Tilt: High Frequency Traders Are Buying Data Ahead of You. Legally.

It is conceivable that some day in the future historians will look back on this era and shake their heads in wonder at the blatantly anti-competitive behavior permitted in the name of efficiency or capitalism or whatever misleading euphemism suffices.

But they wont dare do so now as many of their positions are funded by contributions from the financial services industry.

When even the Wall Street Journal finds it impossible not to comment on the notion that market-moving information is being sold for competitive advantage by the companies that produce it and some of the market makers that regulate and manage it, one begins to sense the size of the current standard deviation from what used to be considered fair play.

Why this is considered reasonable, let alone permissable, remains something of a mystery. Raw financial power explains some of it. The palliative impact of 'market smoothing' allegedly engendered by such sales is another potential benefit often touted in defense of the practice.

But whatever the excuse, the declining participation by retail investors in the equity markets suggests that while the short-term results may be profitable to a few, the long term impact on the market may be less positive for companies looking to raise capital and the nations hoping to see their economies prosper from those investments.JL

Geoffrey Rogow reports in the Wall Street Journal:

Fitch Ratings became the latest provider of market-moving news to streamline a path to high-frequency traders.
In a contract announced Wednesday, German exchange operator Deutsche Boerse AG DB1.XE +2.13%(DB1.XE) will now distribute a computer-readable “low-latency” version of Fitch’s ratings decisions. Clients of Deutsche Boerse with superfast computers, algorithmic-trading software and access to the exchange company’s data centers around the world will now be first to trade on nearly every ratings decision from Fitch.

“By adding Fitch ratings data, we are enabling AlphaFlash clients to instantly react to rating changes, which can have a huge market impact,” said Georg Gross, head of Front Office Data and Analytics at Deutsche Boerse.

A representative for Fitch declined to provide financial details or the motivation behind the decision.

However, both Fitch and Deutsche Boerse could stand to gain financially from the agreement. Analysts have noted that distribution of news such as ratings, which are often market movers, can net fees of more than $25,000 a year from trading firms or as part of larger algorithmic trading packages that cost several hundred thousand dollars. More broadly, it could play into Fitch’s marketing efforts to compete with its slightly more prominent rivals, Standard & Poor’s and Moody's Investors Service MCO +2.55%, for influence.

Representatives for Moody’s and S&P weren’t immediately available to comment.

The contract is the latest development in an arms race of exchanges, data center providers, news organizations and others to meet the demands of a deep-pocketed and growing community of high-frequency traders. In a recent contract in July, the Institute for Supply Management signed a pact with Thomson Reuters to offer a streamlined version of its closely watched business-activity report.

Private organizations have embraced high-frequency, partly to curtail the likelihood of technical glitches, but also under a belief it will smooth the impact of the data.

Governments around the world, however, have recently taken measures to limit the access that high-frequency traders have to data from the public sector.

The U.S. Labor Department, for example, is poised to soon change the protocol for market-sensitive economic indicators released during its “lockup” with media organizations. Other government data distributors, such as in Australia, refuse to allow any computers at their lockups.