TOPICS: Financial Services Industry, Insider Trading, Regulation

SUMMARY: New York Attorney General Eric Schneiderman called on officials in Washington to take action to prevent high-speed traders from making investments based on early peeks at market-moving data and analyst reports in what he called "Insider Trading 2.0." Mr. Schneiderman said that when high-frequency traders have access to soon-to-be-released information, it creates something "far more insidious than traditional insider trading." "Comprehensive action is required," Mr. Schneiderman said in prepared remarks for delivery Tuesday at the Bloomberg Markets 50 Summit. "This new form of market manipulation ultimately requires action from Washington." Mr. Schneiderman criticized an arrangement between Thomson Reuters Corp. and the University of Michigan that allowed paying customers to get the results of the university's consumer confidence survey before it was released to the public. Under the arrangement, which was the subject of a front-page article in The Wall Street Journal in June, Thomson Reuters paid the university about $1 million a year to get early access to the data. Thomson Reuters would then give the survey results to a top tier of paying customers five minutes before the university released the monthly survey on its website. An even more elite group of high-frequency traders paid a higher fee to get the survey results two seconds earlier than the first group, according to a contract between the university and Thomson Reuters that was reviewed by the Journal.

CLASSROOM APPLICATION: Insider information has been widely used by traders to take advantage of financial opportunities before the information is publicly released. Obtained data, that is not released to the general public, provides an opportunity to execute trades before the public and other traders can act. In this case, it appears that Thomas Reuters Corporation was involved in a conflict of interest regarding high frequency trading information. The University of Michigan had been supplying Thomas Reuters with their consumer confidence survey results before they were publicly published in exchange for $1 million per year. In turn, the company sold the information to two groups: traders and customers. The traders paid a higher fee than the customers to receive the data two seconds before the customers who received it five minutes before the University of Michigan published it on their website.

QUESTIONS:

1. Do you feel that traders, by purchasing data from Thomas Reuters, were gaining inside information for trading purposes?

2. If everyone has a chance to purchase this information from Thomas Reuters, is there anyone who would have a disadvantage?

3. Could there ever be successful regulation to prevent traders from obtaining any information not available to the public to prevent insider trading?