Information-Dissemination Law: The Regulation of How Market-Moving Information Is Revealed

Corporate information that moves stock-market prices has long sat at the center of modern securities regulation in the United States. The Great Depression-era securities laws at the foundation of the field require much mandatory disclosure of this type of information. They also include a strict anti-fraud regime to ensure the credibility of those disclosures of that information. And for a half century now, that regime has been interpreted to prohibit insiders from trading on the same information. All of these laws have been motivated by both concerns for fairness and economic efficiency.

Today, a new body of securities law is emerging on top of this regulatory structure. Yet, in our recent article, Information-Dissemination Law: The Regulation of How Market-Moving Information Is Revealed, we show that the current defining feature of this body of law—which we call information-dissemination law” (IDL)—fails to meet its primary stated ends or live up to its larger potential.

Today, IDL focuses almost exclusively on ensuring that market-moving information is made available to all market participants at the same exact time when first disseminated beyond a small group of corporate insiders or the like. For example, over the past few years, regulators have repeatedly decreed that they would end what was quickly becoming a routine practice: the release of market-moving information to high-speed traders just seconds before it was being made available to the entire public.

The most prominent examples of regulatory efforts in the area during this period involved New York State Attorney General Eric Schneiderman. He termed these types of practices “insider trading 2.0” and vowed to end them. But this emphasis on the simultaneous dissemination of market-moving information also goes back much farther. Since 2000, the Securities and Exchange Commission’s Regulation Fair Disclosure has required public companies to make their disclosures available to the entire public at once when they first reveal them beyond the firm.

The primary rationale behind these recent and longer-standing simultaneity requirements at the heart of IDL today? The familiar one of making securities markets fairer for ordinary investors. But, we show that the ordinary-investor benefits of such equal-timing efforts are far from clear. Indeed, simultaneity appears to be perversely harming the most vulnerable ordinary investors.

The point can be illustrated briefly by thinking about Reg FD and its effects on information asymmetries among participants in the stock market. Reg FD has two distinct, and opposite, effects on ordinary investors that have been overlooked in the securities-law literature. The regulation prohibits firms from engaging in the once‑common practice in which they reveal new information to selective audiences hours, days, or even weeks before announcing it to the entire public. For that reason, throughout sustained periods leading up to the release of new corporate information, it reduces the risk that some select group of traders will have superior information that others lack. The ultimate result is that the welfare of ordinary investors who trade in these relatively long pre-release periods is improved. However, that improvement is only slight as a general matter because the ratio of informed trading to all other trading during these periods would generally have likely been quite low for the great majority of publicly traded stocks. Ultimately, then, Reg FD improves ordinary-investor wellbeing during those prolonged pre-release periods—but only slightly so because the information asymmetries it eliminates would generally have only imposed a slight negative effect on each member of the enormous herd of ordinary investors in the market during those periods.

But, in brief post-release periods, Reg FD does something very different: It dramatically increases and concentrates this same information asymmetry. In the seconds after new information is made publicly available, those who want to capture a trading profit based on this information must trade on it immediately, lest the competition beats them to the punch.  Ordinary investors who trade in this period are made markedly worse off as the execution of their orders to buy and sell stock are far more likely to be affected by better-informed pros in those periods than they would be without the legal intervention.

Stepping back, it becomes clear that the issue of whether ordinary investors are helped or harmed by Reg FD’s simultaneity mandate depends mainly on whether the small gains from trading in the sustained pre-release periods that are slightly safer exceed the large losses from trading in shorter, now far more dangerous post-release periods. No empirical study has aimed to quantify these gains and losses, and the SEC has not supported the rule with any analysis other than a plea to “fairness.”  Indeed, we know of no previous spotting of any of these issues whatsoever.

But our analysis does not stop there. As mentioned at the outset, securities law more generally has long focused on both fairness and efficiency issues. Indeed, at least one simultaneous-dissemination effort (Reg FD) explicitly aims to make improvements along this dimension—namely, by enhancing the quality of securities analysis in the market. So, we look at whether IDL can also be shaped to improve the other main aim of the field. More specifically, it examines the fascinating question of whether the way in which the dissemination of market-moving information is regulated can be crafted to increase the production of the valuable information at the core of so much securities law, all the while without eroding fairness. If so, then thoughtfully molded regulation in this emerging area of securities law that we examine in this article may lead to both increases in fairness and economic efficiency.

The preceding post comes to us from Kevin Haeberle, Assistant Professor of Law at the University of South Carolina School of Law, and Todd Henderson, the Michael J. Marks Professor of Law and Mark Claster Mamolen Research Scholar at the University of Chicago Law School.  The post is based on their paper, which is entitled “Information-Dissemination Law: The Regulation of How Market-Moving Information Is Revealed” and available here.