“It is extremely distressing that a select few insiders have been getting an early look at public filings for so long. It violates the basic principles of fairness that underpin our markets, and I urge the SEC to put a stop to this as soon as possible.”, Rep. Carolyn Maloney (D., N.Y.), ranking Democrat on the House Financial Services Committee’s panel that has jurisdiction over capital markets.
Fast Traders Are Getting Data From SEC Seconds Early
Studies Show Lag in Posting to Website
By Ryan Tracy and Scott Patterson
WASHINGTON—Hedge funds and other rapid-fire investors can get access to market-moving documents ahead of other users of the Securities and Exchange Commission’s system for distributing company filings, giving them a potential edge on the rest of the market.
Two separate groups of academic researchers have documented a lag time between the moment paying subscribers, including trading firms, newswires and others, receive the filings via a direct feed from an SEC contractor and when the documents are publicly available on the agency’s website.
The studies found a wide variation in the lag time, from no delay to one lasting more than a minute—a considerable advantage for computer-driven traders. The ability to get the information before it is on the SEC site can give traders precious seconds to act on the news.
When documents carrying good or bad news reach the subscribers early, trading volume often surges in the relevant stocks and prices move, the researchers found. The findings suggest the regulator’s own system is giving professional traders an edge over mom-and-pop investors, the studies’ authors say. “These results raise questions about whether the SEC dissemination process is really a level playing field for all investors,” wrote Jonathan Rogers of the University of Colorado, who co-authored an Oct. 22 study that analyzed the SEC’s distribution system.
The studies are the latest indication that some superfast, sophisticated trading firms are enjoying an advantage over other investors, echoing previous cases in which high-frequency traders received corporate news releases or key data on the U.S. economy milliseconds before competitors.
The findings could be a headache for the SEC, whose mission is to protect all investors. Regulators are trying to ensure high-frequency traders, who use computers to analyze company filings and execute trades in milliseconds, don’t receive an unfair timing advantage over other investors. In February, The Wall Street Journal reported that such traders were getting early delivery of corporate news releases from Business Wire, which distributes corporate news. Following the article, the New York attorney general’s office pressured the wire service to stop the practice, the Journal reported. A Business Wire executive later said in a statement that the company would “no longer allow high-frequency trading firms to license direct feeds.”
“We have reviewed the working paper and are taking the issues raised by it seriously,” an SEC spokeswoman said, referring to the study by Mr. Rogers, who partnered with two University of Chicago professors on it. “We are conducting a thorough assessment of the dissemination process, including timing increments, and will make any systems modifications that may be necessary to optimize the dissemination of information to investors and the markets.”
The timing discrepancy can be seen in trading in Balchem Corp. , a New Hampton, N.Y.-based chemicals company. On Nov. 9, 2012, a corporate insider filed a form disclosing the purchase of 6,000 shares of the company’s stock. Some direct-feed subscribers received the filing at about 1:45:25 p.m. Eastern time, several seconds before at least two newswire services, including Dow Jones & Co., distributed the filing, according to people familiar with the data.
At about the same time as the direct feed was delivered, trading volume in the company jumped and the price of the stock rose from about $31.90 a share to $32.13 a share. The same information was posted to the SEC’s website at 1:45:48 p.m., according to the people familiar with the data. That was after the price jumped.
Two sets of researchers have been examining when paying subscribers receive SEC filings compared with when they become available on the agency’s website. The study from the researchers at the Universities of Colorado and Chicago examined Form 4 filings—which detail stock sales or purchases by corporate insiders—and found that, when subscribers got those documents first, trading volumes and stock prices would react. Another forthcoming study from Columbia University looks at filings more broadly and documents a similar phenomenon, according to those researchers, who say it will be published soon.
The studies focus on the SEC’s Electronic Data Gathering, Analysis and Retrieval system, or Edgar, which was launched in the 1990s to disseminate earnings reports and other documents filed to the agency. Investors know Edgar as the name on the website they visit to retrieve public filings.
‘There has not been a day in financial markets when a minute didn’t matter.’
—Prof. Robert Jackson of Columbia Law School
Less widely known is the fact filings also are transmitted to a group of roughly 40 paying subscribers, including newswire services such as the one owned by Dow Jones, publisher of The Wall Street Journal, according to people familiar with the matter. Subscribers currently pay about $1,500 a month to an SEC contractor—hired to run the Edgar system—in order to receive all Edgar filings, according to one subscriber and public documents.
When a company submits a document, the contractor forwards it to the Edgar subscribers and to the SEC website “at the same time,” according to the SEC. But the studies suggest that the SEC website can take anywhere from 10 seconds to more than a minute to post the documents, giving an advantage to the Edgar subscribers or their customers, who are often professional investors. Mom-and-pop investors can download the documents from the SEC website, but the information may already be known to others in the market, the studies indicate.
Mr. Jackson subscribed to the SEC’s data feed and found that, over a two-month period, the median delay between when he received filings and when they were posted on the SEC website was 10 seconds.
Mr. Jackson says a forthcoming paper will document that investors could make about several cents a share, on average, on market-moving filings by receiving it in advance of those who rely on grabbing the document from the SEC website. When he told friends on Wall Street, they said he should execute the strategy and retire. “Why would you write a paper? Buy a house in the Hamptons,” he says they told him.
The paper co-written by Mr. Rogers sampled 4,782 disclosures about a corporate insider buying stock in his own company—typically a bullish event for a stock. The researchers obtained data from a subscriber who voluntarily provided information about when it received the documents and when they were available on the SEC site. In 57% of those cases, the subscriber received the information before it was publicly available.
Mr. Rogers’s paper, which looked at corporate-insider trades from March 2012 through December 2013, found that, when subscribers got the information early, stock prices and volumes moved as well.
The findings are likely to increase pressure on the SEC to change the way it distributes information. “It is extremely distressing that a select few insiders have been getting an early look at public filings for so long,” Rep. Carolyn Maloney (D., N.Y.) said. She reviewed Mr. Rogers’s paper and is the ranking Democrat on the House Financial Services Committee’s panel that has jurisdiction over capital markets. “It violates the basic principles of fairness that underpin our markets, and I urge the SEC to put a stop to this as soon as possible.”
There are no limits on who can sign up for the Edgar feed. The SEC declined to provide a list of subscribers to the direct feed, but they include data providers such as Morningstar Inc. and Edgar-online, a unit of R.R. Donnelly & Sons Co.
A representative of Morningstar said, “we subscribe to the feed because we need an automated source to populate the information in our products” and added that the company “isn’t involved in high-frequency trading.” Attain LLC, the SEC contractor currently running the Edgar dissemination service, and NTT Data, the contractor for the service during the time of Mr. Rogers’s study, declined to comment.
One subscriber to the SEC feed, the Washington Service, has a website touting its ability to filter the information quickly. The site describes customers including a banker, a mutual-fund manager and a hedge fund “using quantitative models to drive trading strategies.” The firm also provides reports on corporate insider trades that are republished by Dow Jones.
—Bradley Hope and Andrew Ackerman contributed to this article.