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‘Insider Trading 2.0′: The Battle Over Milliseconds

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It's been a week since the Federal Reserve shocked the world by not moving to rein in (or taper) its bond buying program, but a growing number of people are refusing to let it go and move on. While stocks have reversed after a brief euphoric jump to record highs, the aggrieved parties now are largely regulators and advocates who argue the timing of this latest release and others wasn't fair.

Specifically, reports that certain high-speed traders had access to the FOMC's market moving statement a millisecond (that's one 1/1000th of a second) early, has New York Attorney General Eric Schneiderman fuming, to the point where he's just launched a new whistleblower hotline to field anonymous tips in order to crack down on what he's dubbed "insider trading 2.0".

This is not the first probe into the timing of sensitive data releases, but it is the latest, and perhaps the biggest, as some estimates show nearly a half-billion dollars of the very fastest money was able to get a jump on the merely fast. For what it's worth, it takes about 300 to 400 milliseconds to blink your eye.

"To have that (information) even a millisecond ahead of others is, I think, totally unfair," says Mark Luschini, chief investment officer at Janney Capital Management, in the attached video. "It's not so much that the information is reaching some pocket of the world (eg trading desks in New York or Chicago) slower or quicker than another, it's the fact that somebody was able to trade in advance of others."

There's a catch to all of this that no one really wants to talk about and that is, as often as not, the so-called "first trade" is wrong.In the case of the recent Fed report, investors must remember that the data in question was a verbose, six paragraph statement from the FOMC. I don't care how many Evelyn Wood speed-reading courses you have taken, the risk of misinterpreting a document of that size in order to get a millisecond jump on the street is enormous, and therefore risky and unwise.

"The important thing is not to be overly focused on whether someone was unfairly advantaged, as unfair as I believe it was," Luschini says. "At the end of the day, for most investors, making decisions predicated upon long-term investment goals that are measured in years" is far more realistic than trying to ingest and react to a press release at the speed of light.

In addition, even if the FBI or SEC is able to somehow level the playing field on data releases to within a millisecond, you and I and most of the world still don't have a chance to compete fairly. That's because the cost of the data feeds and computer hardware alone are off limits to most people, not to mention the technology and capital required to actually process a $500 million ticket of your genius trading ideas in a millisecond.

The point is, as Jimmy Carter once said, life isn't fair. Even your average online brokerage account has far greater disadvantages than those being pursued today. In short, we're witnessing a tail-chasing effort that is supposed to make us feel good by leveling the playing field of data releases. Unfortunately, there's no quick fix.

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