Stock Clearinghouse Leaked Sensitive Data, Trading Firm Says

Businessman checking stock market data. He using a mobile phone. Analysis economy data on forex earn graph.
Businessman checking stock market data. He using a mobile phone. Analysis economy data on forex earn graph.

Summary

  • Traders worry Depository Trust & Clearing Corp. data feeds could reveal when large investors are buying or selling stocks, a charge DTCC rejects

The clearinghouse that processes U.S. stock trades is selling data that sophisticated traders can use to profit at the expense of more traditional investors, according to a report from an institutional brokerage firm.

The Depository Trust & Clearing Corp. is “leaking sensitive trading data" via two little-known data feeds, brokerage Themis Trading said in the report, which it circulated to clients earlier this week.

The DTCC disputed the report. “We categorically reject any claim that our data products reveal or could be used to reveal confidential information, including the trading strategies of particular firms," said Tim Keady, managing director and chief client officer at the DTCC.

Mr. Keady said the DTCC’s feeds anonymized the firms doing the trading, provided only aggregated data across many transactions and came out with a delay—measures designed to eliminate the risk of information leakage.

Still, some money managers said they worried about harmful impacts from the two data feeds, called Equity Kinetics and Investor Kinetics. “It seems inappropriate that the information that we must provide to settle trades is repurposed in a manner that directly harms our clients," said Doug Schrank, head of trading at Southeastern Asset Management.

A critical part of Wall Street’s market infrastructure, DTCC is owned by a financial-industry consortium whose members include many Wall Street banks. It clears and settles hundreds of billions of dollars of securities trades each day. Its main function is to ensure that shares are delivered to buyers and cash is delivered to sellers.

The clearinghouse collects transaction fees and typically reinvests profits into its services or rebates them back to members. It also has a side business selling data.

In 2022 its revenues from data-related services grew 15% to $56 million, out of a total $2.2 billion in revenues, the DTCC’s financials show.

The two data feeds featured in Themis’s report paint a picture of market activity—including what kinds of firms are the heaviest buyers and sellers in individual stocks—based on activity at the clearinghouse. Potentially, such data feeds can be used as inputs for computerized trading strategies, signaling to programs when to buy or sell.

Traders at several asset managers voiced concern that the DTCC data feeds could help reveal when their firms are buying or selling a stock, a process that can sometimes stretch out over days or weeks. If a sophisticated trading firm infers that such a transaction is under way, it can try to get ahead of the big investor’s trade.

For instance, if the big investor is buying Ford, the sophisticated trader can buy Ford shares too, knowing that a large buyer is pushing up the price of the stock. That means the big investor pays more for Ford, and it is why such firms try to execute large transactions quietly.

“We’re trying to limit our information leakage whenever we’re transacting," said Mehmet Kinak, global head of systematic trading and market structure at T. Rowe Price Group.

“When we’re in the market, I feel like we do have I.P., because we’re the only people who are aware of our intention with a large-size order," Mr. Kinak said. “And it feels like some of these DTCC products gift-wrap that information for other market participants."

Adam Conn, head of trading at U.K.-based asset manager Baillie Gifford, also expressed discomfort. “Regardless of the product, we would question whether clearinghouses, custodians, broker-dealers or other houses in receipt of trading data should be in the business of repackaging and distributing it on a granular basis," Mr. Conn said.

Equity Kinetics provides daily snapshots of trading volume at the 10 most active brokerages in different stocks, including buying, selling and short selling. Investor Kinetics offers stock-by-stock 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. Such data comes out three days after the trades are executed.

Themis said the data feeds, used together, could reveal whether a few firms are responsible for most of the buying activity in a stock, or whether hedge funds are shorting a stock. Combined with other sources, DTCC’s data feeds could “create an even clearer picture of what market participants are doing," Themis wrote.

Mr. Keady responded: “DTCC has implemented rigorous product development controls to ensure our data products cannot be used to identify any party to a trade directly or indirectly through reverse engineering alone or in combination with generally available third-party data sources."

Still, one firm that the DTCC hired to test out the data feeds said they produced lucrative trading signals and called Investor Kinetics a “gold mine."

CloudQuant, a firm that evaluates data sets for algorithmic traders, said it developed potential trading strategies using the two DTCC feeds. The strategy based on Equity Kinetics returned 17% annually, while the strategy based on Investor Kinetics returned 36% annually, according to the evaluations posted on CloudQuant’s website.

Such yields are hypothetical, because they are based on running the strategy against historical market data and not in real life. But CloudQuant’s analysis “clearly demonstrates the signals that can be generated are of tremendous value," Themis wrote.

Asked about the report, CloudQuant Chief Executive Morgan Slade played down the value of the DTCC feeds. “This information is available from a myriad of sources if you know where to look for it and have the right skill set," Mr. Slade said. “We’re just trying to level the playing field and make it more accessible."

Equity Kinetics was introduced in 2018 and Investor Kinetics dates to 2020. But they have only drawn attention recently as the DTCC has stepped up efforts to market the data feeds, said Joe Saluzzi, a partner at New Jersey-based Themis and co-author of the report. Mr. Saluzzi is well-known in market circles as a vocal critic of high-frequency trading.

“They do a great job with clearing and settlement—they’re the backbone of the stock market," Mr. Saluzzi said of DTCC. “But what are they doing in the data business?"

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