Market Matters Blog

Economic data is a big business, and the profits from trading data faster than anyone else has fueled the rise of algorithm-based trading. Government agencies, like USDA, try hard to ensure their data is released to everyone at the same time while non-government organizations sell early access to the data, raising questions of fairness and ethics.

Data, regardless of the market it influences most, means real money to real people, so when something goes wrong, the money made and the money lost generates additional controversy. Earlier in June, a newswire reporter was caught in USDA's lock-up with an unapproved electronic device, which is a violation of USDA's procedure to keep information from leaking out of the locked, windowless room where reporters got to get early access to the data. USDA kept the company's data feed from releasing the numbers until 30 minutes later. Even a few minutes delay makes people angry, and 30 minutes is an eternity in this era of fast paced trade.

Shortly after the June WASDE, I read an article by the Wall Street Journal about how much traders pay for early access to data from non-government groups (http://on.wsj.com/…). The buzz the article generated combined with an investigation by New York's attorney general into the fairness of the practice caused Thomson Reuters to retreat. It's no longer going to release the University of Michigan's consumer sentiment data to its high-speed traders two seconds early.

Still, the difference between government data releases and non-government data releases astounded me. Let's compare.

USDA's lock-up procedures are stringent: reporters must have proper credentials, put all electronics in a locker before entering the secure area and have their bags checked for contraband wireless devices. USDA even invested in equipment that senses electronic signals inside the lockup room. Cell phones, laptops and tablets have never been allowed; and USDA no longer allows outside calculators in the lock-up room. Reporters sign contracts acknowledging the rules and consequences.

I think USDA really beefed up security around report releases after news broke that the FBI was investigating how media companies transmit government data to investors and whether or not they facilitated insider trading (http://on.wsj.com/…). While the FBI focused primarily on Labor and Treasury Department releases, they looked at agriculture too.

USDA staff has said its security measures were being audited, and it's been more focused on enforcing them, like they did to Dow Jones last month.

I've never had occasion to cover the releases of data like the University of Michigan's consumer confidence report, but I was surprised to learn that non-government groups sell early access to their reports.

"Economic reports from public universities, trade groups and other nongovernmental organizations can move markets as surely as official data from the U.S. government. But unlike government reports, where pains are taken to make certain no one gets them ahead of time, few rules control release of nongovernmental economic reports. Unknown to many investors, selling early access is routine," the Wall Street Journal article states (http://on.wsj.com/…).

Thomson Reuters paid $1.1 million in 2013 for the right to distribute Michigan's consumer confidence data on its high-speed news service (designed for algorithmic trading) two seconds before it's given to other news outlets and 5 minutes before it's put on the university's website.

On the morning of March 15, in one single second, firms that had access to the consumer confidence data bet 7 million shares that equity markets would decline. Stocks did, indeed, drop. That's astonishing volume for such a short period of time. It's not considered insider trading because there's no law preventing trading on nonpublic information that's legally purchased.

One of the Journal's sources 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. If the news providers are making that much money, the Watsons, Cheetahs and other breeds of algorithmic traders must be making multiples of that.

Access to non-government reports isn't a question of legality; it's a question of ethics. With so much money in play around big data reports, it's worth reviewing the fairness of those procedures, especially when you compare it to what the government does. Some of the groups quoted in the WSJ article, like the Conference Board and Thomson Reuters, are doing just that; others aren't. Big data is big business, and I'll be interested in seeing how it all shakes out.

© Copyright 2013 DTN/The Progressive Farmer. All rights reserved.