Two recent opinion pieces in the WSJ caught my attention. (If only it were Hustler that rejected all my letters to the editor, how much different these posts would be). One of the Journal pieces is by Holman Jenkins, whom I had challenged (via an aforementioned letter) to a duel for repeatedly writing that insider trading is a victimless crime. Jenkins often writes informatively though, such as eighteen months ago with Apple riding high, he wrote that it was due for a fall as no hardware company can keep the kind of margins they enjoyed. And this time too, he writes sensibly on the LIBOR scandal. Well, for the most part writes sensibly. He errors in suggesting that Nick Leeson, who lost a few billion dollars for his bank by taking unauthorized positions, and Tom Hayes, who made hundreds of millions for his by bribing other bankers with the support of his superiors, are peas in a pod. In fact they have nothing in common other than a connection to Asia. To say financiers are similar because they have a connection to Asia is like saying two baseball players are similar because they both chew tobacco.
But I quibble -- importantly Jenkins points out the gigantic incentive traders at banks have to bend the rules given modern technical and financial leverage -- one person can generate hundreds of millions for the bank and therefore tens of millions for himself with just a little edge. If the edge happens to come with legal risk that doesn't mean it won't be considered.
Plus, some rules designed to keep markets fair, such as insider trading laws, are often gray, and so it is difficult for traders to know what they can and can't do. For instance, compliance departments will tell their employees not to trade on material, non-public information. But if you are playing golf with two strangers and you overhear one of your threesome tell the other that his company is about to be the subject of a buyout, you can legally trade on that information. Why? Because you didn't solicit the information and because you didn't have a fiduciary duty to the company in question. But what is that information if not material and non-public? Huge rewards combined with inexact rules means plenty of chance for malfeasance.
This brings us to the second Journal article, by Gordon Crovitz. He writes about the early release of private (i.e. non-government or official corporate) data to high-paying customers, specifically the data from University of Michigan consumer sentiment survey. Crovitz, who has escaped my duel invitations in the past perhaps because I never read his column, may need to invest in a flintlock. He rightly says the Michigan flap is overdone, and that private purveyors of data should be able to do whatever they want with it. He is correct about that, private owners can do what they want with their property -- what's new about that? But he doesn't add that customers of private market data should probably think twice about their purchases.
Lets consider the Michigan data. I've written elsewhere that the sentiment data is not new news, that the previous month's stock market performance is an excellent predictor of this month's sentiment. No surprise, since the stock market is nothing if not a sentiment gauge. And if you didn't want to rely on the market as a sentiment indicator, to get the Michigan data early you could conduct a survey yourself for $20k per month -- pennies compared to what the data would be worth if it were truly market moving.
But since sentiment data is not new news, its not market moving. Our analysis shows that there is no meaningful or lasting move subsequent to the release of sentiment data. So why are people paying to see it early? Because they can take a position and turn around and sell it to you two seconds later when you overreact to the non-news. Which brings me to my point about the perils of private data. What Crovitz doesn't point out is that any private data worth its salt never sees the light of day. Successful money managers, and by successful I mean those that produce superior risk adjusted returns year in and year out over the course of decades, like the hedge fund Renaissance Capital, have reams of data you and I have never seen, and never will. Any worthwhile private data stays that way because releasing it makes it worth less to the holder. I can tell you that the Michigan data isn't useful, but the fact that's it's released at all should give you a hint. Put another way, if you see Carl Icahn on CNBC talking up some stock or other, you can be certain he has it to sell to you.
This is not to say that all private data is worthless. The Institute of Supply Management manufacturing index is one of the few releases (private or otherwise) that meaningfully and lastingly move markets. (Which begs the question, if the ISM were formed in today's hyper-financial CNBC era instead of 1915, would they be trading on the data instead of giving it away?) How can mom and pop, widows and orphans, doctors and dentists (or professional traders) tell what data is useful? It's not easy, I know I can't, so to be safe investors would be well-served to ignore private data releases since most of it is junk. As Jenkins points out, there is massive incentive for traders to try to gain an edge, and peddling their own data (i.e., talking their own book) is certainly one way to take your money and put it in their pocket. Crovitz ends his column challenging regulators who would rein in private data sales, noting that the WSJ is in the business of selling private data by virtue of peddling their newspaper each day. Indeed, and for those of us that subscribe and read it, principium considerandum.