(Originally published here.)
In most businesses, it’s normal to charge more for superior products and offer discounts for less valuable ones. Airlines now sell you the “privilege” of early boarding. So it makes sense that Thomson Reuters Corp., which sells financial information, releases certain data on a tiered schedule.
New York Attorney General Eric Schneiderman disagrees. According to him, “the early release of market-moving survey data undermines fair play in the markets.” Thanks to pressure from his office, Thomson Reuters decided to “suspend” the tiered system for one of its products, the University of Michigan’s Surveys of Consumers.
Schneiderman made the wrong choice. There are plenty of activities that undermine any sense of “fair play” in the markets. The government’s unwillingness to prosecute anyone in the financial industry who isn’t suspected of insider trading would be at the top of most lists. Earlier today, for example, the New York Post reported that the Justice Department is dropping its probe of Jon Corzine for MF Global Holding Ltd’s misuse of customer funds. By contrast, the early release of private survey data — to paying customers — doesn’t seem like a problem.
Here’s what people are arguing about. Every month, researchers affiliated with the University of Michigan conduct about 500 telephone interviews asking how people feel about the U.S. economy. Those interviews are then transformed into indices that supposedly gauge beliefs about inflation and incomes, as well as the inherently vague concept of “confidence.” The theory is that expectations and “sentiment” affect employment and spending, rather than merely reflect it.
The boffins in Michigan sell their indices to Thomson Reuters, charging about $1 million a year plus a “contingent fee.” The data are publicly released at 10:00 a.m. Eastern time, but subscribers can get the data at 9:55 a.m. Last month, Eamon Javers of CNBC reported that those willing to pay an additional fee could get the data two seconds before that, at 9:54:58. Even though this feature was advertised to clients, it wasn’t well-known.
It’s important to remember that the Michigan data are privately produced by a private organization and distributed by another private organization. (Those who are bothered by Michigan’s responsiveness to monetary incentives should consider its lucrative relationship with the National Collegiate Athletic Association before complaining about a survey.) As long as Thomson Reuters offered all customers the option to get the data two seconds earlier in exchange for higher fees, it’s hard to see where there is a problem.
Legal experts agree that there was no violation of insider trading laws, which is why Schneiderman is thought to be using New York’s Martin Act to go after Thomson Reuters. The law is notoriously broad and can be used to prosecute any financial activity “contrary to the plain rules of common honesty”. (Intriguingly, no one is giving the company grief for a similar arrangement it has with the Institute of Supply Management.)
More important, there is no good reason for regular people to trade on the basis of what other regular people say when they are asked whether they will be “better off financially” in a year. Anyone who invests reacting immediately to the release of these data deserves whatever happens to them, especially if they can’t be bothered to pay for the privilege of getting it first.
Finally, as Dealbreaker’s Matt Levine notes, Schneiderman seems to be offended by news organizations that keep content behind pay walls. Does Schneiderman really think that the Wall Street Journal and the Financial Times should offer everyone free access to all of their articles in the interest of “fairness”?
(Matthew C. Klein is a contributor to the Ticker. Follow him on Twitter.)