by Neil Hershberg, Senior Vice President, Global Media
Forget about bedbugs. The real threat to anyone involved in the financial markets these days is spiders – and I’m not talking about the eight-legged variety.
Spiders — sophisticated web-crawling software – are seemingly rampant on Wall Street, wreaking havoc in the financial markets, and yielding big profits for select investors in the know.
There were several incidents recently in which earnings results were leaked to the market in advance of their scheduled release. The predictable result: widespread investor confusion.
Shares of NetApp Inc., one of the affected companies, sank sharply in the subsequent market volatility, leading to a nearly one-hour trading halt.
The use of these advanced search bots is certainly nothing new; what has become apparent is their disruptive impact on fair and orderly capital markets. More ominously, the growing use of these bots threaten to make a mockery of the principle of fair disclosure.
The problem is not uncommon. Ironically, Jeff Morgan, president and CEO of the National Investor Relations Institute, issued a warning to NIRI members about a week ago:
“I recently spoke with a member who told me about a situation where a news organization ran a story on their earnings 45 minutes before the earnings announcement was scheduled for release. The company released their earnings immediately and began an investigation. The company found that the news entity breached an unpublished area of the company’s online newsroom and accessed the confidential draft earnings release by using sophisticated, proprietary web crawlers. The company routinely used this private website area to post and format draft earnings releases prior to publication. Their plan was to do as they had done for many prior quarters and open access to the release once it became public. Unfortunately, the unpublished release was discovered overnight by the media outlet’s proprietary web crawlers. For IR professionals the lesson learned is to be sure your documents are secure on the web wherever they reside. And a word to the wise – the member noted that the news organization pointed out that this type of discovery has happened before.” [IR Weekly, November 9, 2010 issue]
The major market-moving news services have long relied on spidering technology to ferret out news that hasn’t been disclosed via conventional channels. What has largely remained under the radar is how the wizards of Wall Street are similarly taking advantage of state-of-the-art software to identify hidden trading opportunities. It is a safe bet to assume that the financial news wires aren’t the only ones routinely trolling the Internet in search of actionable information.
While spiders are a major concern, issuers must also deal with another silent but potent threat: Their own lack of imagination in naming their important news and data files. Due to habit or inertia, many issuers sequentially name their financial files, or use other intuitive names for identification purposes. This scenario potentially allows a skillful web spy to decipher the URL of material information waiting to be released to the market place.
As if all this depressing disclosure news isn’t disturbing enough, there was also the recent revelation that Google might be stacking the deck in favor of its own properties. According to Harvard Business School assistant professor Ben Edelman, Google’s search results aren’t as objective and unbiased as the search giant has led us to believe. Edelman’s study concludes that “Google has made inaccurate representations to the public including to users, publishers, advertisers, investors and regulators.” Based on his findings, Google may not be the unbiased arbiter of information exchange that it has successfully portrayed itself to be.
Clearly, “self-publishing” is more complex – and has more associated risks with dire market consequences – than may seem obvious. The costs and complexities of the required security upgrades are likely to far outweigh any perceived cost-savings. And the potential loss in market valuation and credibility in the event things go awry is by far the largest financial liability of all.
So what is the simplest, most effective way to navigate this obstacle course? More importantly, what is the best way to maximize the reach of your message so that the market is fully informed? Hopefully, it should be obvious that posting the news on your web site won’t get the job done, and also is fraught with hidden dangers and unintended consequences.
A broadly-disseminated news release issued via Business Wire remains the surest way to ensure full and fair disclosure. All market participants have simultaneous, real-time access to price-sensitive information.
We have invested tens of millions of dollars in building the industry’s most advanced and secure systems for processing and distributing news. We are vigilant about security to the point of paranoia: Our databases, workflow systems, and public facing web sites are secured from spiders or anyone trying to gain unauthorized access to clients’ pre-released financial information.
And it isn’t just us saying it – Business Wire is audited annually in multiple jurisdictions where we are sanctioned to operate as a regulatory disclosure service. Additionally, as a proud member of Berkshire Hathaway, we answer to a higher authority and undergo a separate corporate security audit. These rigorous reviews, conducted by the world’s leading independent auditing/management consulting firms, certify that our network systems and operational procedures meet the most demanding global standards.
In a risk/reward analysis, web disclosure simply doesn’t make sense for issuers, and is a major disservice to investors.