More on how the stock market works against ordinary investors

I wrote earlier about how the stock market is rigged against small investors. Matt Taibbi provides another example. As a result of a wrongful termination suit by a former Thomson Reuters employee named Mark Rosenblum who became a whistleblower, a document has been released that shows how key economic data that is influential in predicting how the stock market would move was released early to a few special institutions that were willing to pay for the privilege.

Rosenblum learned that his employers at Thomson Reuters, who had a contract with the University of Michigan to release the data, were releasing the data in three “tiers.”

The general public would get the information at 10:00 a.m. at a certain date each month.

Ordinary subscribers to Thomson Reuters would get the data a little earlier, at 9:55 a.m. exactly.

Then there was a third group of “ultra-low latency” subscribers – algorithmic traders who use computer programs to make millions of calculations per second – who would get the data two seconds early, at 9:54:58 a.m.

But it turns out that there may be others who secretly got even earlier information, maybe up to an hour before the rest.

The interesting new development is the news that a number of major financial players may have gotten an even bigger head start on the survey data than the two second jump already addressed by Attorney General Schneiderman earlier this summer. If true, it’s yet another story suggesting that the markets are a sharply uneven playing field, with the general public playing the role of suckers trading on sloppy-seconds information, while powerful insiders pay for enhanced access.

The story jibes with the research done by the reporter Foxman earlier this summer. In her article from June 10th, “More evidence that Thomson Reuters data may be leaking out earlier than it’s meant to,” Foxman pointed to a study done by the market-analysis firm Nanex. The study showed a huge early run-up in trading ahead of the release of the Michigan survey results. Specifically, Nanex saw a spike in the milliseconds before 9:54:58 on December 7th, 2012. To be exact, they saw a flurry at 9:54:57.18, nearly a full second before the “third-tier” algorithmic subscribers got their data at 9:54:58 a.m.

This is exactly what you would expect to see if someone, or a bunch of someones, had access to the data even before 9:54:58 a.m.

Is this practice of selling early information legal? Apparently the issue is not clear. One could argue that the parties involved (University of Michigan and Thomson Reuters) are private organizations that are producing their own information and thus should be allowed to do what they like with it. On the other hand, the stock exchanges depend crucially on the fact that information should be available to everyone on an equal basis, and thus the rules against insider trading. So it may all come down to whether this set of data is significant enough that even though it is privately generated, it should be released to all at the same time.

But until then, smaller investors should be aware that the field is tilted against them.


  1. Reginald Selkirk says

    This is all about day trading. Don’t worry about what goes on at the scale of a few seconds if you are investing for decades.

  2. Randide, Mais il faut cultiver notre jardin says

    I guess I would argue that the University of Michigan is a public university and not a private organization.

  3. dickspringer says

    I can’t play this game, obviously. But this stuff enriches Goldman-Sachs top executives, A tiny advantage can yield a lot of money if you have a high-speed supercomputer.

  4. Lofty says

    Small investors are allowed the illusion of portfolio growth until it suits the big investors to take it off them.

  5. lorn says

    The stock market is a scam for anyone not operating with inside information or other people’s money.

    One of the first rules of poker is that you need to identify the pigeon. If you look round the table and can’t spot the pigeon, it’s you.

    As with any casino, most people lose money on the stock market. The system wouldn’t work otherwise. The stock market has overhead, and your broker has overhead.

    You also have to understand that people tend to do what makes them the most money. Consider what the people telling you to make money playing stocks are really doing. If that broker really had a steady line of sure things wouldn’t they be be laying those bets themselves? ie: If Cramer, nothing against him in particular, could make more money investing than running a TV show he would be spending his time investing instead of running a TV show. I kind of think he isn’t doing this out of the goodness of his heart.

    Lofty @5 makes a good point. People are allowed to build a juicy stash until it is ripe enough to be ready to be harvested.

    It is their game. They make the rules. You go into their house to play. They own the field and the referees. Don’t expect a fair deal.

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