Leveling the Playing Field of Financial Information Access -- a Good Thing?

http://www.nytimes.com/2013/07/13/business/the-ethics-of-a-split-second-advantage-for-traders.html?hp

New York's Attorney General forced Thomson Reuters to stop releasing special data 2-seconds-early to those willing to pay a steep fee. The idea is to level the playing field by not allowing a situation in which rich folks and institutions get to trade on the data by taking positions within the two seconds before the data is released to regular folks.

In the mid-1990's, I played a minor role in the EDGAR Online project, in which the documents filed by all public companies with the SEC -- documents in the so-called EDGAR database -- were made accessible via the Internet for the first time. Previously, they had been accessible only via an (expensive) data feed from a particular vendor, Mead Data Central, that had the sole contract with the SEC for disseminating this data. The idea was to level the playing field.

But, it was decided to release the data to the masses one day later, while still allowing anyone with deep pockets to purchase the no-delay data feed.

But-but, once the data had become Internet-friendly for the sake of the Internet-based dissemination, a whole industry was spawned by companies like EDGAR-Online, offering the whole gamut of access, from full and immediate with value-added etc., to raw and day-delayed. EDGAR-Online pays a large fee for the data, but recoups it by (adding value and) re-selling it.

And so, back to the current case. The New York Times article raises one possible argument against -- or with reservations about -- leveling the playing field as New York's Attorney General has required. They note the possibility that if no one is allowed to get the data early, then no one will pay for it, and if no one will pay for it, then it won't get created. (The counter-counter argument was that, er, yes it will). That argument comes direct from the academic accounting literature. But to my mind, and based on my experience with EDGAR, there are equally important arguments against this well-meaning effort to level the playing field. One argument is that in today's very sophisticated information markets, regular folks are not handicapped in any meaningful way, because data re-sellers will step in and sell it at affordable prices to the masses. This is what happened with EDGAR.

It may be preferable to allow a free market to establish prices for different cuts and speeds of access to the information. This is anyhow what happens, because while the Attorney General thinks he has now leveled the playing field, that's only for raw access. It's still only the "rich" who can get instantaneous trend analysis (to know if a number signifies an increased or a decrease in whatever metric), cross-referencing of prominent names, or whatever other analysis will now be the basis for trading on the information. In other words, there's something arbitrary about leveling the playing field; one has merely leveled the raw input. Well, isn't it better to at least do that? I'm not sure it has any benefit, which leads me to my next point, a thought exercise.

Imagine that the playing field were to be totally level in the sense that everyone has access not only to the same raw data, but to the same analyses, and analyses of analyses, etc. As is also well known from the academic literature in financial accounting, this would result in much more agreement between people, which, in turn, means fewer opportunities to trade, to the benefit of no one. This is just a fancy of way of saying that informational differences are what makes for horse trading. The ideal situation, then, is not one in which all information is totally equal and disseminated to all. Rather, the ideal situation is that different entities decide which information they choose to purchase. The ideal situation is one in which this Thomson Reuters data set, and all the other data sets, are all being bought and sold and re-sold in markets, with different investors deciding what information to pay for. That's what gives you a market, both for information and for financial instruments. That's much better than a situation in which all those sources of information are given away freely and identically to all, where's there's no information market, and in which there's less basis for trading in the financial market.

So, even New York's Attorney General will not really be trying to level the playing field. Advised by finance professors, he will be balancing the wish for a level playing field, with a wish for horse trading. Does it make sense to find this balance by standardizing access to some basic data feed? I don't think so. IF IT WERE THE CASE that the only way to get the data, or to get it non-delayed, is to fork over a million bucks, then clearly, regular people would be at a systematic disadvantage. In such a case, it would not be that different people decide to get different information, only that rich people or institutions always decide to get it, and everyone else always "decides" not to. But that is often not the case, at least not in the black and white way it may sometimes be portrayed. Rather, the case is probably that different quality-levels of data are available for sale for different prices, for various data sets. In this case, it may be better -- i.e. Pareto better, better for everyone, not only the rich -- to allow information markets to flourish for them all.