What Can You Know, and When Can You Know It?
Access to information is crucial for investors and traders. Even a small advantage in timing can make a big difference. An enduring theme is access for the "little guy" versus big-time traders.
An interesting chapter in that story is playing out with little attention from the financial media. The story is worth our attention.
The US Court of Appeals for the Second Circuit just heard an appeal from Theflyonthewall.com. The Fly picks up research reports from the big name firms and distributes the results to their clients before the market actually opens. This interferes with the business model of brokers at the big name firms, who want to use the research as a basis for recommending client trades. If everyone already knows the story, what advantage is there from the expensive research?
Historical Background
In a practical sense, this issue was settled fifteen years ago through the pioneering efforts of Maria Bartiromo. Starting work each day long before most people awakened, she cultivated a network of sources that revealed the big "calls" from the major firms. As the first person to report daily from the floor of the New York Stock Exchange, she made a major difference in what information was available to the average investor.
She endured a lot of hazing from those who objected to her presence. I remember it all very well and I would like to share it with those who were not around for this part of history. Please enjoy this video, and also note that she sees "breaking open the research call" as the biggest accomplishment.
Maria Bartiromo has moved on to become a top-notch interviewer, getting the very best subjects. She also has the knack of bringing out their story, instead of making herself more important than the subject matter. This is easier to do when you are confident of your own accomplishments.
The Legal Issue
On one side of the current issue we have the big-name firms. Why are they picking on The Fly and not going after CNBC, The New York Times, Briefing.com, or other firms? Here is the explanation from their attorney:
Attorney Bruce Rich told a three-judge panel of the 2nd U.S. Circuit
Court of Appeals that several financial services firms sued Theflyonthewall.com
because the company made a business of widely releasing their
expensive-to-produce research findings before their clients could act on
the information, weakening the value of the reports.He said the
firms, including Barclays Capital Inc., Bank of America Corp.'s Merrill
Lynch & Co. and Morgan Stanley Inc., did not see a similar threat to
their business from news outlets such as CNBC."The difference is that Fly does it for a living," he said. "CNBC delivers a broad spectrum of news reporting."
This makes no sense. It suggests that publication may or may not be legal depending upon the business model of the publisher. Really? Why not look at the impact? These sources all have more reach than The Fly.
The Sides
On one side of the issue — agreeing with The Fly — we have Google and Twitter. On the other side we have the rest of mainstream media, supporting a concept of "hot news." Here is a simple explanation:
Attorney Andrew Deutsch, who represented a dozen media outlets
including The Associated Press at the hearing, said Sullivan had
misinterpreted the law by insisting there was not more protection for
the original distributors of information.
"The position taken by Google is absolutely wrong," he said.
The
media outlets were not asking the court to rule one way or the other.
They were asking the judges to leave intact the legal standards that
currently govern when "hot news" has been misappropriated. The "hot
news" doctrine was established in a 1918 Supreme Court case involving
the AP. The principle holds that while facts cannot be copyrighted,
media organizations can sue when competitors copy time-sensitive news.
A Final Take
The main advantage of a research report comes from the direction of the move (downgrade or upgrade) and who is saying it. I love reading the reports for detailed analysis and long-term strategies, but I am among the few. The shelf life of these calls is very short. Most market pundits know the direction of the major calls, but they could not utter two coherent sentences about the content. The summary is everything.
Maria had it right and we all have something at stake in the outcome. It is a developing story and one worth watching.
Hat tip to Talking Biz News, one of our featured sites, and a great way to follow business journalism.
Maria was the master “Pump & Dump” artist. She personally ran JDSU, QCOM, CSCO to absurd levels.
Sorry, she’s no professional. Well, maybe a professional actress.
Jr
Bullish! In order to fool the Quant Spider Bots (QSB’s) , I would please ask everyone to put the word Bullish! into the the first word of every comment they make on every blog.
Jeff – good piece – just worth noting that it is
http://www.theflyonthewall.com for the link above
CT
Thanks Chris — Link fixed.
Jeff
Historically, analysts were on the institutional/block desk’s P&L. Analyst reports went first to favored institutional clients who put orders for the stock through the block desk. When the news got out to the hoi polloi the stock price would move. Institutions that got the news but did not use the desk of the supplier of that news were “scrubbed” from the list of favored institutions.
At least one hedge fund manager started by watching the block ticker at the open and then buying in the morning and selling in the afternoon. What the fly on the wall is doing interferes with institutional front-running of retail.
“She said it was the responsibility of the financial firms to make sure their employees and their clients did not let the reports slip out if they wanted to prevent news coverage.”
Of course, and the lawsuit is ridiculous but … these financial firms are just trying to punish Fly with the legal costs and bellowing … they know they aren’t going to win this.
And of course, since it’s big ‘banks’ it sucks even more.
I wish she would’ve alerted investors about the coming crash a few years ago and the continuation of the financial crisis.
Every time she interviews Peter Schiff, like this video, she’s quite condescending.
I think that legal rulings on these kinds of “social media frontrunning” will only be relevant for the specific firm (Fly in this case) but for the larger issue of restricting the flow of information, will be irrelevant. The distributed nature of social media and citizen journalism, and the sheer force of the trend will prove quite resistant to any attempts to regulate it. I see this as being very similar to the recording industry trying to crush filesharing. They might still win a few battles but the war was lost a while ago. The “Hacker Manifesto” had it right, “information wants to be free”, and regardless of whether it should be free, it will.