From 2007 to June 2013, a small group of fee-paying, high-speed traders received the bi-monthly results of the Michigan Index of Consumer Sentiment (ICS) from Thomson Reuters at 9:54:58, two seconds before the broader release at 9:55:00. This arrangement was initially reported on April 5, 2013 by Financial Times regarding a complaint by a former Thomson Reuters employee for his dismissal after telling US federal agent about this arrangement of tiered distribution of information. Wider media coverage followed in June and July as well as a review by the office of New York Attorney General (see, for example, “Thomson Reuters Gives Elite Traders Early Advantage” by CNBC and “Traders Pay for an Early Peek at Key Data” by Wall Street Journal on June 12, “Seconds Out” by Economists on July 13, 2013). In July 2013, Thomson Reuters decided to suspend the program.
Despite the negative “optics” projected by this practice of tiered information release, a series of questions were raised: To what extent does it give an advantage to those with early information? Does it hurt general investors and hence damage the integrity of the financial market? How does it affect the efficiency of the price discovery process in the market? More careful analysis is needed in order to answer these questions.
In a recent research paper with Professor Xing Hu at University of Hong Kong and Professor Jun Pan at MIT, we have examined in detail the price dynamics and trading activity in E-mini S&P 500 futures around ICS releases during this episode. We focus on S&P 500 futures because ICS, reflecting consumer opinions of the overall economy, is likely to move the entire market instead of individual stocks. Being highly liquid and unaffected by short-sale constraints, E-mini S&P 500 futures is an ideal instrument to trade on both positive and negative market-wide information.
During the period when Thomson Reuters offers early peek advantage, we find abnormally high trading activity in E-mini S&P 500 futures at 9:54:58 on ICS announcement days. On average, the trading volume jumps to 1,473 contracts per second at 9:54:58, well above the sample average of 124 contracts per second, which reflects the trading volume of general investors. One second later at 9:54:59, the abnormal volume drops to 261 contracts, still well above the sample average but sharply down from the trading volume at 9:54:58. The volume pattern makes two points: First, early peek by high-frequency traders does generate high volume of trading, but mostly among themselves. (There is no reason be believe that general investors will choose to trade more at the time when they have an information disadvantage.) Second, the first second at 9:54:58 is disproportionally more meaningful to them.
More detailed study of price dynamics after the early peek reveals a clearer picture: We find that the prices are fully adjusted to the ICS news after the first 10% of the trades during 9:54:58, which lasts about 14 to 16 milliseconds. There is no evidence of further price drift after the initial price discovery. This implies that most of the transactions during 9:54:58 and all the transactions afterwards, including the public announcement at 9:55:00, are traded at the fully adjusted market prices. The scope of the early peek advantage is therefore narrowly contained and limited to high-speed traders trading amongst themselves. Outside of this narrow time window, general investors, as well as high-speed traders, trade at fully adjusted prices and are not disadvantaged by the early peek of a few.
The initiation and later suspension of the early peek program by Thomson Reuters also provides a natural experiment for us to examine how different mechanisms of information release might impact the speed of price discovery. Associated with the early peek program is highly concentrated trading amongst those fee-paying, high-speed traders over a span of two seconds. As a result of this intense and coordinated trading, we see a superfast price discovery in the order of 14 to 16 milliseconds. After the suspension of the early peek program, however, we do not see the same level of trading intensity and we find that the price discovery takes much longer. From this perspective, one might argue that, as a mechanism of information release, the tiered program provides a venue to facilitate concentrated and coordinated trading among informed high-speed traders and therefore makes price discovery more efficient.
How information actually transmits and impounds into market prices remain a central question in our understanding of how the financial market functions. Empirical investigations aimed at tackling this question are always hindered by the fact that most information is private in nature and hence unobservable to researchers, even ex post. The multi-tiered process adapted by data vendors in feeding market-moving information to their different clients, as in the case of Thomson Reuters when releasing CSI data, offers a rare instance where we know precisely what information is transmitted, when and to what subset of market participants. This situation allows us to examine with more clarity how information, private to some traders, drives their trading behavior and influences the market. It may also help us to better design and regulate the information dissemination process in the market.
For details of this research, see Grace Xing Hu, Jun Pan and Jiang Wang, “Early Peek Advantage?”