Cover Story: COMMENTARY
COMMENTARY: HOW TO KEEP THE LITTLE GUY IN THE LOOP
After a volatile day of trading on July 16, Intel's stock closed at $70 a share. Then, an hour later, the chipmaker announced better than expected quarterly earnings. Institutional investors rushed to trade the stock in the so-called aftermarket, and the stock opened the following morning at $74. That was nice for big money managers, who were able to take advantage of the late-breaking information. But for individuals, the news came late. They had virtually no way to participate in the aftermarket, which consists of negotiated trades over electronic exchanges accessible only to brokers and institutions. By the time the stock opened on July 17, individuals had lost their chance to ride Intel Corp.'s stock up on the good news.
Unfair? Yes. And it's just the latest example of a pervasive problem--one made more serious by volatile markets, where stock moves can be particularly dramatic. With trading taking place around the globe 24 hours a day, individual investors are increasingly being left behind. Big institutions active in the global markets can take advantage of knowledge gleaned at any time, be it 8 p.m. or 3 a.m., and trade instantly.
REGRETS OFFERED. Making matters worse, some companies selectively disclose market-moving information to big institutional investors, giving them an even greater edge. Take Bank of New York Co. It created a big problem on June 19, when it told 92 analysts and institutional investors in a 2 p.m. conference call that it would set aside $350 million to cover expected losses from delinquent credit-card accounts. The bank didn't publicly announce the charge until 4:09 p.m., after the market closed. By then, its shares had fallen 1 3/8, to 52 1/2. "We regret the circumstances of the June 19 announcement," the bank said in a press release issued two days later. "There was never an intent to advantage or disadvantage any shareholder."
The timing of big earnings announcements and other news is critical to whether everyone has an equal chance to trade on it. Motorola Inc. announced its disappointing earnings at 5:30 p.m. on July 9. In robust after-hours trading by institutions, Motorola's stock dropped nearly nine points, to 57 5/8, by the time the stock opened after a brief delay the next day. "We report our earnings at the end of the day to give our analysts time to study and absorb the information overnight," says a Motorola spokesman. But it also gives big market players extra time to act.
About one-third of public companies disclose share-sensitive information in ways that may shortchange individual investors, says a survey by the National Investor Relations Institute, an association for investor-relations professionals. "Small investors deserve the same information at the same time as institutional investors," says Gerri Detweiler, policy director for the National Council of Individual Investors. But neither the Securities & Exchange Commission nor the stock exchanges have clear rules on how companies must share sensitive information.
That should change. Companies should be required to publicly release market-moving information 20 minutes before their exchanges first open for trading. A company's primary stock exchange should act as a watchdog--and it should levy fines for noncompliance. Repeat offenders should be subject to increasing penalties.
THE MORNING BEFORE. Releasing data in the morning could still leave institutional investors with a small advantage. They're able to engage in premarket trading, which works like the aftermarket. But when sensitive information is disclosed while the market is open, it clearly benefits institutions that can pounce on the news and trade more quickly. Moreover, announcing news shortly before the opening gives any investor a limited amount of time to digest the information before exchange trading starts up.
Sometimes, of course, midday announcements must be made--for example, if a company inadvertently discloses information to a few investors. But companies can minimize the advantage that gives institutions. They can immediately prepare a press release and issue it just as their meeting or call comes to an end. In the same vein, if a stock-moving event occurs midday--if, say, a company completes an important acquisition--that critical information should be released to the company's primary exchange immediately and followed up with a press release.
Sure, institutions are still more likely than the little guy to trade immediately on any news disclosed in the morning. But with early announcements, both groups at least will have nearly equal opportunity. "The field will never be fully level because of the ability of institutional investors to access information," observes Louis M. Thompson, president of the National Investor Relations Institute. But responsible disclosures would go a long way toward making it less hilly.By Toddi Gutner