We hereby present a modest proposal to cut the budget deficit without having to either raise taxes or slash any government programs. On the first Friday of every month, the Labor Department releases a report packed with data about how the U.S. job market fared the previous month. Financial markets often make big jumps on that news, with valuations of stocks, bonds, currencies and commodities sometimes moving by trillions of dollars.
So the plan is simple: The Labor Department can release the report to the public as it always does on Friday morning at 8:30 a.m. But traders who want it five minutes early can write Uncle Sam a $25,000 check for the privilege. Of course, getting the information even earlier than that could be worth more. The White House and Federal Reserve get the report the evening before, so why not extend the privilege to some friendly neighborhood hedge funds for a mere, oh I don’t know, $10 million. And maybe you could have an auction to give some high frequency trading firm the very first crack at the report, offering it up the afternoon before release to the highest bidder. They might pay hundreds of millions of dollars!
This thought experiment is of course triggered by the revelation this week that Thomson Reuters, which distributes the University of Michigan Consumer Sentiment index, makes the information available to paying subscribers five minutes before the masses and hands it to select high frequency tradering firms two seconds before that, for even more money.
The revelation raises a knotty and uncomfortable set of issues for anyone in the information business — and exposes a touchy paradox in providing any kind of news or information that affects markets.
The idea of the Labor Department auctioning an early look at the jobs numbers is, of course, absurd. But why? Two reasons:
First, the U.S. government is in the business of making information available to the public, not selling it to favored investors; the Bureau of Labor Statistics doesn’t exist to make a profit. But what about organizations that are? Consider the Wall Street Journal, very much a for-profit enterprise. It employs Jon Hilsenrath as its chief economic correspondent and lead Federal Reserve watcher. Hilsenrath has often been the first to report on what direction the Fed will go next, and so markets assign considerable weight to his articles (they also seem to misunderstand how to read him, but that’s a story for a different day). Just last month, a mere rumor in the markets that he had a story in the works about the Fed winding down its stimulus policies led to a stock market selloff.
The Wall Street Journal charges a few hundred dollars for a subscription that includes access to its Web site. But would it be acceptable for it to offer Hilsenrath’s articles 10 minutes early for a premium of a few thousand dollars? Or to sell an early look to an even smaller universe of hedge funds for a six- or seven-figure sum? Everybody agrees that it is perfectly fine for the Journal to charge a reasonable subscription fee to read its articles, but most people would be ethically troubled by the idea of selling an early look to the highest bidder for millions. But the question of exactly where to draw the line between those extremes is a difficult one to answer based on our initial principled reactions.
The second reason that auctioning off an early look at the BLS report seems absurd is that once it became known that some players in the markets had that early access, it could cause unpredictable disruptions in the financial markets, essentially creating more volatility for no real economic gain for the country.
What a trader wants is 1) Information no one else has 2) that will soon become known to everyone, shifting broad market prices. But there’s a stipulation, as well 3): They don’t want others in the market to know that they have this exclusive information. In short, you need some dumb money.
It will be interesting to see if, now that it is widely known that some traders are getting the consumer sentiment data early, it will be harder for them to make money. Would you trade in a market where you know there is secret information about to be revealed that the other guy has but you don’t?
This is the paradox of financial information: It is more valuable the fewer people have it. Yet we also have expectations that markets will be fair and that nobody will have an early edge.
It’s not just media companies and financial data providers who have to grapple with this. The same applies to the research departments at investment banks, who periodically come under fire for giving their clients access to reports upgrading or downgrading a company’s stock before the information goes out to the rest of the world. As Richard Curtin, the economist who runs the University of Michigan sentiment survey, told the Wall Street Journal in defending the practice of early release put it: “This research is totally funded by private sources for the benefit of scientific analysis, to assess public policy, and to advance business interests. Without a source of revenue, the project would cease to exist and the benefits would disappear.”
Whether you’re a reporter who comes up with a scoop on the Fed, an analyst who has an insightful take on what a big company’s stock is worth, or a university doing a large and expensive survey, somebody has to pay the bills. And this conflict between the needs of investors — that limited, early access — and what is best for the public and markets as a whole, isn’t going away.