>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.
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.