Pay to Play: Pros who pay for advanced peek on data are cheating and the sellers know it

Traders are paying up big money to get an early look at market-moving data provided by non-governmental groups. This is pay-to-play, pure and simple.

This is way different from data that the government releases. The rules are very strict; if anyone break s an embargo they get the boot. But according to the Wall Street Journal, private companies don’t have to follow that protocol. In the case of the University of Michigan Consumer Sentiment Survey, Thomson Reuters charges a premium to traders who want a two-second head start on the news. In computer-driven trading, that’s a lifetime. Thomson Reuters and its clients defend the practice, saying it’s no different from paying for a premium subscription to the Wall Street Journal or one of its feeds.

Not exactly. I am a WSJ subscriber and I am constantly bombarded with opportunities to pay up for special subscriptions. Ditto for premium subscriptions from Politico. And so forth. It’s quite public. Bloomberg news agrees, and PRIVATELY  complained to the University of Michigan about the deal it struck with Thomson Reuters.

The advance-data-peek world is submerged — a backroom club.  Even if traders believe the practice is wrong, they don’t dare buck the trend. Try and spot the irony in this explanation, by one “event-jumper” who sounds like a brainwashed  kidnapping victim:

“It’s not an exclusive club,” said Infinium’s chief operating officer, Gregory Eickbush. He said his firm needs to have an advance look at the consumer-sentiment survey to keep from getting “flattened” by other futures traders.

Mr. Eickbush said Infinium attributes around 10% of its annual revenue, or close to $18 million in recent years, to using high-speed news and economic-data feeds, in a strategy he called “event jumping.”

Trading on such reports, called the “news-feed trade,” is emblematic of an era in financial markets dominated by hair-trigger trading measured in fractions of seconds.

At its speediest, this means trading by algorithms based on what is known as “machine-readable news.” Paul Rowady of research firm Tabb Group, who studies the economics of trading, estimates the delivery of machine-readable news will generate $75 million in revenue for financial-news providers this year, up almost 50% in five years.

Sharad Kumar, a veteran of several high-speed trading firms, said the availability of early access to nongovernmental data creates an arms race in which firms pay for it to avoid being at a “huge disadvantage.” At the same time, its cost can be “a barrier to entry” for smaller traders, he said.

So Mr. and Mrs. Saver, if you want to  protect your nest egg, be sure to ask your advisor if their traders are members of the Event Jumping Club. Otherwise, they will be losing out.