Tuesday, March 4, 2014

Insider trading 2.0

The WSJ reports on the increasingly repugnant practice of selling access to news earlier to some customers than others:
Firm Stops Giving High-Speed Traders Direct Access to Releases--Warren Buffett Involved in Berkshire Unit Business Wire's Decision to End Practice

"[New York Attorney General Eric]  Schneiderman has begun cracking down on practices that provide high-speed traders with opportunities to act first on market-moving information, referring to such access as "Insider Trading 2.0."
"Traders engaged in this so-called race to zero, a measure of the difference between the pace of order transmissions and the speed of light, are constantly pushing to get news and market data a fraction of a second before their competitors.

"We see the AG action and the Business Wire story highlighting a deeper problem" with the stock market, said Eric Budish, an economics professor at the University of Chicago who has studied high-speed markets.

"The problem, Mr. Budish said, is that markets in which the first trader to enter an order wins the race give too much of an advantage to traders with the fastest technology.

"Instead, he says, markets should favor investors who offer the best price, even if that order comes in a fraction of a second after a speedier trader."

Mr Budish and his recent paper on high speed trading have been getting some other press lately as well, see
Declawing Speed Traders Is Goal of Stock Market Revamp Proposal

"In the paper written with Peter Cramton of the University of Maryland and John Shim at Booth School, Budish showed the opportunities that exist for speedy traders by looking at the trading patterns of the SPDR S&P 500 ETF Trust (SPY:US) and futures on the S&P 500. They found that the price of E-mini contracts often jumps before the ETF, creating the chance for fast traders to make money from buying the fund before the market reacts. While the time shrank from a median of 97 milliseconds in 2005 to 7 milliseconds in 2011, the arbitrage opportunity still exists, the authors said."

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