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.
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.
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.
The difference isn't nearly as cut-and-dry as you think, especially since a variety of regulatory institutions have varying rules between them. Some jurisdictions cast a very wide net so that even associates and family members are included.
Since this debacle is approaching world-wide proportion then the impact will be similarly global.
It's a grey area - Mosaic theory stipulates that material information gleaned superior analysis of public non material information is itself classifiable as public and non material (ie not inside information)!
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.
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.
Only if the market is known to be unregulated. The problem is that the government, and companies that operate within financial markets, create the perception that the markets are regulated and fair.
Markets have rules on competition, that's just a fact, and no one wants to live with markets that have no rules. Taken to the extreme, a shopkeeper could just kill his competitor. It's still competition (why didn't the competitor hire body guards?), and it's still a market.
Yet no one seriously objects to government interference in the market when it comes to declaring murder illegal and punishing murderers. So why is this? Probably because most people regard murder, or force in general (though not always) to be an invalid, or unproductive competitive dimension. We would prefer that shopkeepers compete on who has the best products rather than on who is the best at violently eliminating his competitors.
This suggests that there are other dimensions on which we do not want competition to occur. If one of those is "who can get their hands on information the soonest", then sure, we should definitely regulate this issue.
There is a fundamental dividing line here that you are missing.
It is ultimately in every honest person's self-interest to disallow the _initiation_ of physical force.
When you have that, you can have markets and a free society.
When you don't have that, you have anarchy on the one hand, or some form of mixed or total authoritarianism on the other hand.
Financial markets should have rules, and people who break those rules should be sued and disbarred from the market. People should be free to choose to participate only in markets whose rules they can agree with, and create new markets if they see the need. Such is a robust, free system. All of this is possible in a traditional market system that disallows initiated force. The SEC and other regulators use initiated force and do not permit such a system to exist.
> It is ultimately in every honest person's self-interest to disallow the _initiation_ of physical force.
You used the word "honest" but failed to define it. That word must have a definition, and within that definition you are implying additional values beyond pure competition. I suspect that if we tried to clearly define that word we would find many more actions that many people would argue should be disallowed, like the "initiation of physical force". But many of those things would be far more controversial. My point is that real, existing (non-theoretical) markets are more complex than you seem to believe. Market actors will always try to find the "edges" of acceptable behaviour in order to gain advantage, and in a dynamic, changing world, those edges continuously multiply, making self-regulation in real life a pretty unreasonable prospect in my opinion.
> You used the word "honest" but failed to define it.
I mean it according to the simple English definition. An honest person does not seek to gain a value by deceiving other people.
I just put in the word "honest" to make my argument more readily apparent, but I could have ommitted it, because I don't think it is self-interested to try to live under a policy of deceiving others. So the word is redundant.
> I suspect that if we tried to clearly define that word we would find many more actions that many people would argue should be disallowed, like the "initiation of physical force". But many of those things would be far more controversial.
Omitting that word, what do you think people would argue should be disallowed? Once you bar the initiation of physical force, so many common-sense things are already covered. Maybe people would argue that we should bar using drugs, for instance---that would not be covered, as it's not initiating force. But I think it's obvious that drugs should be allowed except through circuitous logic that would be irrelevant in a context with a just government---such as "it costs the public to pay for drug use because of socialized medicine."
This is a bit of a tangent, so don't feel pressured to answer this question if you don't want.
> My point is that real, existing (non-theoretical) markets are more complex than you seem to believe.
I don't think so. You'd have to give me an example.
> Market actors will always try to find the "edges" of acceptable behaviour in order to gain advantage
Certainly.
> in a dynamic, changing world, those edges continuously multiply, making self-regulation in real life a pretty unreasonable prospect in my opinion
I don't get any of that. I mean, any rational investor wants to play on a market that has known, fair rules. Otherwise, they lose money. If all the rational investors go to a good market, the people who want to cheat on an unfair market won't have anybody to cheat off of.
You don't need government nannies to make the market fair. Say I open a stock exchange to compete with the NYSE. I am going to publish clear, straightforard rules, and if I am caught cheating, people can sue my ass off and go trade elsewhere.
The same principle applies in every sector of the economy. It's hard to see in some cases, due to the nannies. But obvious in many cases. For instance, if I buy a shitty laptop from Dell, I will not buy from them again. If it's bad enough, enterprising lawyers will start a class action lawsuit.
