The Securities and Exchange Commission is about to fix a problem with its electronic data distribution system (EDGAR) that can favor high-frequency traders over other market participants.
Responding to government criticism and calls from the equity trading industry, SEC Chairman Mary Jo White said the agency plans to complete an overhaul and create an enhanced electronic distribution system in the first quarter, according to an earlier report in the Wall Street Journal.
The SEC’s goal is to better even the playing field for all types of traders in the U.S. equities market, which some have argued is unfair and favors HFTs and other firms that can better afford to pay for market access and/or data feeds. At issue is the electronic distribution of corporate regulatory filings that has allowed low latency traders to get a first look at what could be market-moving news and execute trades using it before others.
The Journal wrote that the issue was first raised by a pair of academic studies published this year documenting a lag time between the moment paying subscribers-including trading firms, newswires and others-received filings from a direct feed from an SEC contractor and when the documents became available on the agency’s website.
The studies unearthed lag times ranging from seconds to a minute or more, giving traders with access to the direct feeds ample time to act on the information ahead of investors who rely on the SEC’s website.
The discovery was the latest to reveal how some superfast traders can exploit tiny advantages in how market-moving information is disseminated electronically, at times to the detriment of less-sophisticated investors.
Last year, The Wall Street Journal reported some high-speed traders were able to get the University of Michigan’s consumer confidence report a few seconds before everyone else. High-speed traders also were paying to get direct access to market-moving news releases before other investors from certain press-release distributors, the Journal reported in February. Both revelations led the companies distributing the information to stop the practice.
Regulators have been beefing up their focus on computer trading in recent years amid revelations some sophisticated firms have gained advantages over others. They have also worked to address electronic market malfunctions such as the May 6, 2010, “flash cash” and a failure in the Nasdaq Stock Market’s data feed last year that halted trading in Nasdaq stocks for hours.
SEC Chairman Mary Jo White has vowed to ratchet up oversight of computer trading. In June, she said in a speech in New York that while technology has increased market efficiency, “it can also allow severe problems to develop very quickly.”
The recent studies focused on the SEC’s Electronic Data Gathering, Analysis and Retrieval System, or Edgar, which was launched in the 1990s to disseminate corporate earnings reports and other documents filed to the agency. The studies analyzed differences between the time filings distributed by a contractor through the Edgar system were sent to subscribers of its public dissemination system, or PDS, and when they appeared on the SEC website. The studies showed evidence of trading upon the release of information through the direct feed and before it reached the Edgar website.
The Journal reported the issue in an Oct. 29 article, citing the studies. Following the article, several members of Congress raised concerns about the issue with SEC officials.
On Dec. 19, the SEC chairman, in a letter to Senate Banking Chairman Tim Johnson (D., S.D.), said the agency has reviewed its distribution system and is “implementing an enhancement to our system designed to ensure that Edgar filings are available to the public on the SEC website before such filings are made available to PDS subscribers.”
White wrote that the SEC expects to complete the process in the first quarter. “Upon implementation, we will continue to monitor our systems to ensure optimal dissemination of Edgar filings to the public.”
An SEC spokeswoman confirmed the contents of the letter. SEC officials have also spoken with staff members of Sens. Chuck Grassley (R., Iowa) and Jack Reed (D., R.I.) about the matter, telling them they planned to fix the Edgar distribution system, according to people familiar with the conversations.
