Op-Ed: Cracking Down on Insider Trading 2.0
Op-Ed Published in the Albany Business Review
By Eric T. Schneiderman
America’s markets have traditionally been the fairest and most respected in the world, but a trend is emerging that threatens to drastically undercut the integrity and credibility of those markets. I call it Insider Trading 2.0, and it must be brought under control.
Our markets can thrive when there is one basic set of rule for everyone – from individual investors to pension funds to giant corporations. Give everyone a fair shot at success using their brains, guts and intuition, and let the best succeed. That’s the American way. And that’s what our markets have traditionally offered.
The notion that there should be one set of rules for everyone is at the root of traditional insider-trading laws, which prohibit insiders from buying or selling securities while in possession of material, nonpublic information about those securities. Think Gordon Gekko gobbling up companies using information no one else has access to.
As bad as that is, what we are seeing today is far worse.
Small groups of privileged traders have created unfair advantages for themselves by combining early glimpses of critical data with high-frequency trading – superfast computers that flip tens of thousands of shares in the blink of an eye. This new generation of market manipulators has devised schemes that allow them to suck all the value out of market-moving information before it hits the rest of the street.
Insider Trading 2.0 is wrong, and it undermines our markets by creating an impression among all those people who are left out that the markets are rigged.
That is why my office persuaded Thomson Reuters to stop giving a select group of clients access to the market-moving information in the University of Michigan’s Survey of Consumers two seconds before the rest of their subscribers saw it.
Two seconds would have been nothing in the old days, when investors bought and held onto stocks for years to let them build value. But two seconds is a lifetime in the world of Insider Trading 2.0.
The information was so powerful that in July 2012, 200,000 shares of an S&P 500 fund were traded in the first 10 milliseconds of the magic two-second window before the survey was released. But one year later, after Thomson Reuters reached an interim agreement with my office to halt the two-second edge, trading on the same fund during that 10-millisecond period plunged to just 500 shares.
Agreements like that are solid steps toward restoring confidence in the markets. But my concern does not end with Thomson Reuters and its clients. I worry that others may be engaging in similar practices, including the related problem of early access to analysts’ assessments about the companies they cover.
Analyst sentiment—like the University of Michigan survey —is market-moving information. A firm that sees analyst assessments before they are released can front-run the market and gain an unfair advantage over the competition. And when a trader can systematically plug illicit early data into a trading program, it can mean an enormous windfall.
While my office is using its power under New York’s Martin Act, we need help from the industry. It is in the interest of the vast majority of market players who are responsible actors to stop the bad actors who put the markets at risk for personal gain. My office has set up a hotline for financial industry insiders to confidentially report improper or illegal conduct involving the dangerous combination of early access to information and high-frequency trading, and we ask anyone who knows of such wrongdoing to come forward.
By reestablishing a level playing field and making sure everyone plays by the same set of rules, we can restore public confidence in the markets.