To broaden the example, the market is obviously working quite well and "self-regulating" for most consumer goods. I don't buy something with a shitty review on Amazon. If I go to Wal-Mart, I know most of the products are decent because Wal-Mart's people won't stock shitty stuff, because people won't keep buying it and they'll lose money (and devalue their brand in the mind of the consumer that bought something shitty).
This isn't the question. The question is whether or not the market is fair. This is the role of government in this case - to protect the little guy from being taken advantage of by the big guy.
You can argue about whether or not Reuters should be able to release public information in a tiered manner. In this case, I don't think they should, but others may differ. But what you can't argue about is that the knowledge of the tiers must be made public.
You should be able to know if someone else is getting information 2 seconds or 10 minutes earlier than you, just because they paid more for access.
>>This isn't the question. The question is whether or not the market is fair. This is the role of government in this case - to protect the little guy from being taken advantage of by the big guy.
Exactly. Having a free market is desirable if and only if we can also ensure fairness for all market participants. Otherwise it's just like the Wild West where the strong take advantage of the weak.
> "This is the role of government in this case - to protect the little guy from being taken advantage of by the big guy."
That narrative is nonsense. The government mainly protects the big guys and takes advantage of the little guys. That's what the banking bailout was. That's what a lot of Wall Street is today.
When nobody can use force on anybody else to get their way, we are all players in a market. Our society has gotten very, very far away from that ideal.
> But what you can't argue about is that the knowledge of the tiers must be made public.
You are just making an assertion without any principle to back it up.
I think people who produce knowledge should be free to sell it in whatever way they want, per whatever agreement they come up with with their customers.
In this case it's more complicated, as the people producing knowledge (University of Michigan) are doing it via government handouts. In such a sitauation, there is no "right" or "wrong" except for the government to stop bossing people around.
I'm not saying Reuters can't sell their information however they want. (Well, I'm not entirely sure about this).
But what I am saying is that they need to make customers aware that they may get access to the data after other customers. It should be public when others get access, but I'm not willing (yet) to say that open access should be mandated.
Depending on how the original contracts were written, it may be an FTC issue if everyone thought they were getting the information as soon as possible only to find out now that others were getting it earlier.
When market participation (here, trying to speculate on news) is optional, an unknown information disadvantage is far more pathological than a known information disadvantage.
> One of the fundamental, positive properties of markets is that there is information assymetry
The entire theory of the efficiency of "free markets" is predicated on the rational choice model, which takes as a premise that all actors have perfect information about the expected costs and benefits of all possible market decisions.
Information asymmetry is not a "positive property" of markets, it is a source of inefficiency.
> entire theory of the efficiency of "free markets" is predicated on the rational choice model
Whatever theory you are referring to is probably bullshit (definitely, if it's the one I think it is), but it's not the only theory supporting free markets.
I am anxious to see your presentation of any theory supporting the efficiency, in utilitarian terms, of "free markets" in which the claim that information asymmetry is a positive property is defensible.
Utilitarianism is bankrupt moral philosophy, so you won't get a utilitarian justification from me.
Unless you just mean "utilitarian" to mean "useful" or "efficient."
I really don't have the patience to go deep into philosophy and economics in HN comments, so I'm not going to try to do that. The most I aim for normally is just to call out irrationality that can easily and convincingly be called out.
That said, I'll go into it a little bit.
I'm not saying that it's good for certain people to know less than others. I'm saying that it's inherent in human society.
The whole point of a stock market, to take a simple example, is so that a company can raise money based on certain people's belief that the company will do well. Sometimes they are right, sometimes they are wrong. They want to take the risk. The whole situation comes from information asymmetry.
If that weren't the case, all investments would be no-brainers, and everything would be totally different.
That said, the market rewards people for acting rationally on the information they have. That's not the purpose of the market, exactly, but it's a good thing.
And it does not imply victimhood. Knowing less doesn't make you a victim of someone who knows more.
Overall, people acting rationally on information they know is fundamental to the economy.
This is a huge topic, so I'm not sure if these points are that relevant to whatever you are thinking, but there you have it.
> Utilitarianism is bankrupt moral philosophy, so you won't get a utilitarian justification from me.
> Unless you just mean "utilitarian" to mean "useful" or "efficient."
Economic efficiency and the value proposition of utilitarianism are defined identically, so, yes, I'm saying "utilitarian" to mean "efficient".
