16 Major Firms May Have Received Early Data From Thomson Reuters

http://www.rollingstone.com/politics/blogs/taibblog/16-major-firms-may-have-received-early-data-from-thomson-reuters-20130905

by kevando • 13 years ago

179 131 13 years ago

rollingstone.com

mattip• 13 years ago

If you're going to engage in an arms war, you better have the best tools. I never really understood how small investors think they can do microtrading, but apparently it is common since the trading sites bombard you with the very latest statistics.

kevando• 13 years ago

http://www.jamesaltucher.com/2011/04/10-reasons-you-should-n...

I know, right. James Altucher has a great post on this, especially like his #3

raverbashing• 13 years ago

#5 is more to the point

All credit rating companies give it a good score

All auditing companies agree it's going great

All numbers look good

All "market analysts" recommend it

And then it implodes.

Remember what happens when you don't know who the fool on the tables is.

gizmo4• 13 years ago

Since all trading sites get a commission on each trade it's no surprise that they don't push people to put their money in a number of Vanguard index funds for 30 years.

On some of the investment funds offered by my bank their fees are so high the investment fund will never ever make money for the customer. And yet they shamelessly sell it anyway.

ImprovedSilence2• 13 years ago

I use TDAmeritrade, which actually offers a number of vanguard and iShares ETF's commission free. It really incentivizes investing in those rather than anything else. I know there has to be a catch somewhere on it, but I don't see what it is...

deveac2• 13 years ago

Specifically, Nanex saw a spike in the milliseconds before 9:54:58 on December 7th, 2012. To be exact, they saw a flurry at 9:54:57.18, nearly a full second before the "third-tier" algorithmic subscribers got their data at 9:54:58 a.m. This is exactly what you would expect to see if someone, or a bunch of someones, had access to the data even before 9:54:58 a.m. In this game you would want to hold your cards until the last possible moment before placing your bets.

A phenomenon not unlike what many of us have experienced bidding for an item on ebay.

Yet another example of the game being rigged. I don't invest for a living, but I've always thought it folly to approach the exchange in any manner other than a long term diversified one (as an individual investor). Maybe it is my lack of sophistication in the area, but anything else feels like gambling to me.

kasey_junk8• 13 years ago

As someone who does work in this industry, a spike before the number is completely explainable without anyone having early knowledge.

Lots of market participants are speculators. If you are speculating on the results of the number, you need to make sure your orders are in before it. Everyone in the low latency game knows when the number is coming, so it makes sense for speculation orders to go in when they do.

Now if Nanex wanted to prove something, they could show that a high percentage of those orders are consistently on the "right" side of the number, something they haven't done.

yummyfajitas3• 13 years ago

Not only that, but if market makers know volatility is about to increase, they will jump in early to get to the top of the queue.

theorique5• 13 years ago

Absolutely true.

A spike in orders in advance of an "important" time implies that people are trading in anticipation of market movements around that time.

It does not, on its own, imply that anyone has material, non-public information in advance of anybody else.

deveac2• 13 years ago

I think that the unethical (illegal?) problem is already inked in black and white where the three tiers of market information recipients exist.

I didn't make that clear at all in my comment, but yeah, I agree that the 4th tier is definitely speculation at this point.

I agree that it would be interesting to look for the payout skew for the numbers; that would just verify an additional transgression in my book. Unfortunately nobody reads my book so to speak :)

danielweber• 13 years ago

I don't want to dismiss the problem, but if the report is supposed to come out at 9:55:23, anyone who is willing to be on the other side of the trade at 9:55:22 is either being greedy or stupid.

Refuse to trade for the 10 seconds before 9:55:23 and you know you won't be a victim. You might also miss out on something big, but you can't have it both ways.

vasilipupkin• 13 years ago

Everyone can get access to this early data if they want to pay Reuters for it. The reason only a few firms do it is because their business is to trade on it. Regular investors are not affected

MichaelGG3• 13 years ago

eBay's problem is that it's an auction with a fixed end time and zero incentive for bidding early. That model makes no sense whatsoever, as it just prioritizes who can cram in a bid as close to closing as possible.

eBay could easily fix it by auto-extending an auction for X amount of time after the last bid. That way any activity would allow all participants to respond.

