How “Regulation Fair Disclosure” is Leveling the Playing Field For Smaller Investors
Today, smaller investors have the benefit of real-time data, extensive publicly available information on equities, and advanced trading platforms. With these resources, smaller investors have the benefit of a far more level playing field against hedge funds and other big institutions than ever before.
Standing behind this “great leveling” is a very important rule: Regulation Fair Disclosure. Investors who began trading after the year 2000 may underestimate just how informationally disadvantaged smaller traders once were.
As recently as the early 1990’s, individual investors had dramatically limited resources for evaluating stocks:
- Mailed annual or quarterly reports.
- Articles in financial news publications.
- A phone call to their full-service stock broker to inquire about a given stock.
But even as the internet began to make this sort of basic information more easily available, smaller investors still weren’t getting equal access. Most quarterly earnings calls, for instance, were not open to the public. Firms would practice “selective disclosure,” feeding details to big institutional players that simply weren’t available to the broader public. These practices may sound like insider trading, but they were all perfectly legal.
As more investors got the chance to follow their portfolios far more closely using online tools, they began realizing the market’s reactions to key stock news events were essentially rigged against smaller investors. It was the birth of sort of consumer rights movement for investors, with websites set up to try to shame firms into holding public earnings calls. This movement for transparency in stock data dissemination also began working with the SEC to raise awareness of this deep-seated issue (imagine the disadvantages smaller investors faced prior to the 1990’s!).
This drive culminated with the SEC’s issuance of “Regulation FD,” as it’s often known in the industry, in August 2000. Per this rule, “all publicly traded companies must disclose material information to all investors at the same time.” Needless to say, this rule drove a sea change in equity markets—one that’s still unfolding today.
Making sure all shareholders had equitable access to the relevant information was simply the first step, the foundation for an environment where every trader has a chance to develop strategies that can win in a competition with billion-dollar banks and hedge funds. Indeed, we’ve seen a rapid evolution of digital market intelligence, going from e-mail listservs of stock tips to comprehensive earnings-based strategies like Zack’s in just 20 years.
Like any strategic process, the contours of the competition are dynamic. The popularity of Zack’s like approaches has led to companies carefully managing their earnings expectations for consistent “Beats,” leading to a playing field where good historical data is essential for average-beating profits.
The Regulation Fair Disclosure rule is just the latest example of the ongoing interaction of new technology, new regulations, and institutions’ ever-present desire for advantageous information. This interaction determines the competitive contours of the stock market and has played out since earliest days of US stock trading. A brief story from history is good enough to briefly mention.
In the lead up to the so-called “Erie War” of the 19th century, the legendary Cornelius Vanderbilt was trying to gain control of the Erie Railroad and began purchasing huge quantities of the company’s stock. The firm’s principal shareholders, uninterested in a Vanderbilt takeover, simply began printing up more and more shares! At this time there were:
- No Federal Security regulations.
- No laws in New York, where the Erie Railroad was incorporated, mandating the dissemination of information on the number of shares outstanding, nor a New York law explicitly banning watering down of stock through new issuances.
An infuriated Vanderbilt eventually found a New York judge who figured out a legal method for stopping further stock printing in New York. And Erie’s owners simply crossed the river to New Jersey, barricaded themselves in a hotel with armed guards, and kept printing more stock! This old-school stock market was truly the Wild West, and it took decades to build a system where smaller investors could own shares without being at immense risk of fraud or financial piracy.
The battle for information and profits continues to this very day. The current confluence of regulations and technology have created a true golden age for smaller investors. Data is the key to striking what we consider to be a truly historic opportunity. If you’d like to learn more about using our platform’s synthesis of real-time news analytics and historical data to find market-beating profits, there’s no better place than one of our totally free training seminars. Just sign up using the button below: