Tuesday, August 13, 2013

Another News Service for High Frequency Traders Draws Scrutiny

By Tim Dulaney, PhD and Tim Husson, PhD

The Wall Street Journal is reporting that Need To Know News has come under investigation from the Securities and Exchange Commission for selling early access to government data to high frequency trading (HFT) firms.  This comes as other firms who sell machine-readable market data to HFT, including Thomson Reuters, have also made news for potentially distorting markets.

The WSJ story offers an example of how Need To Know News assisted HFT firms:
A news event on Sept. 2, 2011, shows the critical role of speed in trading. Investors were expecting a positive monthly employment report that morning; instead, the economy added no net new jobs. 
A Swiss investment fund, Da Vinci Invest AG, got this number a fraction of a second after its release via Need To Know News, zapped from its seat inside the Labor Department. Da Vinci's computers instantly made trades on European markets that within minutes showed a 16% gain, said the firm's founder, Hendrik Klein. 
Need To Know News "was the fastest service" when the firm became a client in 2009, he said, and "they're still the best."
To get this data, Need To Know News allegedly earned media credentials which allowed it to view Labor Department reports early in a process known as a lockup.  Lockups traditionally allowed reporters to write stories on new economic data before it was released to the public, but are now suspected of leaks to HFT firms.

Indeed, the HFT data firm Nanex, LLC has documented numerous examples of market prices moving fractions of a second before news is officially announced. It is not always clear where leaks come from, but it is increasingly clear that even a few millisecond advantage can prove very valuable to HFT firms.  Whether or not this effectively constitutes insider trading, however, remains to be seen.

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