Study Finds Time Advantage in Distribution of SEC FilingsAdam Haigh
Researchers investigating whether corporate documents are distributed to investors fairly by the U.S. Securities and Exchange Commission found evidence that some paying subscribers got the information first.
An examination of almost 18,000 filings by professors at the University of Chicago and University of Colorado found the commission’s Edgar system usually posted documents to its website after an electronic feed run by an outside vendor sent them to subscribers. The study of Form 4s, which track changes to stock holdings by company directors and officers, showed an average timing advantage of about 10 seconds.
How information is distributed in the U.S. equity market has been a flashpoint in the debate surrounding high-frequency traders, the electronic firms that have supplanted human market makers and account for as much as half of all stock trades. New York Attorney General Eric Schneiderman began an investigation this year into whether the fastest traders were afforded advantages that are unavailable to others.
“These results raise questions about whether the SEC dissemination process is really a level playing field for all investors,” wrote the authors, Jonathan L. Rogers, Douglas J. Skinner and Sarah L.C. Zechman.
In addition to evidence that some subscribers received filings before the public, the researchers found that trading in related stocks suggested someone acted on the information, they wrote. Prices and volume in shares covered by filings changed 15 to 30 seconds before filings hit the SEC’s public website, according to a working paper detailing the research.
“This implies that the process through which company filings are disseminated via Edgar provides certain intermediaries and their clients with a significant timing advantage and that some market participants trade on this advantage,” the authors wrote.
The study stops short of ascribing a reason for the discrepancies, saying “it is unclear why there are delays in the posting of Form 4 filings to the SEC site.”
The results of the study were reported earlier by the Wall Street Journal. Bloomberg LP redistributes SEC filings and Bloomberg News competes with other news organizations in reporting details in the filings.
“We have reviewed the working paper and are taking the issues raised by it seriously,” an SEC spokesman said by e-mail. “We are conducting a thorough assessment of the dissemination process, including timing increments, and will make any systems modifications that may be necessary to optimize the dissemination of information to investors and the markets.”
In February, Business Wire, the press-release distributor, said it would stop letting high-frequency traders purchase direct access to its service amid concern that some firms were able to exploit timing advantages in data distribution. Direct subscribers to the feed let users shave thousandths of a second off the time it took to receive and process the releases.
In reviewing the SEC’s procedures, the study’s authors showed that filings made by corporate insiders to the SEC are supposed to be transmitted to the commission’s website at the same time they are distributed by a private vendor to “around 20” paying subscribers. In 57 percent of cases involving insider purchases, those subscribers saw the data first, they found.
“While the time differences are measured in seconds, these delays are likely to be significant in the world of HFT,” the authors wrote. “If milliseconds now matter in securities markets, these numbers challenge the notion that the public dissemination process is a level playing field.”
The researchers also found indications that share price and volume changed in related stocks. In cases when paying subscribers saw filings before posting on the SEC website, stocks moved about 30 seconds before the documents were posted publicly. “Abnormal volume” was also measured 30 seconds before the Internet posting.
NTT Data Corp. was the contractor overseeing dissemination of filings to subscribers during the period of the study, researchers stated. Takanori Iwauchi, who works in the communications department at the Japanese company, said he couldn’t immediately comment.