Yes, I know the stock answer is "people should always enter the max they would pay", but that's not a good strategy and also not how psychology works.

cbr3• 13 years ago

Why is that not a good strategy? It has consistently worked for me.

Karunamon• 13 years ago

"Penny auction" sites work on that model. You buy a pack of individual bids from the company which increment the price of some widget by .01, which extends the end time of the auction every time someone does it.

They market themselves on the occasional good deals you get on this model.

mprovost• 13 years ago

Trademe, the local equivalent of Ebay in NZ, auto extends their auctions which has pretty much stopped sniping. It works really well. It's probably a question of who they're interested in keeping happy, the buyers or sellers. I imagine fixed time auctions are better for buyers and auto-extending ones are better for sellers.

baddox• 13 years ago

How is it "rigged" in a bad sense? Isn't the point of trading that those who are "the best at trading" do the best? Sure, certain people have very real advantages, but it doesn't feel any more "rigged" to me than the other advantages, like having more capital to begin with, or having more knowledge of and experience and interest in markets.

the_french• 13 years ago

Can any legally informed HNer explain the probability of criminal prosecution? The article seems to imply that it is un certain that this is illegal, but to me it seems like this is insider trading at the very least and maybe something else (criminal). The article says on this:

  > There are disagreements as to whether or not this practice is illegal.

kasey_junk8• 13 years ago

This is certainly not insider trading. Reuters insiders are not giving out information about internal Reuters information. They are giving out proprietary analysis/research about the economy (specifically employment). There is no law that says everyone needs to have the same access to this.

yummyfajitas3• 13 years ago

If Steve Ballmer comes up to you and says "hey buddy, I'm retiring soon, better buy some MS since the price is going up", and you buy, that's insider trading.

If I (unrelated to Steve Ballmer) tell you "hey, that guys getting old, he'll probably retire soon", that's not insider trading.

Near as I can tell, the Reuters early release is firmly within the category of the latter. I can't see any reason why early release of private research would be illegal.

lifeisstillgood3• 13 years ago

Is there a pricing page on the Reuters site that says "standard", "Two Seconds early" and "One hour early"?

If not I suspect its illegal.

Al Capone was done for tax evasion, cannot see why Reuters cannot be in breach of a Fair Trading / Sales Act :-)

JackFr5• 13 years ago

Insider trading requires material, non-public information about a publicly traded firm, which the Michigan Survey is not. Additionally, there are regulations which pertain to releases from the the Treasury and the Departments of Labor and Commerce which also would not apply to the Michigan number.

The Michigan Survey is one (probably the most prominent) of a number of private surveys and data point the big banks, but also include things like National Association of Purchasing Managers Survey, LA Port Traffic, Mortgage Banking Association Mortgage Applications, American Institute of Architecture Billing Index (leading indicator of construction), and a host of others.

rayiner2• 13 years ago

Zero. There's nothing illegal about it, because the information isn't insider information about the companies being traded, but rather information compiled by a third party (U of M) that just happens to have a lot of market-moving power.

JackFr5• 13 years ago

I don't understand on what legal basis the SEC could force Reuters to stop selling the information to different people at different times. Reuters is simply not under their jurisdiction, and the University of Michigan Survey is not a public good, which everyone is entitled equal access to.

On the other hand, the SEC could forbid registered entities from buying the survey before it is generally available.

More importantly, I think Taibbi's outrage is misplaced - I don't see a victim here.

dhimes2• 13 years ago

I guess the only problem could be if they limited who was allowed to buy the advance information. It just looks like a premium service to me.

pmorici• 13 years ago

The problem as pointed out in the article is that they didn't disclose that they are doing this to their lower tier customers. It looks like it only became public knowledge once the excerpt from the contract specifying the three tiers was included in the wrongful termination lawsuit.

kcorbitt• 13 years ago

It might be illegal and would definitely be unethical if the subscribers to the lower tier don't even know that a higher tier exists. They would be buying access on the presumption that everyone else were getting the data at the same time. If enough sufficiently large investors receive the data earlier the lower-tier subscribers won't get much benefit from their subscription at all.

cynicalkane2• 13 years ago

Economists differ, but it's generally believed that tiered access to public information is a bad thing. It's one thing for algos to act faster on information that everyone gets, when everyone knows this is happening, because they can avoid suffering the worst of the information disadvantage--but it's another thing entirely if the public doesn't know about the information disadvantage. So I think this is against the spirit of public markets as it is generally understood in America.

