Regulators are scrutinizing a news reporting service, owned by Deutsche Boerse stock exchange that has been accused of violating “media lockups” when economic data is released by the government agencies.
According to an investigative story in the Wall Street Journal, the company, Need to Know News, a provider of machine-readable news, has designed clever and faster technology to report the data ahead of other news organizations, such as Bloomberg and Dow Jones News.
The purpose is to send the government data over high-speed lines to financial firms whose algorithms are ready trade on it.
High frequency trading firms pay as much as $375,000 per year for the service, according to Wall Street Journal. Allston Trading, a Chicago-based firm, started the service in 2004 for its traders to receive economic data as fast as its competitors.
At the center of the storm is the government system for disseminating market moving economic data, and which types of organizations qualify to get the media credentials to sit at the table.
Need to Know News is suspected of violating media lock-ups – embargoes of half an hour that give reporters time to digest complex information and write stories. From the Wall Street Journal:
In 2011, the Securities and Exchange Commission subpoenaed computer hard drives used by Need To Know News's reporters, documents reviewed by The Wall Street Journal show. The same year, the Federal Bureau of Investigation installed a hidden camera at a Labor Department room where reporters gather to see economic reports a half-hour in advance of their release, under a news-embargo system that is known as a "lockup."
Last year, the Labor Department took the unusual step of essentially banning Need To Know News from its lockups. Need To Know News retained access at other federal agencies as well as several foreign governments and private groups that release market-sensitive reports.
John Harada, a former trader at Chicago-based Allston Trading who became head of the news service, told the WSJ that the criticism is “sour grapes” from larger competitors whose technology is not as fast as his firm.
Problems started for the company in 2008 when it faced accusations that it transmitted the gist of remarks by Fed Chairman Ben Bernanke ahead of an embargo. As reported in the Wall Street Journal, a reporter was caught using “some sort of voice –activate algorithm’ that involves speaking numbers into a telephone line during the lock-up,” wrote Chad Pergram a member of the radio-and –TV press gallery’s board in an email to other members.
The demand for rapid transmission of economic data has surged with the rise of high frequency trading. For example, the WSJ story notes that fees for Need to Know News have increased from $5,000, eventually up to the current $31,000 per month.
Questions of fairness are raised since subscribers are getting this data fractions of a second ahead of the public. On the other hand, exchanges will say they provide the news service to anyone who is willing to pay for it.
The scrutiny of Need to Know News is part of a long running, investigation of news organizations, which are suspected of leaking economic data before the embargo is lifted. Those who defend the practice say it helps disseminate economic data into the market and makes prices more efficient, while critics see it as a form of insider information and front-running by the few against the many.
Deutsche Borse told the WSJ it couldn’t comment on matters, which occurred prior to its acquisition of the news service in 2009. Declining to comment on the SEC and FBI probes, the exchange operator released a statement to the WSJ, saying that it “always operates its financial news and other market data businesses strictly in compliance with applicable laws, regulation and other codes of conduct.”
Meanwhile, it seems that government agencies are upping their own surveillance technology to police Need to Know News. In 2011, SEC collected hard drives from computers it used at the Labor Department, and that same year the FBI installed a hidden camera in the ceiling of the Labor Department media room to monitor the renegade company’s activities during lock-ups.
One issue is whether Need to Know News really is a news organization? It doesn’t write news stories, yet it was granted media credentials, reflecting the murky definition of what constitutes a media organization these days.
In 2012, the Labor Department went so far as to ban Need to Know News from its Lockups, according the WSJ article. But this year Deutsche Boerse seems to have found a way to skirt the blockade: It has combined Need to Know News with Market News International (MNI), which produces articles for the public and therefore is eligible to be in the media-lockup.
But other organizations have also landed in trouble. A Dow Jones Newswires reporter apparently was using an iPad, a device not allowed in lock-ups.