on market-moving information. As a grader for the Chartered Financial Analyst exam given by the Chartered Financial Analysts Institute, Jones comes in contact with other test examiners who tell him that the practice is somewhat common among investment firms. According to Jones, the word among his fellow CFA examiners was that an unspecified number of institutional investors, especially some engaged in high-frequency trading, were paying significant fees to certain news dissemination organizations for a two-second advantage on early public release of material market moving corporate specific information. These graders include experienced portfolio managers and academics in the global finance business and are noted for expertise and integrity.

Tim Quast, chief executive of ModernIR says, “We track trading data from Sun Trading, Two Sigma, Hudson River Trading, RGM Advisors, and a host of other proprietary trading firms. The advantage high-frequency trading has is significant. We often see explosions in HFT as price-setters—not by volume but where they are showing up a full day before large institutions move.” Quast goes on to say: “The problem isn't someone getting information early. The problem is a market structure that advantages the fastest participants, making an early look vital to profiting on that information.”

The question now is will the SEC, under new chairman, Mary Jo White, look more closely at these practices.  Some of these news dissemination organizations are the same ones that have been involved in the early release of the privately generated research discussed above. If this gets into the realm of market-moving material non-public information, then it may be crossing the threshold into insider trading. One of the weaknesses of Reg FD is the burden for proving that a company or company official covered by the rule did not violate it is on the corporate side, not on investors who might receive material non-public information through other sources and trade on it. Insider-trading rules in this situation may prevail over Reg FD which is corporate focused.

If the smoke leads to fire, then the Department of Justice may have its work cut out for it. But, it may well suggest the SEC should take a closer look at the news dissemination process where two seconds can be highly profitable for traders using sophisticated high-speed trading super computers.