But it should also be pointed out that, as usual, the average individual investor shouldn't be speculating on these numbers in the first place. This is yet another instance of professionals harming professionals.

javert12• 13 years ago

One of the fundamental, positive properties of markets is that there is information assymetry (i.e., "information disadvantage") in your language.

When there is too much information assymetry about something, it gets reflected in the price. That is also part of the economic power of markets.

So I disagree that this is against the "spirit of public markets."

In addition, it's certainly against the American spirit to have government nannies bossing people around. Let free people interact in the market... there is no need for this.

DannoHung• 13 years ago

The problem isn't that some customers are given first access, it's that they are given secret first access.

If Reuters had made it widely known that the report would be issued to customers in a higher tier first, this wouldn't be a problem. The fact that they were giving it out to certain customers first without telling others that they were going to be getting it later is the material issue. They were, fundamentally, helping create inside information for certain customers and creating an opportunity to exploit other investors who would be unknowingly trading with an information gap.

Even though the report was going to be widely disseminated, getting it ahead of other people without them knowing allows for you to create a huge market advantage for yourself if you know those other people are going to be trading on the same information shortly.

yummyfajitas3• 13 years ago

Yes, doing research and gathering information does give you a huge market advantage.

That's not the same thing as inside information, which is privileged information given to you by a corporate insider with a fiduciary duty to all shareholders.

jzwinck2• 13 years ago

Can you explain how the "Survey is not a public good"? It is rivalrous only at the second order (people compete to trade based on it), but non-rivalrous in itself (everyone can get the news). Other facts regarding its "public" nature are that the University of Michigan is a public university, with substantial taxpayer funding, and the Survey was initially funded by the Fed [1] (without which, it might not have the cachet it enjoys today).

[1] http://www.ipr.northwestern.edu/publications/docs/workingpap...

JackFr5• 13 years ago

To quote Wikipedia:

"a public good is a good that is both non-excludable and non-rivalrous"

"a good or service is called excludable if it is possible to prevent people (consumers) who have not paid for it from having access to it."

If the Michigan Survey were non-excludable, we wouldn't be having this exchange. While you might argue that upon general availability through the media it is non-excludable, the excludability of the timely access is at the very heart of the issue.

The argument that the University of Michigan is a public institution has some merit, however the onus is on you to suggest a legal argument for the Federal Government to compel the regents and trustees to behave in a manner contrary to what they would have done otherwise.

ballard• 13 years ago

The victim is everyone else that doesn't have access, something the SEC attempts to level the jungle. Winning in stock market is all about access to intelligence. If you have money, you may be able to buy it... if you have power, people try to give it to you (paying for it is stupid).

Fiction sums it up best:

"Public’s out there throwing darts at a board, sport. I don’t throw darts at a board, I bet on sure things. Read Sun Tsu's The Art of War ‘every battle is won before it's fought.’ Think about it. You are not as smart as I thought you were, buddy boy. You wonder why fund managers can’t beat the S&P 500, cause they’re sheep and sheep get slaughtered. I’ve been in the business since ’69 most of these Harvard MBA types don’t add up to dog shit. Give me guys that are poor, smart, and hungry and no feelings. You win a few you lose a few but you keep on fighting. If you need a friend, get a dog. It’s trench warfare out there, pal." http://www.imdb.com/title/tt0094291/

goombastic• 13 years ago

I think the government response to this should be to delay the feed to reuters by 2 seconds or whatever penalty time they feel like tacking on.

yoshakezula• 13 years ago

Matt Taibbi is the man - he's one of the only investigative journalists to consistently stay on Wall Street's ass and make reading about it entertaining (and not just depressing).

kasey_junk8• 13 years ago

Except he is nearly always incorrect in what he is reporting. For instance, in this article he makes a claim that early reuters data leads to front-running. That is just technically wrong. If he is going to report on a subject, understanding the basics of it would be a good start.

lifeisstillgood3• 13 years ago

err, isn't Front-running knowing what your customers are going to do as a trade and getting in first (so if you order my guy to buy IBM, I simply buy some IBM first, then sell it to you, making a little bit off your order).

