The Depository Trust & Clearing Corp. (DTCC) is taking advantage of small traders in the latest regulatory scandal.
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 new report, drawing criticism from money managers and brokers.
The Depository Trust & Clearing Corp. is “leaking sensitive trading data” via two little-known data feeds, institutional brokerage Themis Trading said in a report to clients that was released on the brokerage firm’s website Thursday.
Traders at several investment managers, including T. Rowe Price of Baltimore and Baillie Gifford of the U.K., told The Wall Street Journal they believe the practice could undermine their businesses and should be abandoned.
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.
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.
DTCC is Selling Data Traders Can Use to Profit at The Expense of More Traditional Investors
The 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, per WSJ.
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.
Data Feeds Deemed as “Gold Mines”
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.
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.”
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