> I really don't have the patience to go deep into philosophy and economics in HN comments
Then you probably shouldn't make value claims about properties of economic arrangements.
> I'm not saying that it's good for certain people to know less than others. I'm saying that it's inherent in human society.
You seem, then, to have completely abandoned the "positive property" claim that I asked you to support.
> The whole point of a stock market, to take a simple example, is so that a company can raise money based on certain people's belief that the company will do well. Sometimes they are right, sometimes they are wrong. They want to take the risk. The whole situation comes from information asymmetry.
No, it doesn't. Sure, the point of a stock market is to allow firms to raise money. But information asymmetry isn't essential to it. Some difference between the market participants is necessary for exchanges to occur in the market, but difference in preferences (i.e., different utility functions) is sufficient (this can manifest in, e.g., different sensitivies to risk and different preferences for current vs. future goods) to support a market without asymmetric access to information.
Objectivism is actually the systematic rejection of Platonic thinking in philosophy, and thus is the opposite of a religion. So it's wrong to call me a "disciple."
Why shouldn't he hold his breath? Do you think I can't answer a simple question?
I would say there's no connotation of religion or Platonism in the word "disciple" and that by the second definition especially, you are very much a disciple of Ayn Rand. That's why it's useless to ask you for a utilitarian argument--Rand never dealt in utilitarianism, and as her disciple, you wouldn't, either.
Arguably, there is no _denotation_ of blindly following someone in the word "disciple," but I certainly feel that there is a _connotation_ of that.
I would also reject being called a "follower" or "adherent." All of these seem to me to have a connotation of _blind_ following, faith, or believing something just because you _trust_ some "authority" figure.
People who agree with Darwin are not called "disciples" of Darwin.
I acknowledge that the word "disciple" _is_ sometimes used to describe people who agree with a certain intellectual thinker, but I still think it generally has a negative connotation.
Anyway, regardless of your opinion on the word, Objectivists are likely to interpret you as being openly hostile if you use it to describe them. Though I can't speak for everyone, as I am a particularly sensitive person.
For instance, Your "don't hold your breath" point was right on target, but I initially interpreted it differently than the way I now think you meant it.
Darwin didn't advance a comprehensive philosophical system but rather a unifying theory of biology. And it was not a theory that was unique to him; he only published his theory of natural selection when it was independently developed by another scientist. He gets the credit in the same sense that Newton (or is it Liebniz?) gets credit for calculus--it has simply passed into accepted truth and it's merely a question of history as to who came up with the theory of natural selection.
Rand, on the other hand, advanced a large, comprehensive philosophical system that has never been independently arrived at. Every Objectivist becomes such by reading and becoming convinced by the works of Rand and her associates. And very little disagreement with Rand is tolerated--certainly no disagreement with what she clearly incorporated into her philosophical system itself. This is the behavior of disciples, not simply people who agree with a philosopher. This is not to say that they are wrong, but that they are engaging in a behavior--namely wholesale acceptance of another person's thoughts--that fits, for me, the denotation and connotation of the word "disciple". And it doesn't bother me one bit that some disciples of Rand bristle at that word, because the word fits.
Under your description, people who agreed with Newton or Leibniz would be called "disciples" until the work has "passed into accepted truth," at which point they would not be. I don't think that's right.
I don't think it's relevant that Darwin didn't publish until someone else agreed with him. I think it's a minor detail, and it's certainly irrelevant to whether or not something is true.
In summary, I think the distinction you're making is a false one.
It's certainly possible for a philosopher to develop a system that is faith-based, but that is not the case here.
> And very little disagreement with Rand is tolerated--certainly no disagreement with what she clearly incorporated into her philosophical system itself.
There are lots of people who disagree with Rand. It's not a religion. You can't be banished. There is no enforcement. So to say that little disagreement is "tolerated" is painting an incorrect picture.
> wholesale acceptance of another person's thoughts
That is a correct characterization of some people, but not everyone who agrees with Ayn Rand. Presumably, some people who agree with her acutally agree with her, rather than just "accepting" her thoughts. I would say that about myself.
> And it doesn't bother me one bit that some disciples of Rand bristle at that word, because the word fits.
If you think the word fits, I don't blame you for using it, but you're incorrect to think that it fits. It's bad to insult people based on _your_ own mistake.
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.
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/
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).
"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.
