Q. So lots of news about this phenomenon over the past couple of days, and it ties in to the discussion we had this week about expert networks…
A. Right: people are often surprised to hear that its perfectly OK to trade on non-public information about a stock, or the market as a whole, so long as you get that information in a non-prohibited way. Many high frequency trading shops specialize in “news feed trades”, getting and trading on market-moving news before the rest of us see it, read it, comprehend it, and try to trade it.
Q. Some of the stories this week are about how some traders pay big bucks for a few second advance access to some well know indexes, like the University of Michigan’s Consumer Confidence Index and the ISI. So is that the main way news feed trades work?
A. That was pretty surprising stuff, but its only one of many. There’s a general technology arms race underway to get and understand general news faster than others can…The clearest example is the race to understand and trade US company just puts out its quarterly earnings press release to the world, several firms have that release analyzed by so-called natural language software, trying to grab that info and divine how the results were compared to expectations before mere humans can even scan the headline.
Q. Of course when you think about it that makes sense… what other sorts of news do these firms try to use?
A. Well, computers are constantly queering the SEC databases for new 13D filings, to see which companies might become takeover targets, and trade that info before the public becomes aware of it… that’s one. And, believe it or not, some firms specialize in hyper-rapid translation software so they can be the first to trade on foreign news reports that might move markets.
Q. Wow… it sort of seems that normal human traders are at a real disadvantage!
A. Right, and don’t forget the advantage the HFTs have in executing their trades, too… so between the “understanding” time advantage and the “executing” time advantage, you’re talking about full seconds– a trading eternity for the HFT guys, who can execute millions of orders in that time. Normal folks shouldn’t be trading on the idea that they’re ahead of the market regarding breaking news.