So if I know the results of the orange harvest before you, I can buy frozen OJ futures and sell them to you even if you are not placing an order through me.

You still lose out, I still take advantage of my private knowledge. Whats the difference?

ShabbyDoo2• 13 years ago

Right. It's technically not front-running. However, I've heard many traders use the term when talking about how to take advantage of other market participants' likely future orders. As an example for those not immersed in this sort of jargon, imagine that you are driving by an oil refinery and see a huge explosion. You grab your smart phone and go long on gasoline because you presume that short-term refining capacity will be greatly reduced and prices likely will spike. While you had no specific knowledge of other market participants actual orders, you moved quickly to take advantage of their likely future behaviors. Even given this common usage, the author of an article aimed at the general public should not have used language suggestive of a crime when describing behavior akin to my above example.

JackFr5• 13 years ago

All his 'reporting' fits into a tidy victim/perpetrator framework, which often doesn't actually align with reality.

While some of his reporting on the crisis was OK, he has a habit of treating equivalently shortsighted or foolish behavior differently if he has predetermined you to be victim or a perpetrator.

rayiner2• 13 years ago

While some of his reporting on the crisis was OK, he has a habit of treating equivalently shortsighted or foolish behavior differently if he has predetermined you to be victim or a perpetrator.

That's a really wonderful way to put it.

apalmer• 13 years ago

Honestly Stock Market investing is not nor has it ever been for the common man. The hyper aggressive day trading & HFT sector is not for the common man. As for the slow long term investment route, the biggest section that gets abused by the savvy investors is the institutional pensions and such.

Bottom line if you are not going to put in significant effort you are not going to get much out of the stock market except by pure luck, and on average your going to lose... for the common man the effort necessary to make an extra 15% on your yearly income in the stock market, is more than if you did overtime or even went out and got a part time second job to earn that extra 15%

lifeisstillgood3• 13 years ago

Can you expand on that - an interesting idea / any proof / demonstration

I was told it was always sensible to invest in index trackers with minimal really low admin costs.

gizmo4• 13 years ago

Day trading and HFT are not for the common man. But regular long term investing is.

Getting a part time job is only a good idea if you have very few assets. Suppose you have 50k in salary and 50k in assets, then it's much easier to earn an extra 5k per year than it is to get an extra 10% return on your investment.

However, if you have 50k in salary and 500k in assets the story is the other way around. Investing 500k for 10 years with 6% interest instead of 3% interest leads to gains of 395k and 172k respectively. In this case making an effort in investing your money sensibly will lead to an extra 22k every year. A substantial difference. And as your assets increase your investment strategy only becomes more important.

Then there's the issue that not investing your money simply isn't a viable option. Inflation will chip away at your money at 3% per year, so you lose 25% of your money every 10 years if you stick your money in a checking account. Then there's the issue of employer-based 401k matching. You pretty much have to invest here, otherwise you lose out on free money. And if you just pick some investment funds at random you're going to do very poorly indeed (because many 401k funds are basically scams)[1].

[1] See http://www.pbs.org/wgbh/pages/frontline/retirement-gamble/

pnathan3• 13 years ago

Day trading and HFT are not for the common man. But regular long term investing is.

I drop a portion of my money each month into selected ETFs and it's done well for me (ha, the market has been on a bull rush, of course it did well for me).

onebaddude• 13 years ago

for the common man the effort necessary to make an extra 15% on your yearly income in the stock market, is more than if you did overtime or even went out and got a part time second job to earn that extra 15%

You're right. And why should it be any other way?

People often forget that underneath the glitz, glamour and dazzling array of numbers of the stock market and Wall Street, the purpose of "the game" is moving real capital to real businesses in need. And there are real risks associated with that.

