The Wall Street Journal has been doing terrific reporting on the unfair advantages high-frequency traders are getting from news organizations. Its latest page-one story looks at how a Deutsche Börse “news service” helped spark an FBI investigation into how government data is transmitted by publishers.
The story comes two months after the Journal reported that Thomson Reuters was charging big bucks for a two-second heads-up on University of Michigan consumer-sentiment data—a serious ethical problem even if it turns out not to be a legal one.
I wrote last month that the serious problem there was that Thomson Reuters “wasn’t exactly broadcasting the fact that it was giving the HFT bots the early dope.” In other words, most market participants didn’t know that other traders had an edge. And now an interesting MarketWatch post reports that trading has all but dried up in the first milliseconds of the two-second early window. Where 200,000 shares of an S&P index fund used to be traded on average, now just 400 are. Reuters has suspended its two-second window, but in a clear win for the WSJ, the trading evaporated after its June report:
But Hunsader also pointed out that trading after 9:55 a.m. dried up after press reports revealed the advantage in June. Other investors felt they were getting taken advantage of and stopped trading upon receiving the data at 9:55 a.m. That had the effect of driving the high-frequency traders to stop trading at 9:54:58 because there was no one to front run, he said.
That’s pretty clear evidence that a lot of traders really weren’t aware of the Thomson Reuters unfair advantage.
Whereas Thomson Reuters was getting $5,000 a month for its two-second head starts on quasi-governmental data. Deutsche Börse’s Need to Know News was getting up to $31,000 a month from subscribers for ultra-fast peeks at government stats.
What’s Need to Know News? A wire founded by a Chicago investment firm that thought its traders “weren’t getting economic data as fast as some competitors,” in the Journal‘s words. It only sends news to traders paying super-high prices and doesn’t do any public journalism, but it was able to take advantage of lax rules to get a press pass and access to the lockups where highly market-sensitive government data is released to reporters.
So what happens when traders get in the press room?
Need To Know News reporters in its lockups were allowed to have a phone connection starting one minute before news embargoes lifted. Reporters for Need To Know News “openly, willfully and repeatedly” violated the rules by talking during this minute, the Labor Department wrote to its bureau chief, Ms. Slack…
Need To Know News may be a “front for a trading organization” and “gaming the system,” one media-relations employee told the department’s labor-racketeering and fraud division in a May 22, 2009, email reviewed by the Journal after an open-records request…
The SEC collected hard drives from computers Need To Know News used at the Labor Department. The same year, the FBI installed a hidden camera in the ceiling of the Labor Department’s media room to monitor the activities of Need To Know News during lockups, according to emails and to officials familiar with the matter. The emails showed that officials suspected the organization was using technology to get around the system for blocking data until the release.
The story has a great kicker too. Solid work by the Journal.
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.