It's Not About What's Fair

By Larry Tabb, TABB Group

Originally published on TABB Forum 

The free market is about taking risks to harvest opportunities, and our capital markets are about investment, reward and competition – not fairness. 

Last week, the Wall Street Journal featured TABB Group research in a front page story about low-latency economic data and machine-readable news (“Traders Pay for an Early Peek at Key Data,” June 12, 2013). The angle of the story was how certain firms buy access to data ahead of the general public, albeit by seconds and sub-second intervals. The article focused on the University of Michigan Consumer Sentiment Index, the Chicago Business Barometer, and the Institute for Supply Management (ISM) Monthly Manufacturer’s Index – all examples of privately sourced data.

Then, like clockwork, legislators started calling to inquire what can be done to address this apparently obvious market inefficiency. Isn’t it unfair that some traders can buy advanced access from data providers to this information? Aren’t individual investors at a disadvantage? Isn’t this something that Congress should fix? 

I (maybe all of us as a society?) must have some Pavlovian response to the word “fair.” Maybe it was growing up with three brothers and being told constantly to share. Maybe it was ingrained in my psyche when I was in nursery school. Who knows? But when I hear the word “fair,” all these images pop up into my head about playing nicely, doing the right thing, letting others go first …

But are those feelings right? Are they correct in terms of capitalism and market structure?

Let’s look at the issue of payment for preferential access to information and the question of fairness. It really boils down to two sides of the same coin:

First, is it fair that traders/firms with deeper pockets get access to potentially market moving information before other investors?

Second, should the SEC, or the “Government,” dictate how private (or, for that matter, public) entities monetize their efforts?

This is clearly a discussion about the balance between fairness and business models. So where do we stand?

I don’t want to wrap myself in the Conservative Agenda (personally, I generally lean more left of center), but for this argument, I’m squarely right of center. Our markets – and, for that matter, our economic system – are about investment, reward and competition, not fairness. Is it fair that the computer killed the typewriter? Is it fair that the smartphone killed the traditional handset? Is it fair that Apple was almost dead and a visionary brought it back from the brink? No, no, and no. Were some people hurt by these developments? Of course. Where are Smith Corona (making thermal labels), Motorola (bought by Google for its patents), and Dell or HP (in the midst of a buyout and restructuring, respectively) today?

The free market is about taking risks to harvest opportunities. And that is the whole purpose of research – to gain insight and competitive advantage when making investments. To the extent that a research firm is not a regulated entity and/or not governed by the SEC, it’s the firm’s job to maximize its revenue opportunities.

Fairness doesn’t really come into play. As long as various participants and investors are not discriminated against, and the information is available to all to buy, the goal isn’t to be fair – it’s to create a product and harvest revenue. Otherwise, the firm is not doing right by its owners.

So it is understandable that a private company’s goal is to maximize its revenue opportunities; but what about publicly funded universities or government-sourced data?

For universities, at least in my opinion, the issue is the same. A university has a duty to maximize the value of its resources. That is why schools compete for the best students and to attract top teachers, and work to develop the best research. Even state-sponsored universities allocate their capital to the most rewarding endeavors. If state schools don’t invest in teachers, they won’t provide a decent education, their students won’t get jobs, ratings will fall, and students will go elsewhere.

When universities develop research, such as the ISM, that research isn’t given to the world for free. Well, yes, the headline numbers are given away. However, there are typically troves of data, below the headline rates, for which investors and other consumers are willing to pay. While I am not intimately familiar with the ISM, typically similar research breaks out trends by geography, sector and subsector. That information rarely is free. The revenue generated by this type of research is used to cover costs, and, if there is anything left over, to support the university’s financial goals. If the university doesn’t generate revenue from these endeavors, eventually people lose interest and the products get stale.

While private and university research revenue should be harvested with yield maximization in mind, what about governmental data? Surely governmental information should be released to all simultaneously, right?

Government data is probably the only type of information for which a case even can be made for simultaneous release. We the People pay for the creation of this research, and we should all be able to access the results equally. That said, even with public data, if we ran these statistical services with “We the People” in mind as trustees, maybe there is a case to be made for a pay-for-access business model. If the government charged extra for early release, maybe our budget deficit would be the tiniest bit lower. But that argument is probably more extreme than conventional wisdom.

We live in a capitalistic society, and our capital markets are the center of that world. While fairness has been drilled into us since we were little, so has competition. When fairness gets confused with competition, that is when business models break down. While competition isn’t always pretty, it has been at the core of our country and our markets since they were founded. It drives innovation, it drives competition and, like it or not, it drives our way of life.