Fair points. Wikipedia'a Public Good article shows at the top a fireworks display as an example. This is interesting because most large fireworks displays I've seen do offer a small number of viewers the ability to watch from nearby (i.e. to obtain more-privileged access) in exchange for money. So non-excludability may not be complete and absolute: a "public good" may be available to all comers, but also available in an enhanced form for pay. Similarly with outdoor concerts having VIP seating, parades, and so on.
In the end this is a semantic issue and we can probably agree that the language is not precise enough to succinctly describe what's going on with the Survey now. But perhaps the examples above are illustrative enough, as I have rarely heard complaint about the visible existence of ticketed/VIP seating at public events. Some others here claim the Survey's dissemination would not be objectionable if it were done in a more transparent fashion (but still in tiers for pay).
Finally, it's interesting that this particular news item has such a "long" advantage period for paying customers. Two seconds is a long time for computers, and even if the Survey were released "simultaneously" to everyone, those who paid to build better networks and systems to use it would still benefit. The end result might be similar, only without the extra rents paid to Reuters. If Reuters and UMich argued that without these rents the Survey could not be produced at all, I wonder if it would calm the critics.
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.
>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.
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.
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 :)
It's neither illegal nor unethical for a private entity to invest money and manpower to compile statistical data, to release it in a staggered fashion, and to charge purchasers for early access.
It sounds innocuous enough with absolutely no context, but the fact is that they are selling market-moving data, and they know it. They know exactly what staggered release of this data does: create an uneven playing field for all but the wealthiest investors. This causes the creation of false profits that don't come from actual risk, or underlying value of securities, but by screwing retail investors, pension funds, and anyone else who doesn't start off with absurd amounts of money to begin with. Sure sounds unethical to me.
Of course they are selling market moving data. If it weren't market-moving, why would anybody pay a premium price for it? Just because something is market-moving does not make it "material, non-public information" about a specific company. And just because something is market-moving doesn't mean that a trader or hedge fund or whoever makes use of this data will gamble correctly and win every time.
You see people paying for privileged access to information all over the place. For example, on a slower time scale, industry analysts hawk expensive monthly newsletters or one-time reports. Bloomberg terminals provide news feeds and market data for the bargain price of ~$2000 a month.
I'm no financial or legal expert, but by market moving I am referring to data that moves the aggregate market in a fairly predictable direction. If jobs or the consumer confidence numbers go up, the market follows and vice versa. If your system gets this data before everyone else you essentially have a money-printing machine (at the expense of everyone else).
If you report data that's valuable because the federal government uses it in monetary policy decisions, then just push it to your customers as soon as its available for a flat rate.
When a company intentionally holds back data to make money on an incremental time difference, I'm sorry, that seems scammy and unethical to me.
As to Bloomberg consoles, that seems like a slightly different case, but if they similarly tier, then it is also unethical IMO.
In the trading game, there are very few things that move the broad market in a predictable direction. Simple correlation and causality get very, very hazy. It's not a simple matter of:
* get data a little early
* go long on the index
* profit!
A trader could execute all possible best-practices, and the numbers go the 'wrong' way. Or they go the 'right' way for a while, but then turn around as other traders cash out. Regardless, there's no guaranteed profit just because you have paid for early access.
The presence of risk-taking traders on all different time scales in secondary markets means that there's liquidity and accurate price-formation at a range of different time scales. At the very shortest time-scales, all customers are already against each other - it's the nature of a very liquid market, where A's gain is B's loss and vice versa.
But all this churning activity means that if you want to cash out your Apple stock, there's going to be a buyer right there on the other side, at all times. Without a deep reserve of risk traders willing to take the other side of every trade, liquidity is lost and capital is less likely to be attracted to the public markets.
"It's neither illegal nor unethical for a private entity to invest money and manpower to compile <news articles>, to release it in a staggered fashion..." etc.
Actually, it is illegal to manipulate markets through selective disclosure. People have gone to jail for trading off of pre-published news articles. Not sure what your point is, if you consider data market moving, its news.
True. Although this isn't really germane to the main point of whether they (via Thomson Reuters distribution channel) are doing a bad thing by charging high prices for early access.
Apparently UM gets a $1M/year or so through their distribution deal with Thomson Reuters in order to perform this research.
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.
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.
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.
Sniping is better for "advanced" buyers. It makes normal people that think of eBay as an "action" site really, really annoyed. You start bidding 5 days out, and feel comfortable, then literally at the last second, someone outbids by a dollar. I've even seen some sellers so annoyed they will refuse to sell to any sniping winners.
"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.
