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From Securities Regulation Daily, July 16, 2013

NY Attorney General garners high-frequency-trading agreement, Sen. Grassley begins inquiry

By Jim Hamilton, J.D., LL.M.

New York Attorney General Eric Schneiderman has announced that financial information giant Thomson Reuters has agreed to immediately discontinue the practice of providing high-frequency traders with certain market-moving consumer survey results prior to the release of that information to its other subscribers, a move prompted by a current investigation by the Attorney General's office into this matter.

Prior to this agreement, Thomson Reuters was selling early access to the University of Michigan consumer survey results to high-frequency traders. The survey results are distributed exclusively by Thomson Reuters every other Friday. The University of Michigan’s consumer survey results are among the most closely watched indicators of consumer sentiment in the United States.

The AG said that high-frequency traders were able to access and act on this information two seconds earlier than other Thomson Reuters subscribers. That two-second advantage, said the Attorney General, is more than enough time for these traders to take unfair advantage of their early access to this information as they execute enormous volumes of trades in the blink of an eye. The Attorney General’s investigation into the scope and impact of this practice is ongoing.

Promoting fairness and avoiding distortions in the securities markets is an important focus of his office, emphasized Attorney General Schneiderman. The securities markets should be a level playing field for all investors, he averred, and the early release of market-moving survey data undermines fair play in the markets.

The change of Thomson Reuters’ practice immediately removes this unfair advantage for high-frequency traders and only allows them access to this market-moving information at the same time that it is made available to other Thomson Reuters subscribers. This change immediately removes a prior distortion in the markets and it sends a message that unfair timing advantages for high-frequency traders and others will not be tolerated, said the Attorney General.

Senator Grassley inquiry. On July 12, 2013, Senator Charles Grassley wrote a letter to the University of Michigan’s survey research center in an effort to help Congress understand the survey center’s practices and how they further the public interest. In that regard, the senator asked for information on whether the agreement between the Survey Research Center and Thomson Reuters was approved by the University of Michigan’s Institute for Social Research and, if so, how the agreement furthers the public interest. The senator also asks to see the contract between Thomson Reuters and the Survey Research Center. He wants to know if the Survey Research Center has any other exclusive contracts similar to the contract with Thomson Reuters; if so, these contracts should be provided. The senator asks for a response by July 26.

For stock traders, the rise of algorithmic and high frequency trading has placed a premium on obtaining market moving information as quickly as possible. Technological innovations in trading speed create opportunities, noted Senator Grassley, but also present difficult questions for legislators and regulators.

Senator Grassley is concerned that the Survey Research Center’s decision to allow preferential access, an exclusive two-second advanced feed of results designed specifically for algorithmic trading, may not be in the public interest. More broadly, he noted that high frequency and algorithmic trading’s appetite for low latency data has led to new concerns for small investors and their ability to gain meaningful access to market-moving information.

Advance access to market-moving information creates a critical edge for investors. For this reason, the Federal government releases all market-moving data at fixed dates to the general public. However, the Federal government has not created a similar set of rules for nonprofits who release market-moving information.

Somewhat parenthetically, the senator also mentioned that in 2000 the SEC was confronted with the selective disclosure of company-specific market-moving information that occurred on analyst conference calls not open to small investors. This selective disclosure harmed small investors who began to enter the stock market through online brokerage accounts. The SEC met this challenge through the promulgation of Regulation. FD and ensured that large shareholders, small shareholders, and stock analysts would all have access to the same information at the same time.

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