Did You Hear The One About Early Release of SEC Filings?

The Wall Street Journal’s Scott Patterson and Ryan Tracy wrote an article yesterday that has sparked a whole new wave of OH MY GOD THIS IS SO UNFAIR rage and ranting in my RSS feeds and Twitter feeds.    The WSJ has a gate on their articles, but you can read the article on Yahoo Finance if you so desire.    The article notes how common folk like me using SEC.gov to look up public filings (and I do use that site almost every single day) are likely to be viewing filings after others who subscribe to direct feeds of the data.  The gist is this:

“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.”

This seems like a good time to repeat a bunch of markets-related philosophies I’ve written about at length before.

First of all, someone will always have the data first.   This is a fact of physics.  I wrote that post more than 4 years ago, amazingly, in response to a Scott Patterson post at the time complaining about the fact that some people would get the data first!  At the time, the Patterson quote I took issue with was his (tautological!) statement (of the obvious):

“Some fast-moving computer-driven investment firms are getting an edge by trading on market data before it gets to other investors, according to market players and researchers who have studied the trading.
The firms gain that advantage by buying data from stock exchanges and feeding it into supercomputers that calculate stock prices a fraction of a second before most other investors see the numbers”

Now, 4 years later, we’re back on this meme.   The very similar quote from the current article heading is:

“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.”

Yes – there will always be someone who gets, processes, and reacts to the information before you get it.   As I noted in another earlier post, I think it does a tremendous dis-service to retail investors to try to convince them otherwise.   Instead, we should be telling them, to quote myself: “There will always be someone smarter in the market.  There will always be someone faster than you in the market,  there will always be someone who gets the information before you get it.  There will always be someone who reacts before you can react. ”   I’ll add another one:  there will never be a time when you – the retail investor –  are the first to read, understand and react to a news story.

But it’s not quite the same this time, right?  After all – we’re not talking about market data transmission speeds – we’re talking about the SEC repository of company information which is essential reading.   So is it a problem?

Cue the Ignorant Populist Rage – channeled by NY Representative Carolyn Maloney, quoted in the WSJ article:

““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.””

Ahhh – the classic “select few insiders” meme that blow ups a mere ONE SENTENCE LATER in the same article, with the revelation:

“There are no limits on who can sign up for the Edgar feed.”

You want the top secret special EDGAR feed?  You can sign up for it. Voila.  It’s not just available for a select few insiders.

But here’s my point: you don’t want to sign up for it, because it would be a waste of money for you  (footnote 1).   It won’t matter to you if you get the data at the same time as the fastest players in the market, because you have to click. And wait for your internet connection to download the page (spoiler alert- you’re already too late).  And read. And think. And click some more, and then act.   And all of that stuff takes time, and you will *never* be able to act before the other players in the market.

Am I, then, sticking up for this early disclosure of SEC filings for paying subscribers?  No – go ahead and change it – I don’t care, and the reason I don’t care is because it will not make an iota of difference in my executions,  or of those of the other poor “Mom & Pop” traders held up as Victims in Patterson’s article – because regardless of how/when the data is distributed, we will NEVER act first on it!

We should talk about another few things while I’m at it – taken from the actual paper by Jonathan Rogers that was the nexus for Patterson’s article.   First, the direct feed data subscribers are getting the data faster than the SEC website users only 57% of the time!   The other 43% of the time the SEC website gets the data first!   You can see the entire data table in Rogers’ Table 4.

Of course, as I noted above, it doesn’t matter to me if they’re getting it ahead of me 100% of the time, 57% of the time,  or 0% of the time – they’re going to hit the market with their trades before me 100% of the time in all scenarios (which is why this whole story is going to be good for no more than ranting about a lot of useless nothingness – even if the dissemination is changed, the fact that others act quicker than Mom & Pop will not change).   But Rogers & Co. commit a huge logical error in this paragraph:

hft_sec_paper

Did you spot the fallacy?    Milliseconds do NOT matter to Mom & Pop – they matter to high frequency traders competing with other high frequency traders!  Mom & Pop are not competing on speed (CAN NOT COMPETE) with high frequency traders.  So yes – if you’re a high frequency trader trying to trade on market moving information in real time, you’d better be subscribing to all of the fastest direct data feeds.

Reading both the Rogers paper, and the Patterson article, though, you will find no mention of the non-subscribing high frequency traders being the victims here…

My point in this post is to again try to get across the message that instead of trying to convince “Mom & Pop” that they will ever be on an even keel with other market participants, we would do them a much greater service by telling them the truth, which as I have explained above, is precisely the opposite.   Regardless of how and when data, news and quotes are distributed, We Common Folk should *always* expect that someone else is able to act quicker on all information than we are.

Patterson’s article at the WSJ (though not the Yahoo Finance version) has a graphic on top, with the text:

Some subscribers to data feeds for SEC regulatory filings are able to trade on the information faster than other investors, research shows.”

In case I haven’t made my point – that’s a tautology.  It will always be true that some subscribers will be able to trade faster than other investors.   Importantly, even without the “data feeds” in question, it will still be a tautology.

Let’s just do one more quote: Patterson quotes Jonathan Rogers:

These results raise questions about whether the SEC dissemination process is really a level playing field for all investors.”

Since one cannot hammer home one’s point enough, I’ll say it again:  trying to convince retail investors that they will ever be on a “level” playing field in terms of execution is perhaps the most dangerous thing one can do, and could result in tremendous damage to said investors.   Citing a “level playing field” is great for populist politics (see: Carolyn Maloney), but terrible for actual investor understanding.

Related:

Someone Will Always Have the Data First

HFT – The Little Guy Is the Big Winner

Run Edgar Run – Jonathan Rogers

Fast Traders Are Getting Data From SEC Seconds Early

-KD

1)  It seems like we should have a discussion here about Bloomberg, right?  Is it unfair that professional traders and hedge funds use Bloomberg to get access to all sorts of market moving data and news well ahead of Poor Little Old Me who can’t afford the monthly cost ($2000?) of a Bloomberg terminal?  That’s meant to be a rhetorical question, but it comes back to value: if I thought that paying $2k/month for a Bloomberg terminal which would still result in me NOT executing trades before other more sophisticated market participants would help me, I’d pay for one.   Retail traders will not be able to compete (on speed) with more sophisticated market participants even with equal access to information.   Which is why I don’t care about getting the information milliseconds or even seconds (in this case) later…

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