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Companies Paying To Get Ahead With Economic Indicators
Originally published on Thu June 13, 2013 6:35 pm
AUDIE CORNISH, HOST:
What if you could know tomorrow's news before anybody else? And if your first thought is, hey, I could get really, really rich, then we have a job for you. You are probably a good candidate for one of the many trading firms that have found a way to do just that. They pay money to get an advanced peek at crucial economic data before anybody else does.
Adam Davidson with NPR's Planet Money team joins us each week to talk about economic indicators. So, Adam, explain to us, how are a small group of traders getting access to news before everybody else?
ADAM DAVIDSON, BYLINE: Right, well, I do want to give credit where it's due. The only reason we know this is a bunch of news outlets - Quartz.com, CNBC, the Wall Street Journal - have all broken aspects of this story this week.
Let me give you a really good example of how this works. Every month, the University of Michigan and the wire service, Thomson Reuters, gives out something called the Consumer Sentiment Index. It's a number that's supposed to tell you, based on surveys, how the American people feel about the economy. And we know that when that number is higher than people expect, stock prices tend to go up. When that number is lower than we expect, stock prices tend to fall.
Now, what we have learned, though, is that some trading firms are paying money, a subscription fee it's called, to be able to get access to that number a full two seconds before anybody else does. So that they can, for those two seconds, trade on that information without any competition.
CORNISH: But how can two seconds give that much more of an advantage?
DAVIDSON: There is an unbelievable amount of stock trading that is done entirely using millionths of a second, where a handful of microseconds makes a huge difference. So two full seconds, two million microseconds, is an eternity in that space. It's a huge, huge advantage that means basically almost risk-free profits if you're one of the ones who gets the news first.
CORNISH: So is it legal? I mean, it sounds an awful lot like insider trading.
DAVIDSON: As far as we can tell so far, this does seem to be legal. And let me be clear, we are not talking about government data. Most of the key economic data that you hear about - jobs reports, GDP statistics, unemployment rate - that comes from the government. And the government applies truly CIA-level secrecy to that data release. It's released at once to everybody and that information is very carefully protected. And it would be highly illegal and irresponsible to release that to some before others.
We're talking about numbers that are released by private companies and universities that have become crucial indicators of how the economy is doing. But there doesn't seem to be any legal or securities law regulation preventing its early release.
CORNISH: All right, so no legal issues. But it certainly doesn't seem fair. So what's the response been?
DAVIDSON: I'd say were still in the shock mode. A lot of people are really shocked. It's just one more piece of information that tells us there's a huge insider advantage in Wall Street. You know, that's what Wall Street was like before the Great Depression, it was truly an insider's game. If you weren't one of the handful of people who really knew everybody else, then you were really a patsy - just out of the market altogether.
And this, the LIBOR scandal of last year and some of the other information that has come out, shows that more than we realize there are all these hidden advantages that help those who already made money on Wall Street make even more money in Wall Street.
CORNISH: So who's hurt by this today? I mean, are we, the average investor with a 401K, the patsy?
DAVIDSON: You and I should not be trading second-by-second, worrying about whether this data came out four microseconds or 12 microseconds ago. But that being said, I can almost guarantee there's going to be congressional hearings. This is going to be a fairly public issue because, I think, it just adds to that feeling of unfairness, that feeling Wall Street is a rigged game. And I think that feeling itself can be damaging.
CORNISH: Adam, thank you so much.
DAVIDSON: Thank you, Audie.
CORNISH: Adam Davidson from NPR's Planet Money Team, Adam joins us each week to talk about economic indicators. Transcript provided by NPR, Copyright NPR.