Last month, we released a new study, How the SEC Helps Speedy Traders, covered here by the Wall Street Journal, revealing that the Securities and Exchange Commission’s systems have been giving certain investors market-moving corporate filings before those same filings are made available to the investing public. In the days after the Journal published its article, the Senate Banking Committee issued a bipartisan letter to the SEC, “urg[ing] the SEC to quickly investigate this timing disparity for company filings and take the necessary steps to eliminate it.” Based on our subsequent research, the Journal later reported that the SEC had begun to address the problem. As of this morning, however—some six weeks after the Senate made its request—select investors still receive a significant proportion of corporate filings before public investors, giving them the opportunity to keep making trading profits well into the holiday season.
In How the SEC Helps Speedy Traders, we showed that the SEC’s system for disseminating market-moving information gives some investors an advantage over others. The paper described two systems—the SEC’s file transfer protocol (FTP) server and public dissemination service (PDS)—that give certain investors access to securities filings before the general public. We developed software for determining the availability of filings from each system. The paper showed that FTP access gave investors a mean (median) 85 (11)-second lead time, and PDS, a paid subscription service, gives investors a mean (median) 77 (10)-second lead time over public investors who rely on the SEC’s website.
The paper also provided evidence suggesting that investors had the opportunity to take advantage of this lead time to earn trading profits. We showed that traders could earn economically and statistically significant returns by trading on either the FTP or PDS gaps. Moreover, we showed that investors didn’t even have to be especially speedy to take advantage of this problem; indeed, investors who wait as long as ninety seconds to execute trades on the FTP or PDS gaps can earn meaningful returns using this strategy. We also identify abnormal trading volume in the moments after investors with access to PDS receive SEC filings.
Our systems also allowed us to observe the SEC’s response to the Journal story. As we noted in our paper, in the days after the Journal revealed this problem, the SEC made changes to its systems that reduced the percentage of filings that select investors receive before the public. We noted, however, that the SEC was struggling to address the issue. The Commission had not, for example, managed to eliminate the gap with respect to several key company filings.
Over the past several weeks we have continued to monitor the SEC’s systems, and to our surprise the Commission today continues to provide investors on the FTP and PDS systems with a significant advantage over others. In fact, this past Monday, December 8, during the trading hour that began at 10:00 AM, the SEC gave investors with FTP (PDS) investors early access to some 45% (27%) of the filings made with the Commission. The filings that arrived early during that hour early gave investors on the FTP (PDS) systems, on average, some 2.0 (5.8) seconds of lead time on which to trade—a significant amount of time in modern stock markets.
In fact, over the past several weeks the SEC has simply been unable to eliminate either the FTP or PDS gaps that give high-speed traders an advantage. The chart below describes the percentage of SEC filings received early by investors with access to the PDS system for each trading hour since markets reopened after the Thanksgiving holiday:
The full version of How the SEC Helps Speedy Traders is available here.