Because it reveals more information to other bidders, as eBay auto-increments. So by bidding early, you get zero advantage. Another bidder might see 2 hours left for a cheap item, and put in a minimum bid, hoping to win. If you auto-bid them up, then they might further increase their bid. If you snipe them, you bypass any response they have.
The system works if all bids were kept secret until the end, but that lowers pricing, and isn't what people think when they hear "auction".
Meanwhile, as-is, bidding early benefits you nothing and possibly harms you.
Why is that not a good strategy? It has consistently worked for me.
Because your desire for an item, expressed by your bid, is a signal to other buyers that can only raise the final price of that item. This strategy may work for you, but only if you're indifferent to the prices you pay.
When you use the auto-bidder you're not revealing any more information than if you increment bids by hand. Are you saying I could buy things on ebay at lower prices by manually entering bids, implementing the auto-bidder algorithm by hand?
When you use the auto-bidder you're not revealing any more information than if you increment bids by hand.
After you (or your proxy) enter a successful bid, eBay raises the price and increments the bid count. Those are market signals.
It's not a question of whether the auction uses proxy bidding or real-time bid entry... it's a question of when your bid shows up for all to see. It's never in your best interest to call attention to an auction you're interested in bidding on, yet that's exactly what you do when you bid before the very last few seconds.
Are you saying I could buy things on ebay at lower prices by manually entering bids, implementing the auto-bidder algorithm by hand?
Yes, that's what eSnipe and other services do for you. They allow you to hide your interest in an item until it's too late for anyone to rethink how badly they want to win.
Depends on the type of auction. In a Vickrey [1] auction you bid to the point of indifference but pay the second highest bid, that way you potentially capture some utility surplus.
[1] I said "Dutch" but apparently that technically refers to something else.
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
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.
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%
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].
> Day trading and HFT are not for the common man. But regular long term investing is.
+1
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).
I recommend that you read up on the basics of investing and the stock market. The Four Pillars of Investing by Bernstein is very accessible and contains a lot of actionable advice.
If you get a financial adviser just make sure he is a fiduciary -- meaning he is legally obligated to give you honest advice. The financial advisers at banks are (as far as I know) legally permitted to lie through their teeth. The bank receives kick-backs for funds they recommend, with all the predictable consequences.
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.
First, I'm diversified and I'm fundamentally seeking to beat the savings & CD account rate. The ETFs I generally buy are holding around the DJIA, occasionally beating it. Woo.
Second, I don't care if it's just a large number of random numbers or an actual performance: if I can draw out lots of money (lots more than I put in) when I am ready to, I win. :-) Angsting hard about this doesn't gain me much.
pnathan is not beating the market return and he is not aiming to. One buys ETFs to try and match the market. And any decent ETF will get very close to the ETF's benchmark. This tells us that the markets he is following must not have raised 40%. Which is good because it means he is diversified.
As for randomness, ETFs provide exposure to thousands of stocks which better than anything else averages the randomness.
>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.
> 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.
The secondary market actually does serve a capital allocation function. It provides liquidity to the original shareholders, and to the people who bought from the original shareholders, and so on. This, in turn, encourages people to become original shareholders, and to provide capital to the company.
Illiquidity is one major reason that private companies sell for lower multiples than public companies of equivalent size.
Secondary market provides liquidity to the shareholders, but not to the company. There is no cash-flow to or from the company if you buy an AAPL or GOOG. As I've said: the cash comes to the company only if it decides to have another public offering.
I see where you are going with the "what motivates people to buy ownership" part, and it has truth in it. My grandparent response was to the part "moving real capital to real businesses in need". Many people don't realize that the secondary market is not moving capital to the business, only the public offering.
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).
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.
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?
The difference is that one is illegal and unethical and the other isn't. There is no promise in the markets that everyone will have all relevant information at the same time and at the same quality. Why should that promise exist? If I spend my time and energy doing more research than you, why should you get the same advantage?
What we do have is a promise (cynical folks might say promise is too strong here) that if you are my broker, you can't use my non published order desires to take market positions.
We also have a promise that certain covered individuals working for a publicly traded company, cannot release certain material pieces of information about that traded company to anyone early, nor can they trade on that information before it is released.
The problem is not private knowledge, there is tons of that in the market, and that is what makes people take different market positions, thus enabling the market to exist. What is problematic is for people to take advantage of information that no one else could conceivably get.
