Over the last several years, an exclusive group of investors has paid a steep premium to receive the results of a closely watched economic survey a full two seconds before its broader release. Those two seconds can mean millions of dollars in profits for the investors, who practice a computer-driven strategy called high-frequency trading.
On Monday, the company providing these investors with that lucrative edge, Thomson Reuters, is expected to announce that it will suspend the practice, yielding to pressure from the New York attorney general, according to a person with direct knowledge of the matter.
Eric T. Schneiderman, the attorney general, and his staff have been investigating the unusual arrangement that Thomson Reuters has with the University of Michigan. On two Fridays a month at 10 a.m. Eastern time, the widely cited and often market-moving economic survey known as the consumer confidence index is posted by the university on a Web site.
Thomson Reuters pays the university at least $1 million a year to distribute that data early to its money management customers on an exclusive basis. The company offers clients of its news service the opportunity to pay to receive the information on a conference call at 9:55 a.m.
But an elite group of about a dozen clients, which includes some of the world’s most powerful money managers, pays Thomson Reuters an additional fee to receive it at 9:54:58 â€" two seconds before everyone else. Some of the clients pay the company more than $6,000 a month for this early release.
The company packages the information for these clients in a format that allows their high-speed, computer-driven trading systems to exploit the data, making rapid-fire trades in stocks and futures before others gain access to it.
Mr. Schneiderman’s investigation began in April after a former Thomson Reuters employee filed a whistle-blower complaint about the practice, according to a person briefed on the inquiry. The attorney general’s investor protection bureau is specifically examining the 9:54:58 disclosure and, more broadly, whether preferential disclosure of data is a fair and appropriate business practice.
A spokesman for Thomson Reuters defended the practice and said the company was fully cooperating with the attorney general’s review.
“Thomson Reuters strongly believes that news and information companies can legally distribute nongovernmental data and exclusive news through services provided to fee-paying subscribers,†said the spokesman, Lemuel Brewster. “It is widely understood that news and information companies compete for exclusive news and differentiated content to help their customers make better informed trading and investment decisions.â€
Legal experts have said the tiered pricing arrangement Thomson Reuters has with its customers does not violate federal insider trading laws. As a nongovernment entity, the company can disseminate the information as it pleases, as long as it fully discloses the practice, they say. And trading on the early data release is also legal because no one is breaching any duty in leaking the information, as is the case in a classic insider trading crime when a company executive divulges corporate secrets.
But Mr. Schneiderman’s office is exploring whether the advanced look at the consumer data is a violation of the Martin Act, a state securities-fraud law that gives the attorney general broad powers to pursue either criminal or civil actions against companies. The nearly century-old law does not require the government to show proof that a company intended to defraud anyone. It also allows investigators to seek an enormous amount of information from businesses.
Regardless of the legality of the practice, it has raised questions among state officials about fairness in the financial markets. Regulators are concerned that elite investors are being provided privileged access to important data, according to a person briefed on the matter. A mission of the attorney general’s investor protection bureau, which is overseeing the investigation, is to help create a level playing field on Wall Street.
The controversy over the Thomson Reuters practice highlights the prevalence of high-speed trading in the nation’s financial markets. More than half of all American stock trades are now executed by firms that rely on computer algorithms to execute thousands of orders a second. These traders can get an edge by obtaining market data even milliseconds before their rivals.
Most market data providers, including the major exchanges, now charge premiums for faster delivery of information. Regulators have been criticized for being slow to address this seismic change in the market, and are just now examining the issues surrounding the selective disclosure of data to people who pay a premium for it.
One piece of coveted data is the University of Michigan consumer confidence number, a survey that measures the country’s opinion about the state of the economy. Investors consider it a bellwether of economic sentiment and a possible indicator of the direction of the stock market.
Mr. Schneiderman’s investigation of Thomson Reuters evokes the investor-protection campaign waged a decade ago by a former attorney general, Eliot Spitzer, who aggressively wielded the Martin Act to change Wall Street practices that smacked of unfairness. He used the law, for example, to expose Merrill Lynch’s hyping of Internet stocks, and then secured a global settlement involving 10 banks and $1.4 billion in fines.
It appears Mr. Schneiderman is using similar hardball tactics.
In response to the attorney general’s inquiry, Thomson Reuters took the position that its tiered pricing system was legal, said the person briefed on the investigation. But Mr. Schneiderman’s office demanded that Thomson Reuters suspend the selective disclosure of the survey at 9:54:58 to its highest-paying customers.
After Thomson Reuters resisted making the change, the attorney general’s office threatened to seek a court order to stop it from prereleasing the data, this person said. Rather than wage a court battle, Thomson Reuters capitulated and agreed to temporarily suspend the practice for the duration of the investigation.
When Thomson Reuters releases the University of Michigan consumer confidence survey this Friday morning, no one will receive the information before 9:55.
Thomson Reuters has recently had other problems with its release of market-moving data. Last month, the company accidentally released a manufacturing survey from the Institute of Supply Management to a small group of traders milliseconds before others received it. Those traders used computer models to process and trade on the data.
A Thomson Reuters spokesman blamed the problem on a “clock synchronization issue.†The Securities and Exchange Commission has opened an inquiry into the premature release.