The last 20 years have been seemingly "easy" for investors, or at least the years (prior to 2008) have been portrayed that way. But in no way should people believe he or she should be able to throw darts at the stock page and earn a 15% return. Aiming for the maintenance of the purchasing power of your savings, while generating those savings through work at which you're actually adept, is a far more reasonable and sensible goal.

agilord2• 13 years ago

People often forget that underneath the glitz, glamour and dazzling array of numbers of the stock market and Wall Street, the purpose of "the game" is moving real capital to real businesses in need.

Well, if it is a public offer, yes. But most of the time people are just buying stuff on the secondary market, meaning that the ownership of the company changes (a bit), but there is no capital move to and from the company. Nevertheless, this might help companies to create and time new rounds of public offers.

pnathan3• 13 years ago

Baloney. I've spent maybe 120 hours studying the stock market over the past 3 years, and have seen (in the current bull market) about a 25% gain in my ETF-based assets over the past two years.

On average, you should expect your money to move with the market, less costs of admin. Reading prospectuses is not fun, but its not hard to do to figure out which funds will take you for a ride and which are being decent.

Frankly, it's like free money after you finish your initial investigation.

Short-term speculation is, as everyone should know, a high risk high gain occupation. This is not rocket science, this does not take massive intelligence.

jamiequint• 13 years ago

First, that's not really that good as 25% is significantly underperforming the market which is up around 40% over the last two years.

Second, even if you were beating the market, how do you know you're not just being fooled by randomness (In the Nicholas Taleb sense)

smewpy• 13 years ago

If there is one thing I've managed to become sure of in my time on earth, it is that existing financial systems are explicitly designed by the status quo to be abused by the status quo.

brudgers• 13 years ago

Ask HN: Why can't I spot the sucker in the stock market?

malandrew• 13 years ago

From the point of view of maintaining a just society, the big problem with allowing things like this is inconsistency in enforcement. Either you level the playing field with respect to informational advantages across the board, and you prosecute bad actors with impunity, thus making it unattractive to bad actors, leaving only good-faith actors participating. Or you make it a caveat-emptor market, where no actor has any guarantee of a fair trade, leaving everyone to question any trade they want to participate in. This will drive out all the good-faith actors that know the game is rigged and not in their favor and it will leave only actors who are trading on the idea that they think that the fool at the table is not themselves.

Personally, I'd be very curious to see two parallel markets for securities: one that is completely unregulated where anything goes and one where any bad actor is prosecuted to the fullest extent of the law, including multi-year jail sentences and fines that are many multiples of past ill-gotten gains.

This would leave every actor with the choice of participating in the market they want to participate in, including both investors and companies. Companies could choose to list their securities on one just one of those two exchanges or both, and investors could invest only in companies on one exchange or on both exchanges.

The problem with the status quo is that the only actor who knows what exchange they are playing in is is the bad actor. The good actor often will not know that his counterparty is acting in good faith or is corrupting the system until after losses are suffered.

Creating a market for markets, where you can choose between unregulated and regulated markets, allows actors to choose which system they prefer to participate in and leaves regulators free to actually enforce the regulations without being soft for fear of what it may do to the market itself, which is exactly what happened in the 2008 crisis. Regulators were scared shitless of really prosecuting bad actors for fear of plunging the world further into a recession.

javert12• 13 years ago

Sounds good to me. The regulators will never allow it, though. It decreases their own power. They would call the unregulated markets a danger to the economy as a whole.

(Ironic, isn't it? Since the "Great Recession" was caused by government, as well as the fact that we're still in a slump and will be until there is major political change.)

The business of the SEC is to nanny rich adults, and nobody wants that job because they just care so much about those rich adults and truly want to force them to do the best things for themselves. As if forcing people to be good were even possible.

dragonwriter4• 13 years ago

the "Great Recession" was caused by government

This is true only in that it was a direct consequence of deregulation that removed regulations designed to protect against a repeat of the Great Depression.

Mikeb85• 13 years ago

If it's survey data, it seems as though Thomson Reuters should be able to release it however they want to release it.

For individual investors, sitting on the sidelines, watching the carnage and then jumping in is probably the best play. No small investor can beat the machines at their own game, but you can most definitely take advantage of the swings in the market caused by the machines...

mkramlich• 13 years ago

I deduced a long time ago that the "Wall Street + Washington DC + Big Media" combined entity/ecosystem is rife with front-running tailored to the Big Money players.

josho• 13 years ago

It strikes me that there is now enough evidence that high frequency trading & algorithmic traders are a blight on the markets. They should either be banned, or protections put in place to negate the arms race they cause. I see this 'early data' as part of that arms race.

