Monday, March 22, 2010

"Heard on the Street": Is it Time to Retire the Hot News Doctrine?

Barry Graubart's Content Matters highlighted a recent court ruling by a U.S. District Court judge against TheFlyontheWall.com, an online information service has sold news and headlines for the past twelve years to investors that it aggregates from various sources in the financial community. It seemed like a fairly quiet and unremarkable "heard on the street" service, a grass-roots version of similar services offered by major information suppliers for many years. Surprisingly, though, the judge in this case ruled that the "Hot News" legal doctrine, first upheld nationally by the U.S. Supreme Court in a 1918 ruling, could be applied to the news organization's attributed headlines and snippets of reports from stock analysts at Morgan Stanley and other major investment banks.

The judge applied some relatively arbitrary standards to her ruling, suggesting that a 10ET daily curfew might be appropriate before TheFlyontheWall.com could start disseminating their "heard on the street" information about stock recommendations and that the situation could be reviewed in another year - presumably long enough for TheFlyontheWall.com to have disappeared from the scene or to have little option for legal challenges. See Barry's post for some great links and his own (attributed) snippets from some of the major players and commenters on this case.

There are many instances where news information services have tried to appropriate others' content in full to build real-time information services, so this challenge is not altogether new. There are, however, some odd wrinkles to this case that are worth thinking about in terms of their implications to news gathering and dissemination. To the best of my understanding:
  • The information regarding the bank analysts' recommendations is coming, presumably, from people who have received them. This is, as I recall, a relationship that is known in the news business as "having a source." If you have a problem with that relationship, you should speak to the source first and foremost.
  • The information disseminated is attributed to the creator of the stock report. In fact, it would not be valuable without knowing the source. This is the equivalent of a major newspaper attributing a breaking news story to a competitor- but still breaking it. Something is private until someone decides to make it public.
  • Except for small snippets, the research reports themselves are not being duplicated. The only thing that is really being disseminated is the news that the report is out and the general recommendation. This appears to be even less than the typical press releases that are disseminated by major securities ratings firms such as Standard & Poor's and Moody's, a public service. Note that these ratings agencies also sell their full research reports as a separate product.
  • While major banks do profit from their research reports, the sale of those reports has not been a major source of revenue for them. They are produced primarily to induce their clients to execute trades with them, from which they receive trade commissions. Their primary source of income comes from trading, not from distributing time-sensitive facts. In other words, even if what brokerages say is newsworthy they are not in the news business. Neither is TheFlyontheWall.com in the securities trading business.
  • The actual collection of the news of a stock report was a fairly trivial act by the banks in question. They had the reports, and they distributed them to their clients. The report itself may have taken effort and expense, but since they were fully aware of the report and fully in control of its release, the news of the report itself as as simple as posting it on a Web site or emailing it to a client.
  • The banks cite violation of their intellectual property rights. News of a research report collected under the guidelines of "fair use" is not the same thing as disseminating the report itself and its detailed rationale. Unless TheFlyontheWall.com is violating the terms of an agreement that they signed with the banks or a distributor to receive the research, IP rights don't really figure into this issue.
  • Given that news organizations such as Dow Jones already create elementized news feeds that enable electronic trading programs to interpret news items automatically to trigger trades after nearly instantaneous analysis by software, the claim that research reports distributed by email and Web sites is "hot news" that can move markets is highly suspect.
I could go on, but it seems to me likely that Judge Cote has misapplied the "Hot News" doctrine in several fundamental ways. Moreover, I think that it's increasingly likely that we will see the "Hot News" doctrine challenged in some fundamental ways in the years to come. In an age in which virtually anyone can mention to the world what they have heard on a news report via online services such as Twitter, the "pains and expense" required to acquire and disseminate news are at a fundamentally different point in the evolution of publishing technologies than they were in 1918. When the public owns the distribution channel, as the Internet now allows. the economics of news are quite different than they were then. I can sympathize for those in the news world who feel that their reports can give people private advantages, but for how long can the privacy of "news about news" be expected to hold up via today's technologies?

Stock analyst reports are meant to help their clients to jump in to a market for a security or to head for the exits - advice that may or may not be sound at the moment, but which, as a private news event, at least gives investors with major holdings a few moments to think about it before the general public reacts rightly or wrongly to the news of the report. This justifies the securities firms taking a position in these securities in the first place to facilitate trading, in theory. The real risk is not in the cost of the report, as cited in "hot news" court precedents, but in the report issuer's acquisition of securities at a particular price.

In general form the arguments being put forth by the major banks seem to be of about the same texture as those being put forth by major news organizations trying to restrain the use of headlines in online search engines and social media news services. When a gap in technologies creates an opportunity for private advantage in breaking news, then it seems that publishers have a clear opportunity to profit handsomely. This has been true from the time of Julius Reuter and his pigeons carrying stock quotes across a gap in a telegraph line, or even as far back as the Roman elites who paid their slaves to tell them what was happening in the heart of the city's political and business centers. But when those gaps no longer exist, then the advantage is not really about a greater good; it's really about trying to maintain business as usual when business needs to move on. Markets are all about finding private advantages, but if market participants don't consider them to be private advantages, then there's not much that brokerage houses can do.

I would be willing to stake the banks a few seconds in today's technologies before quibbling with services like TheFlyontheWall.com, but even in its heyday the major exchanges were rarely asking for more than fifteen minutes to delay stock quotes being distributed to the public. Now that stock markets are eager to get their quotes out to the public as soon as possible, it seems that the markets themselves have acknowledged that today's investors have a need for a level field of information if markets are to succeed. Finding liquidity in publicly held stocks just isn't that big a deal anymore and research itself will not fill the pinch that the brokerages are feeling as a result, no matter how they try to adjust the terms of its release. In the meantime, the "Hot News" doctrine may live on, but at this point it seems to be headed towards a head-on collision with the First Amendment. Until then, if banks and brokerages want their research to be private, then they should require secrecy from their clients, not from news organizations doing their job.
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