More and more investors buy shares based on alternative datasets and, therefore, no longer have to wait for listed companies to publish their quaterly reports. The question is whether this is fair to investors who do not use this data. According to Arnoud Pijls, Assistant Professor of Corporate Law and Capital Market Law at Erasmus School of Law, this could be a case of insider trading.
Major investors such as hedge funds buy large amounts of data from external parties and derive meaningful information from this about listed companies. Although European listed companies are obliged to publish information related to them directly, the trade in alternative data allows some professional investors to discover important information before the company even publishes it. The question is whether that is fair.
Not a level playing field
Pijls states: “It is an innovation in the financial markets that fascinates me. However, I also immediately thought of the fair playing field that the stock market should be. All participants in the stock market, from large hedge funds to private investors, should have the same information at any given time.”
Reason for further research
Meanwhile, The US regulator SEC and the British regulator FCA have announced that they will investigate the trade- (by data vendors) and the use of (by investors) alternative data. However, the Dutch regulator the Netherlands Authority for the Financial Markets (AFM), sees no reason to do so for the time being. Pijls does think further research is necessary: “Even in High-Frequency Trading questions about a level playing field rise. The regulator is actively working on this, and a lot has already been done in the area of regulation already. However, in this field the developments follow each other up quickly, and, therefore, the legislator is always a step behind.”
Asymmetry of information
Banning the use of alternative data all together would not be a good idea, according to Pijls: “Trading and using alternative data ensures that securities markets become more transparent and efficient because important information about listed companies is incorporated into the stock price earlier. However, alternative data also increases the degree of information asymmetry between investors. The level playing field between investors is, therefore, in my view, at stake and questions can certainly arise here. However, because important information is processed earlier in the stock price, the degree of information asymmetry between listed companies on the one hand and the investing public on the other hand decreases. From that aspect, it is arguable that the risk of insider trading decreases.”