In my previous post I wrote about the disclosure that, for a price, investors can get access to the University of Michigan consumer confidence index a few minutes before the usual 10 am release time. In fact, high-speed traders pay to get access just two seconds earlier than everyone else. I concluded that instead of having to work harder or risk breaking the law to get early information, as in the past, "now you just have to pay a fee in order to guarantee that you can take all the ordinary schlubs to the cleaners." Felix Salmon, ever the contrarian when it comes to little guys getting screwed by Wall Street, tweeted back:
Dear @kdrum, how exactly are ordinary schlubs being taken to the cleaners here?
Well, here's my case, in convenient list form:
- Wall Street traders are paying for this early information.
- They aren't idiots. They'd only do this if they could make trading profits based on their insider knowledge.
- No new money is created by making this information available to a few well-heeled traders a few minutes before everyone else. It's a zero-sum game.
- Thus, someone is getting the short end of these trades.
- That someone must be the people who aren't paying for early access. There's no one else these traders could be taking advantage of.
- And who are these folks? I don't know. But almost by definition, once the snowball rolls all the way downhill the answer has to be people who aren't plugged in and don't have the money to buy early access. In other words, ordinary schlubs.
I'll grant that this argument isn't 100% watertight. It's possible that the early-access crowd all spend a few minutes fighting with each other, and by the time 10 am rolls around the market is exactly where it would have been otherwise. It's also possible that Wall Street's sharpest traders pay for this information in order to get better returns for the widows and orphans funds they run. But I don't believe in the tooth fairy and I don't believe in either of these things either.
Bottom line: the release of financial information moves markets. If you have early access to this information, it means you have privileged insight into how the market is going to move five minutes from now. That's a moneymaker, and the money is made from all the people who trade with you during the period when you know more than they do.
Wall Street pros, of course, have always known more than most of us. They work harder, they have more training, they have Bloomberg terminals, etc. That's produced a skyrocketing amount of unproductive financial activity over the past few decades, but usually in ways that are at least marginally defensible. This latest disclosure, however, is almost a parody of unproductive financial activity. Not only is it obviously socially useless, but there's just something a lot rawer about providing an early release of supposedly public financial information to a chosen few who are willing to fork over a bit of squeeze. Welcome to the schlubocracy.
UPDATE: Karl Smith provides a more macro version of this argument here. It's worth a read.