SEC Dissemination in a High-Frequency World

Understanding the mechanics of public dissemination of firm information has become especially critical in a world where trading advantages are now measured in fractions of a second. In our study, Run EDGAR Run: SEC Dissemination in a High-Frequency World, which was recently made publicly available on SSRN, we examine the SEC’s process for disseminating insider trading filings. We find that, in the majority of cases, filings are available to private paying subscribers of the SEC feeds before they are posted to the SEC website, with an average private advantage of 10.5 seconds.

Regulatory agencies, including the SEC, have actively investigated several instances of firms releasing market moving information early to paying customers. In one recent example, certain clients paid Thomson-Reuters to access the University of Michigan’s Consumer Sentiment Index two seconds before its release to the full set of clients, who in turn received it before its public release. In another example, Thomson-Reuters offered a faster data feed to paying customers receiving reports from the Institute for Supply Management (ISM). While a two second advantage seems short, the high frequency trading (HFT) literature shows that trading advantages measured in milliseconds are economically valuable (Budish et al., 2013; Jones, 2013; Martinez and Rosu, 2013).

In our study, when the insider trading filing is available to private subscribers first, we find that prices, volumes, and spreads respond to the news beginning around 30 seconds before public posting. Of the 2.92% return associated with insider purchases, 1.01% accrues before the news is posted to the SEC site, and 0.42% accrues before EDGAR accepts the filing.

Our findings have a number of implications. First, they show that the SEC’s process for the dissemination of insider filings (and likely other types of filings as well) is not a level playing field, in that certain intermediaries and investors have access to insider filings submitted to EDGAR before others, and that prices, volumes, and spreads move in the direction of the news in advance of it being posted (and publicly-available) on EDGAR. Our findings have already led politicians on Capitol Hill to call for the SEC to change its dissemination process (e.g., for example, see “Senators urge SEC to fix unequal access to market data,” Bloomberg, November 3, 2014). The basic technology underlying EDGAR has been in place for a number of years without significant updating. Our evidence suggests that the SEC’s technological infrastructure has simply not kept pace with the technology capabilities of traders and other market participants. In a recent response, the SEC has indicated a plan to take actions (e.g., for example, see “SEC plans to fix flaw in electronic distribution system,” Wall Street Journal, December 26, 2014).

Second, the insider trading literature typically focuses on the profitability of insider trading strategies over relatively long windows, often six to 12 months after insiders’ trades. These studies consistently find that insider trade-based strategies, particularly those based on insider purchases, are profitable. However, these studies do not provide evidence on the returns available to different types of market participants, and in particular corporate insiders versus other investors. Because we have precise information on how insider trading news is disseminated, we are able to show how much of the return associated with insider trading news is available to insiders versus outside investors, including those who obtain advance access to filings through the PDS feed.

Third, our research contributes to the HFT literature. Most of this research examines policy questions such as whether HFT affects the functioning of the market microstructure in such a way as to be harmful to market liquidity or other welfare measures (e.g., Brogaard, Hendershott, and Riordan, 2014; Budish, Crampton, and Sim, 2013; Easley, de Prado, and O’Hara, 2012; Martinez and Rosu, 2013). Relatively little is known about traders who seek to gain an advantage by obtaining access to news before other traders (Jones, 2013). By providing evidence of significant time lags in the process through which SEC filings are disseminated, we provide evidence that there are significant opportunities for these types of traders to profit by trading on delays in the public dissemination of information.

The full paper is available for download here.