My friend and coauthor Todd Henderson (Chicago law) has a really interesting op-ed in today's WSJ, in which he argues for creating a market in early access to corporate disclosures:
The SEC could mandate that corporate information be publicly released at a particular time, say, 2 p.m. Then it would permit companies to offer early peeks—say, starting at 1 p.m.—to anyone willing to pay. Firms could charge a subscription or sell early information a la carte, depending on market demand, and keep the proceeds. ...
If the data does indeed provide an advantage, then some investors, such as hedge funds and high-speed traders, would undoubtedly pay. Those looking for long-term equity returns, such as ordinary retirees and index funds, would not.
In turn, the pricing data that emerges from such a market would help answer one of the most perplexing questions of securities law: What information is material? The law defines materiality as whether there is a substantial likelihood that the reasonable investor would consider it important in making a decision. As Henderson points out, "The SEC may claim to know what shareholders want, but it can do little more than guess."
Once we know whether investors are willing to pay for information or not, SEC disclosure rules could be tailored to provide better tailored disclosures that are actually cost effective.
In addition, we could reduce the uncertainty around securities litigation. At the moment, when cases go to trial, we give jurors the definition of materiality and send them off to make an uniformed decision. It's not a pretty picture. Knowing whether or not investors would be willing to pay for the information would be a huge leap forward.
And don't come crying about ordinary investors. As Henderson points out:
The SEC worries that it would be unfair to ordinary investors to charge for early access. But creating a brief “pros-only” period would actually work to their advantage. Average Americans, who cannot compete with today’s high-speed traders, would know to stay out of the markets during these short periods. So would index funds, which try to avoid being picked off by savvy information traders.
There are also broader advantages: Laying bare the unavoidable fact that ordinary investors cannot beat the pros using corporate news would encourage a long-term perspective among corporate ownership. Making professional investors pay for early access would lower the bill for shareholders by shifting the costs of disclosure to the pros.
I think it's a great idea.
