Timing Is Everything

Based on research K. Ramesh, Bei Dong, Edward Xuejun Li and Min Shen

• New research uncovers an unfair trading advantage that skewed the playing field before Regulation Fair Disclosure (Reg FD) became effective in 2000. Before Reg FD, the SEC gave financial journalists early access to corporate press releases. Over time, this led to the creation of high-cost subscription services.
• The practice ended after the SEC released Regulation Fair Disclosure.
• This advance notice had as much impact on investing as personal contact from executives, a practice long criticized for its favoritism. 

It may be hard to believe, but as recently as 2000, an SEC-sanctioned rule gave financial news media a 15-minute head start on viewing firm press releases.

Today, just a fraction of a second of such early access can mean staggering profits. To grab that advantage, investment houses pour millions of dollars into ultra-fast fiber optic and microwave communication.

Before Regulation Fair Disclosure (Reg FD), financial media actually sold advance access to this information – by subscription. According to research co-authored by K. Ramesh, Herbert S. Autrey Professor of Accounting at Rice Business, buyers used the information to move markets before the general public ever saw the releases. The policy strikingly disadvantaged regular investors.

Not that the SEC meant for the early bird information to be used this way. In fact, it was supposed to do the opposite: to level the playing field for regular investors. Sophisticated investors, after all, enjoy better resources and expertise for extracting valuable information from firm news. The SEC decided to give regular investors a 15-minute edge by granting financial reporters early access to firm press releases.

The idea was that the press would use that 15-minute window to distill tradable information and release it prior to the full press release going out to the public. Instead, the plan backfired. Media outlets charged subscriptions for the special access, effectively making investing a pay-to-play game. The good news is that this practice ended in August 2000, after Reg FD reinforced the importance of fair access to public information.

Interestingly, the SEC had meant for its early-access plan to democratize investing. It was Business Wire and PR Newswire, firms hired by companies to publicize their business news, that first shed light on the practice.

To study what happened before this policy change, Ramesh and his co-authors used intra-day data to analyze the flow of information into the stock market. The team compared the 15-minute market activity before earnings press releases went public before Reg FD and after its implementation.

They found that traders with advance access were moving markets before the public got the same information. The effects were especially lopsided for firms with institutional investors that base their stock positions on short-term earnings. Subscribers also had a striking edge after good-news press releases, which are easier for traders to use in investing.

The early peeks also increased information uncertainty, which they measured by bid-ask spreads. The bottom line: Giving traders early access to firm information gave sophisticated investors an edge. After the SEC changed its policy, the study raises a new question. Do traders now get an unfair advantage when they can snatch just a few seconds’ advance look at information? If so, it may take both policy and technology to reconcile these current practices with the spirit of Reg FD.

K. Ramesh is the Herbert S. Autrey Professor of Accounting at Jones Graduate School of Business at Rice University.

To learn more, please see: Dong, B., Li, E. X., Ramesh, K., & Shen, M. (2015). Priority dissemination of public disclosures. The Accounting Review, 90(6), 2235-2266.