All you need to know about the New Normal breed of crony capitalism and unbridled hypocrisy is once again best exemplified by the following quote by Charlie Munger – the lifetime business partner of crony capitalist par excellence Warren Buffett – from May 2013, in which he said that “I think it is very stupid to allow a system to evolve where half of the trading is a bunch of short term people trying to get information one millionth of a nanosecond ahead of somebody else. It’s legalized front-running. I think it is basically evil and I don’t think it should have ever been allowed to reach the size that it did. Why should all of us pay a little group of people to engage in legalized front-running of our orders?”
Noble, noble words Charlie. What Munger, however, did not disclose is that as part of the Berkshire Hathaway-owned Business Wire news service, the company was enabling just this “basically evil” frontrunning, by allowing some, those who could afford the hefty fee of course, to make Munger and Buffett even richer and to subscribe to BW’s HFT direct news access which gave them a few millisecond headstart and in the process frontrun everyone else.
At 4 p.m., Ulta’s stock was changing hands for about $122 a share. About 150 milliseconds after 4 p.m., Business Wire released Ulta’s earnings, according to people familiar with the timing of the release. The earnings results missed analyst expectations, a sign for traders to sell. Within about 50 milliseconds, in a series of rapid-fire trades, about 6,200 shares of Ulta’s stock were sold on New York stock exchanges for nearly $122, totaling nearly $800,000.
While it’s possible that the trades were executed by a firm that doesn’t subscribe to Business Wire, traders say the size of the trades indicates they were likely made by a firm, or several firms, with knowledge of the results. A spokesman for Ulta Salon said the company doesn’t comment on stock-market action.
At the time of the first wave of trades, newswires hadn’t yet distributed Ulta’s earnings. Bloomberg L.P.’s Bloomberg News issued the release 242 milliseconds after 4 p.m. Dow Jones & Co., which owns The Wall Street Journal, received the release 296 milliseconds after 4 p.m. and issued it 168 milliseconds later. About 700 milliseconds after 4 p.m., Ulta’s stock reached its closing price of $118 a share on Nasdaq, a price that took account of the orders placed after Business Wire and other news services distributed Ulta’s earnings, according to data analyzed by Nanex LLC, a market data provider, and people familiar with the trading.
Nasdaq stocks often settle a few tenths of a second after 4 p.m. as its computer systems seek to reconcile all trades, according to people familiar with the exchange’s practices.
Because of the heavy trading action, T. Rowe Price got $118 a piece for its 26,000 shares, say people familiar with the trading. That’s a difference of about $100,000 from what it would have gotten if the stock hadn’t taken a hit from the earnings report in the first second after 4 p.m. Such heavy, rapid-fire trading could explain why market volatility in the seconds after the 4 p.m. Eastern time stock-market close has increased in recent years, says Eric Hunsader, founder of Nanex.
Fast forward to last night when the firm that was exposed as enabling such “basically evil” frontrunning, Berkshire, pulled the plug on Business Wire’s direct access:
After publication of the Wall Street Journal article “and in consultation with Berkshire Hathaway’s chairman, Warren Buffett, Business Wire has made the decision to no longer allow high-frequency trading firms to license direct feeds from Business Wire,” Ms. Baron Tamraz said in a statement.
The company said the decision was made after conversations between Business Wire Chief Executive Cathy Baron Tamraz and Mr. Buffett, whose company purchased the San Francisco press-release distribution company in 2006. The conversations with Mr. Buffett took place after The Wall Street Journal reported on Feb. 6 that Business Wire was selling direct access to news releases to high-speed trading firms, as well as to more traditional media and other securities-industry customers.
Mr. Buffett’s personal involvement in the decision by Business Wire to end the practice is unusual for the legendary investor, who generally takes a hands-off approach to the business decisions of companies owned by his conglomerate. Mr. Buffett didn’t immediately respond to a request for comment.
But before anyone congraultates the octogenarian billionaire for “doing the right thing”, it appears he had some legalistic prodding:
Business Wire also had conversations with officials in New York Attorney General Eric Schneiderman’s office about the issue. The officials expressed concerns about the practice and pushed the company to end it, according to a person familiar with the matter.
“Business Wire’s decision to voluntarily step forward and stop selling its clients’ information directly to high-speed traders is a tremendous victory for our effort to eliminate advance trading on market-moving information,” Mr. Schneiderman said in a statement.
In a September speech, Mr. Schneiderman said trading on early access to publicly released information is a “new form of market manipulation” that requires action from regulators and lawmakers in Washington. Mr. Schneiderman’s focus until now has largely been on high-speed traders getting early access to economic reports.
So congratulations to Nanex and Eric Hunsader for exposing yet another hypocrite, and congratulations to Buffett for doing the right thing… when there were no more options. And now we turn our attention to the other newswires who still provide the HFT parasites with the “basically evil” frontrunning info they so desperately need to make a mockery of the market:
Business Wire isn’t the only press-release distributor that has been providing traders direct access to releases. High-speed traders are also paying Marketwired, a Toronto company majority-owned by OMERS Private Equity Inc., which distributes earnings releases and the ADP monthly employment report, to get direct access to the news. Marketwired had no immediate comment.
Sadly, at this point even if one were to root out all of these symptoms of an HFT-driven market that we have been writing about for five years, it would still be too late to fix a terminally broken market, where while HFT is the means by which manipulation is performed, the underlying cause was, is and remains the Fed. Until both HFT and the Fed are eliminated, one can only joke that the US capital markets are anything resembling “fair and efficient.”