If you think the increasingly hot debate over high-speed trading doesn’t affect you, think again.
When high-speed traders get their hands on market-moving data a couple of minutes, seconds – or even milliseconds – before you do, you could lose out.
Imagine if a government statistical agency emailed a much-anticipated announcement to your competitor a minute before stepping in front of the TV cameras. Outraged, you’d immediately say, “That should be illegal!”
In the case of government reports, and releases by companies listed on stock exchanges, rules require consistency in the timing of announcements. But think tanks and universities aren’t under the same restrictions, and some make deals with services that provide data to market players.
Those practices have caught the attention of regulators, and today one major player volunteered to change its ways.
Thomson Reuters, at the request of New York’s Attorney General, has suspended its practice of selling high-speed traders early access to University of Michigan consumer survey results, a key indicator of consumer sentiment in the United States. These traders were able to see the data about two seconds before other subscribers – ample time to take advantage of the information.
“Promoting fairness and avoiding distortions in the securities markets is an important focus of this office,” said Attorney General Eric Schneiderman. “The securities markets should be a level playing field for all investors and the early release of market-moving survey data undermines fair play in the markets.”
The attorney general’s office added the change in Thomson Reuters’ practice removes an unfair advantage and “sends a message that unfair timing advantages for high-frequency traders and others will not be tolerated by the Attorney General.”
Thomson Reuters responded to Advisor.ca’s request for comment as follows:
“Effective July 12, Thomson Reuters will simultaneously distribute the Thomson Reuters/University of Michigan Surveys of Consumers headline data at 9:55 AM ET to its clients while the New York Attorney General conducts a review of this matter. Dissemination of the final data beyond Thomson Reuters clients will continue to take place at approximately 10.00 AM ET by press release. Thomson Reuters is fully cooperating with the NY Attorney General’s review and made this change voluntarily at the request of the Attorney General.
“Thomson Reuters strongly believes that news and information companies can legally distribute non-governmental data and exclusive news through services provided to fee-paying subscribers. It is widely understood that news and information companies compete for exclusive news and differentiated content to help their customers make better informed trading and investment decisions. Thomson Reuters remains committed to being open and transparent about how it releases proprietary data.”
Mark Yamada, president of PÜR Investing Inc., doesn’t object to HFT, but does welcome Thomson Reuters’ change in policy.
“The principle of fair and equal disclosure should apply. To do otherwise is like ‘selling’ inside information. If Thomson Reuters makes all data available to everyone at the same time, it’s difficult to object.”
Others in the advisor community don’t seem to take the issue seriously. It’s a dangerous apathy, because every time a high-frequency trader gets that millisecond advantage, the tortoises stand to lose. Those missed opportunities can translate into lower returns for clients.
As in the U.S., concerns about high-frequency trading have caught the attention of Canadian regulators.
“As trading technology continues to rapidly evolve, it’s important that regulators examine how it is used, to ensure a level playing field,” Wendy Rudd, senior vice-president, Market Regulation and Policy, IIROC, told Advisor.ca.
“[W]e are currently in the midst of a comprehensive study of HFT activity on Canadian equity marketplaces. IIROC believes it is important to address identified regulatory concerns relating to HFT based on empirical data and objective analysis. The research will help to inform Canadian market policy direction, and will complement other efforts by IIROC to have appropriate controls in place,” she added.
IIROC’s High-Order-to-Trade (HOT) study, released last December, “found that 11% of all traders were HOT traders and that this group accounted for 22% of the total share volume traded in Canada and 94% of order messages. The study also found that HOT traders were responsible for 36% of Canadian share volume traded in U.S. inter-listed securities,” a press release states.
Investor advocates also have an eye on HFT. In a letter to IIROC last October, the Canadian Foundation for Advancement of Investor Rights (FAIR) urged the regulator to “take action” if it found “market quality, integrity or investor confidence is being negatively impacted by HFT.”