September 22, 2015
Is Technological Asymmetry the New Informational Asymmetry?
Posted by Christine Hurt

The theory of informational asymmetry drives the securities regulation disclosure regime.  Issuers have more and better information on securities than purchasers, so requiring periodic and ongoing disclosure of relevant information reduces that asymmetry, leading to a more efficient market and possibly a fairer market.  To that end, purchasers should receive the same information at the same time.  

Differences in purchasers' abilities to analyze and use the information exist, but the disclosure regime assumes that a few things will happen.  First, those with more acumen, experience, skill and intelligence will use the information to make informed decisions, moving the share price in an efficient market.  All purchasers benefit from this price discovery.  Second, a market for information analysis will form, and investors can access this acumen, experience, skill and intelligence by hiring financial advisors or purchasing research reports.

Currently, a new type of asymmetry seems to be challenging this carefully (?) constructed disclosure regime:  technological asymmetry.  Though asymmetries in acumen, experience, skill and intelligence could be described as technological asymmetries, I am referring to computer technologies.  I was reading Tom Lin's very interesting papers (here and here) describing computer algorithms and high-speed traders as "new investors" and "cyborg investors," and I was wondering if it helped more to characterize these new developments not as a new category of investor, but a new category of asymmetry.

The investors are the same as they always have been -- retail, institutional, smart, dumb, etc.  But, now the smart investors have new tools.  Securities Regulation seems to understand that investors will use whatever tools are at their disposal -- calculators, experts, slide rules, spreadsheets, computers, models, etc.  But at some point new technologies seem to jump the boundaries of what is foreseeable.  Imagine in the 1980s a law professor saying that students can bring anything they want into the completely open book exam "besides another human being."  (I think I heard this statement from my law professors in the early 1990s).  Then an enterprising young student with a lot of resources brings in a 2015 smart phone with the power of the internet.  Or a device that allows her to read the exam in .4 seconds and express her thoughts on paper in the time it takes to think.  Then, the professor has to change the "completely open book" rule.  So, does securities regulation need to change some rules?

I'm going to separate the "new technologies" into two different categories.  The first is just supercomputing power that allows for the digestion and operationalization of data in ways and at a speed that would have been unthinkable decades ago.  (I am ignoring technologies that allow for traders to break the law in new ways, like hackers.)  So, if some traders receive EDGAR filings a few seconds before the market and are able to trade using software-based trading, is that a technological asymmetry?  At the beginning of the EDGAR portal, I don't think anyone would have thought that having a 100 page document a few seconds before the market would lead to trading on nonpublic information, but now it does.  And what about high-frequency trading, which allows some traders to  "see" trades nanoseconds before the trade completes, allowing traders to use that "nonpublic" but almost public information.

I'm also interested in software that can find patterns in huge amounts of data and use it to a trading advantage.  Though the information is theoretically public, its practically nonpublic to most people using standard technologies.

So, how does securities regulation address technological asymmetry?  Or does it?  

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