Regulators Examining Sales of Early Financial Data

The financial industry is bracing for new scrutiny of services that give trading firms an advance look at market-moving data and news.

The New York attorney general’s office has been taking a broad look at the common practice. On Monday, one prominent data provider, Thomson Reuters, under pressure from the attorney general, announced that it was suspending an early release of a consumer confidence survey to clients who paid extra.

Financial products that give traders first access to data have become widely accepted within the industry. Dow Jones recently announced the creation of DJ Dominant, a program that will release news articles two minutes early to subscribers who pay more. The nation’s stock exchanges, meanwhile, are often releasing new premium products that offer faster delivery of public data from the exchanges.

For the most part, federal securities regulators have been comfortable with these arrangements. But the New York attorney general, Eric T. Schneiderman, is potentially in a position to throw them into question. The attorney general has broad powers to crack down on Wall Street because of the Martin Act, a 1921 New York law that allows him to bring fraud cases against a company without proving the company’s intent.

“Where are you going to go with this investigation?” said Chris Malo, the chief financial officer at the high-speed trading firm Sun Trading. “It’s a slippery slope. I don’t know where you draw the lines.”

The race to get information first has been a part of financial markets at least as far back as the carrier pigeons that delivered news of the Napoleonic Wars to London. More recently, news providers of all sorts give preferential access to articles to their own subscribers.

In the trading world, though, speed has taken on a particular importance over the last decade as an increasing proportion of traders in the financial markets have come to rely on a time advantage. Such superfast computer-programmed trading means that just two seconds â€" the advantage that Thomson Reuters was giving its clients for early access to the University of Michigan consumer confidence survey â€" can make all the difference in trading millions of dollars’ worth of stocks or bonds or other investments. High-frequency trading now accounts for more than half of all trading in American stocks.

“You’ve devolved to a footrace,” said Tim Quast, founder of Modern IR, which works with companies on their listings on stock exchanges.

While the attorney general’s inquiry has unnerved some on Wall Street, it is being cheered by others who have criticized the privileged delivery of data in the past.

“This is a much welcome change,” said Eric Hunsader, the founder of the market data provider Nanex. “Somebody needed to take this up.”

Sal Arnuk, a partner at Themis Trading, and a longtime critic of the high-speed innovations, said that the questions now being asked were long overdue.

Thomson Reuters, in its defense, pointed to how many other data companies provide their own subscribers with preferential access to information. A Thomson Reuters spokesman, Lemuel Brewster, said that its early release of the University of Michigan data was legal, but that it would stop giving the two-second advantage while Mr. Schneiderman was investigating the issue.

Mr. Brewster said that the “debate” about the timing of data release “is a universal industrywide debate that impacts all news and information companies and needs to be done in consultation with the market.”

The current push for speed is in part different than in the past because data companies have standardized the time advantage given to some companies.

One recent example is a service that the Nasdaq market and Chicago Mercantile Exchange introduced in May, which promises to get Nasdaq’s market data to customers in Chicago â€" and Chicago data to the East coast â€" 2 milliseconds faster than it is otherwise available thanks to the use of microwave transmission. The cost for the advantage is a reported $20,000 a month.

Some exchanges and several unregulated data companies have recently introduced similar microwave networks. So far, the Securities and Exchange Commission has not objected to these programs as long as they are fully disclosed to all customers. Last year the S.E.C. fined the New York Stock Exchange $5 million for releasing some data early. But those problems were described as irregular and not part of any standard product. The S.E.C. has also looked into other cases in which important data was accidentally released early.

The New York attorney general is throwing the issue open by looking at practices that have not been accidents, and that have previously won acceptance from regulators.

“It does open up a Pandora’s box,” Mr. Quast of Modern IR said.

In addition to the Thomson Reuters program, there are products like the Deutsche Börse’s AlphaFlash, which provides the results of the Chicago Business Barometer to subscribers three minutes earlier than the normal 8:45 a.m. release.

Mr. Hunsader, at Nanex, has documented how these early releases lead to a flurry of trading that moves stock indexes before the public has even had a glimpse of the numbers.

Mr. Schneiderman’s office could choose to restrict his investigation to the University of Michigan survey data thanks to some of the distinctive elements of that product. It involves data from a public institution, rather than the private companies that provide surveys like the Chicago Business Barometer. In addition, Thomson Reuters was not just providing the University of Michigan data five minutes early to its subscribers, it was providing it five minutes and two seconds early to a select group of about a dozen high-paying clients.

Even as Thomson Reuters is discontinuing that two-second advantage, it will continue delivering the Michigan data to all Thomson Reuters subscribers five minutes earlier than it goes to the public.

But Mr. Schneiderman’s office indicated on Monday that he was interested in the broader principle behind the early release of data, rather than the particular details of the University of Michigan product.

“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,” Mr. Schneiderman said in a statement Monday.

The stock exchanges would be vulnerable to any investigation because of their increasing reliance on revenues from technology products that promise customers with faster access to information about orders on the exchanges. The most well-known programs allow trading firms to “co-locate” in the same building as the exchange’s servers, for a monthly fee. All firms inside the building are a standard length of cable away from the exchange servers, to ensure none of them have an advantage. But all of the firms inside the building are much closer than those not paying for the access.

Representatives for the exchanges declined to comment for this article. But in the past, exchange executives have said that they offered their products equally to anyone who pays, much like an airline offers equal access to first-class airline tickets.