Depository Trust & Clearing Corp. is selling data feeds which could reveal when large investors are buying or selling stocks
Per the excellent reporting at WSJ
An institutional brokerage firm, Themis Trading, has alleged that the Depository Trust & Clearing Corp. (DTCC), the clearinghouse responsible for processing U.S. stock trades, is selling data that could be exploited by savvy traders to gain an unfair advantage over conventional investors.
Themis Trading circulated a report to its clients earlier this week claiming that the DTCC is disseminating sensitive trading data through two obscure data feeds. However, the DTCC has firmly refuted these allegations. Tim Keady, the managing director and chief client officer at the DTCC, stated that their data products do not disclose confidential information, including specific firms' trading strategies.
Keady further explained that the DTCC's data feeds anonymize the trading firms, provide only aggregated data from numerous transactions, and are released with a delay. These measures are intended to prevent any potential information leakage.
Despite these assurances, some money managers have expressed concerns about the potential negative effects of the two data feeds, known as Equity Kinetics and Investor Kinetics. Doug Schrank, the head of trading at Southeastern Asset Management, criticized the repurposing of information provided for trade settlement in a way that could harm their clients.
The DTCC, a crucial component of Wall Street's market infrastructure, is owned by a consortium of financial industry entities, including many Wall Street banks. It clears and settles securities trades worth hundreds of billions of dollars daily, ensuring that shares are delivered to buyers and cash to sellers. While the clearinghouse primarily collects transaction fees and reinvests profits into its services or returns them to members, it also has a side business of selling data.
In 2022, the DTCC's revenues from data-related services increased by 15% to $56 million, out of a total of $2.2 billion in revenues, as per the DTCC's financial statements. The two data feeds highlighted in Themis's report provide a glimpse into market activity, including which firms are the most active buyers and sellers of individual stocks, based on clearinghouse activity. Such data feeds could potentially be used to inform automated trading strategies, indicating when to buy or sell.
Several asset managers have expressed concerns that the DTCC's data feeds could inadvertently disclose when their firms are buying or selling a stock, a process that can sometimes take days or weeks. If a sophisticated trading firm deduces that such a transaction is in progress, it could try to preempt the large investor's trade.
For example, if a large investor is purchasing Ford shares, a savvy trader could also buy Ford shares, knowing that a large buyer is driving up the stock price. This would result in the large investor paying more for Ford, which is why such firms attempt to carry out large transactions discreetly.
Mehmet Kinak, the global head of systematic trading and market structure at T. Rowe Price Group, stated that they aim to minimize information leakage during transactions. He added that it seems like some of the DTCC's products are making this information readily available to other market participants.
Adam Conn, the head of trading at U.K.-based asset manager Baillie Gifford, also expressed his concerns. He questioned whether clearinghouses, custodians, broker-dealers, or other entities that receive trading data should be repackaging and distributing it in such a detailed manner.
Equity Kinetics provides daily updates of trading volume at the 10 most active brokerages for different stocks, including buying, selling, and short selling. Investor Kinetics provides data on the trading volume and number of transactions carried out by three groups of firms: traditional asset managers, hedge funds, and retail wealth managers, three days after the trades are executed.
Themis suggested that these data feeds, when used in conjunction, could indicate whether a few firms are driving most of the buying activity in a stock, or if hedge funds are shorting a stock. When combined with other sources, the DTCC's data feeds could provide a more comprehensive view of market participants' activities, according to Themis.