Does anyone have any evidence whatsoever that high frequency trading is a benefit? I've read arguments that they are market makers by creating liquidity. But, I've yet to read a compelling explanation as to how they actually achieve that, nor how its provably valuable to the market as a whole.

HockeyPlayer• 13 years ago

Chris Stucchio addresses this at http://www.chrisstucchio.com/blog/2012/hft_apology2.html

He links to the HN comments as well.

hft_throwaway• 13 years ago

I'm sure some HFTs engage in event-driven strategies like this, but it's not their bread and butter. Most HFT strategies can be thought of almost like a lubricant that makes markets operate more smoothly and efficiently by moving liquidity to where it's needed.

Market makers move liquidity across time, matching up buyers and sellers who arrive at different rates and possibly on different exchanges. They do this by posting two-way prices and managing their inventory risk. Since placing limit orders gives a free option to other more informed traders, HFT MMs must be very skilled at predicting short-term price movements and adjusting their quotes quickly based on these predictions. They attempt to profit on the difference in their buy and sell prices net of fees. The market maker is buying when potentially informed sellers enter the market and selling when buyers enter the market, and prices often move against them. In reality if they are good at predicting prices and managing risk they will capture a fraction of the spread. This activity dampens volatility since there are more ready buyers and sellers in the market which keeps prices close to fair value rather than moving abruptly simply because of a short-term imbalance in the number of buyers/sellers. For a counter example of this look at the Bitcoin market which is relatively illiquid and large orders can move the price substantially.

Arbitrage is another common HFT strategy where they are moving liquidity and price discovery from one product to another. An example would be trading an ETF vs. the basket of stocks it contains. If the basket is cheap relative to the ETF, the HFT firm will buy the basket of stocks and sell the ETF and realize a profit by either unwinding the trade or creating/redeeming the ETF/basket. This activity keeps prices fair so when you buy shares in an ETF they have very little tracking error relative to the underlying basket of stocks. Because computers can trade for almost no margin, trades like this are extremely competitive to the point where most major ETFs essentially never trade at a discount or premium.

The reason market-making HFT is especially beneficial is because it can operate at such low margins. Human market makers had to charge wide bid-ask spreads because one floor trader could only manage a handful of products at once so they need to make more money in each product. In today's world a small team could run automated market-making on a thousand symbols or more. They're happy making a penny spread or even less since they cast such a wide net.

Financial intermediaries have always existed since buyers and sellers rarely arrive at the exact same time and place. Automating this process is far more efficient than doing it by hand.

Was there so much moral outrage and misunderstanding when manned telephone switchboards were replaced by computers?

There are real issues in the US market structure (internalization/payment for order flow, poor tick size choices that encourage penny jumping in high-priced stocks and jockeying for queue position in cheap ones, excessive number of exchanges some created just to offer different fee structures, tiered rebates, etc.) but HFT generally has positive effects on market quality.

ShabbyDoo2• 13 years ago

The article suggests that more than a few seconds of privileged access to an important economic indicator would have little value due to the speed of algorithmic market participants. I disagree. Imagine that you knew this morning's unemployment number a second before everyone else. Could you have become a bazillionaire? No. Your potential windfall would be limited by how much of a position you could take on without moving the prices of instruments past the point of where they likely would end-up after the general availability of this economic indicator. Order books are fairly light right before a number is released because most participants presume themselves to be the victim of a better-informed trader if the option they "wrote" by putting an order on the book is exercised. So, you as a well-informed trader would have limited opportunity to take on position without paying at least as much as the likely value of that position after everyone knows what you knew a second beforehand. Conversely, imagine that you knew a day or two ahead of time what this morning's unemployment number would be. You could slowly build up a huge position and make orders of magnitude more.

na85• 13 years ago

Quite frankly I believe there should be a cooldown period between trades, with the effect of eliminating the practice known as High Frequency Trading.

16 Major Firms May Have Received Early Data From Thomson Reuters

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