> There is no promise in the markets that everyone will have all relevant information at the same time and at the same quality.
There may be no such promise but it is not clear on its face that such a promise should never exist, for example, to maintain liquid and orderly markets.
Is there any situation where it would be desirable?
If only 10 entities could buy real time stock quotes from the exchanges and everyone else had a 5 minute delay, wouldn't that be undesirable?
And what about government interest rate decisions? Should some entities be allowed to get early access?
This comment is running off on a tangent but I think it's important to understand that Kasey is right here, and front-running orders requires knowledge of the victim's specific trading intent. You aren't "front-running" simply because you're smarter than some other market actor.
> 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?
Well in the specific instance you use, this would be legal. In the futures market it is not only legal to trade on "insider information", its also expected.
The reason is very simple...consider an orange juice producer, they know what their required input will be( the insider information), the entire purpose of the futures market is to let them go out and lock in a price they will pay so they can budget.
Now consider what would happen if you couldn't trade in the futures market with insider information. If their order would be so large or small that they would move the market then they would be locked out of the futures market and woudn't be able to lock in their price.
The data in question is not the results of the orange harvest, it's more like a (very accurate) weather report that has a predictable impact on the orange harvest.
It's basically market research. You can't equate being better at predicting future prices with "front-running".
It's possible that what Reuters was doing is illegal on other grounds, though.
It is market research by the publicly-funded University of Michigan; imagine if taxpayer-funded NOAA gave first rights to all their weather data to Goldman Sachs.
> HFTs don't have customers. They are trading on their own books.
This is just plain false. Knight trading is a HFT firm that trades both their own book and on behalf of clients.
Infact there is a large market of HFT firms that trade on behalf of clients.
As always the term HFT confuses people. HFT doesn't say anything about buy or sell side, it mearly indicates that atleast one of the following is true:
- the firm has a high order to fill ratio, with most orders being live for only fractions of a second
- holds positions for under a few seconds,
- tries to make money by collecting the liquidity fee
- engages in price arbitrage across multiple exchange venues.
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.
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.
> 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.
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.
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.
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...
9 out of 10 times this means TDAmeritrade receives a kickback from Vanguard/iShares whenever you buy their shares. So there is a commission, and it's still being paid by you (albeit indirectly). This kickback doesn't need to be very large because TDAmeritrade isn't doing much work. My guess is that you can't buy shares in Vanguard's low profit margin funds (such as VFIAX - 0.05% expense ratio) without any fees, only Vanguard's high margin funds.
Of course, Vanguard wants to steer people to their more profitable investment funds, and paying the sales fee to the bank on behalf of the customer is a good way to do that.
Perhaps. I'm quite green when it comes to investing, so I probably haven't paid as much attention to expense ratio as I should have, but I have tried to minimize investments in high expense ratio accounts. The big one for me that I get commish free is IVV, which, if I buy in small chunks monthly isn't too bad at a .07% ratio, no?
IVV is very solid. IVV is competing fiercely with the new competitor VOO and SPY (the 3 funds are effectively identical). Vanguard charges the least (0.05% per year) and SPDR charges the most (0.09%). 3 years ago IVV had an expense ratio of 0.09%, now they're charging 0.07% and I expect their ratio to go down to 0.06% in the next year or two. Vanguard is trying to steal their lunch.
So if you get IVV without commission you're benefiting from this price war.
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.
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.
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.
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.
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.
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.
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.
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.
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.
As the article points out, the contract clearly shows the 3 known levels data distribution times (2 seconds early, on time, 5 minutes delayed).
If they were releasing it at other times it would most likely be a contract breach or some other civil matter.
But that is a big if. All this article points to to prove that is a disgruntled employee and a Nanex study (all months old) that do not have any proof of early release.
This is not the customer's contract, it's the University of Michigan's contract.
If the regular customers know that there are other more privileged tiers that impact the value of what they're buying, I guess it's ok. Otherwise, i think it might qualify as fraud
These tiers are widely known about in the algorithmic trading community. There is marketing materials on Reuters site outlining the advantages http://thomsonreuters.com/machine-readable-news/ and if you are event trading you certainly pay for this.
If the 4th secret tier exists, that would be a bigger problem but there is no proof of that in the article. It is all speculation.
I don't actually use their service, I assume pricing is available via a sales rep via their contact us page. If you want notice about the tiers, take a look under the "Suite Components" portion of the link I provided.
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.
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.
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.
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...
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.
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.