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And Another Thing…

Before we get into today’s issue, I would like to assure those readers to get in touch that Monday’s blindfolded monkeys playing darts (with a George Benson thrown in for good measure) was not part of a bet! Anyway, to business – and the ongoing issue of inequality around news releases.

For the past two years we have been discussing, on and off, claims that some firms were getting news releases earlier than others and that this was creating an imbalanced playing field. I have been pondering this for some time, especially in wake of more recent claims that some HFT firms were getting news quicker through private news networks such as those owned and run by exchanges.

It seems that some trading venues have established bona fide news services that have the correct credentials to be able to take part in “lock ins” – the system under which journalists are locked in a room without communication and given economic releases early so they are able to compose their analysis. At the designated hour, a light goes on, communications are opened and the journos hit the send button to let the world know what is going on.

It is here that things, to use the vernacular, go a little pear-shaped.

Traditionally there has been little if any difference between the major news organisations in terms of when the data hits the screen. All traders know it’s coming out and are ready to act and if there are milliseconds’ difference between different sources, they are not quick enough to notice.

Now though, as we have documented before, we have another breed of trader/market maker that operates at a higher speed and is able to act upon the news quicker.

There have been several accusations of HFT firms in particular getting the news quicker, but I don’t think this is happening, because the authorities governing the release mechanisms ensure that all get the same opportunity. The real problem is that these new information services are dedicated to HFT and as such they can use the 20-30 minutes analysis time granted to journalists to ensure they “code” their news release properly.

In other words, they transmit straight the to pricing/trading engine of the customer firms using certain key words or phrases (or numbers more pertinently) that can be recognised by the news reading capabilities of those engines. Factually they get the news at the same time, but technically (literally) they are able to deliver it quicker to the pertinent part of their customers’ business.

This has created a problem for the markets, one that is recognised by the authorities who have moved to prevent certain organisations from participating in lock ins. This has had limited success, it seems, because the barred organisations merely restructure their business to get the right accreditation and they are back in the game.

It is fair to argue, of course, that these firms are doing no different to the HFT firms that invaded financial markets earlier this century in that they are doing the same as everyone else, obeying the rules – they are just doing it faster. The reality is, however, this situation is creating an unfair advantage and markets are, at the end of the day, meant to be fair.

Clearly the advantage gained is meaningful because firms are paying premiums to sign up to the service, this means that something has to change. Either the authorities have to encourage the traditional news providers to offer the same high speed service – and provide it at a price where all participants can afford to sign up. Alternatively they can block all but those news organisations with a traditional delivery method from the lock ins.

There are other ways of course. It could be possible to have this service made available to all market makers, after all they are the ones likely to be hurt in any sharp move. This would appear to be attractive to some trading venues, because the last thing they would want is a reputation as a killing ground for market makers.

I also wonder, however, if the answer is not already out there in the FX space on one or two platforms. Could the releasing authorities add a variable hold algorithm to the various news organisations’ releases to help balance (randomly) the playing field? At face value, this appears to be penalising people unnecessarily and without doubt it could create pain for some investors who get the news later (on occasion) than others because they subscribe to the “wrong” service, but it may help.

If the analytics were available of course, the authorities could perhaps calculate how fast the high speed news services get their news out and impose a delay to ensure everyone hits at the same time.

Either way it is a complicated issue and one that is important for all markets including foreign exchange. Markets have always been about information – in years gone by the banks had the monopoly because they could afford to subscribe to more news services and trading venues than their customers.

More recently this has changed and the trading industry is now very much a transparent, equal opportunities arena where the price is available to almost everybody at the same time. Somehow, we, as an industry, need to find the solution to ensure that the mechanics around economic releases is the same.

Colin_lambert@profit-loss.com

Profit & Loss

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