Rick Santelli reacts to CNBC colleague Eamon Javers' report that Thomson Reuters is providing "ultra-elite customers" and "elite customers" with consumer sentiment numbers from the University of Michigan before the rest of the world.
EAMON JAVERS: Let me walk you through the story that we broke on our air earlier today. It's based on a contract that we obtained between Thomspon Reuters and the University of Michigan to put out consumer confidence information. And in that contract, Thomson Reuters stipulates that they're going to put it out in three tiers. Take a look here at this graphic which shows you the three tiers of they're putting out the information:
First, is the public access to data. That goes out at 10:00 in the morning. But at 9:55, five minutes earlier, Thompson Reuters provides elite customers with access to that data. But even earlier that that, at 9:54:58, two seconds earlier, Thompson Reuters provides ultra-elite customers with access to that data in a machine-readable format, and they can trade on it.
Now here's the real-world impact: Take a look at this chart, that the people over at Madex provided to us. This chart is trading in the SPY on May 17. And what you see is, on the right-hand side, the red line, that's 9:55. What you see here is an explosion of trading at just about exactly 9:54:58. You see that sharp market move up. That gives you the sense that traders are immediately reacting when this early data is going out, two seconds before the 9:55 crowd gets it. And of course, five minutes and two seconds before the 10:00 crowd gets it. Now here's what Thompson Reuters told us about this when we asked them:
"Details of the tiered release of this data are provided openly to Thompson Reuters customers and the wider public and anyone wishing to trade on this data can pay for the service that best meets their data needs."
And guys, it is an expensive service. The contract stipulates that Thompson Reuters pays the University of Michigan $1 million per year for exclusive access to that data.
Before Santelli got a chance to respond, a panel consisting of former Obama administration official Jared Bernstein and CNBC's Jim Cramer react.
"Having done a lot of work with prosecution, what's legal or illegal is up to the prosecutor. It's not up to Thomson Reuters, it's not up to us. If the prosecutor doesn't like this, he brings the case. Prosecutor, bring the case," Cramer said after the report from Javers.
"I don't think it was illegal and I doubt it should be made illegal, but I think it's wrong, I think it's unfair. and I think that Eamon is doing some dogged and very intrepid work here," Bernstein reacted.
"I was about to ask Brian and then Jim Cramer, have you ever heard about this? Because I haven't and I'd be darned surprised if anybody else has," Bernstein added.
CNBC's Rick Santelli joined the conversation and offered this commentary on the new found "outrage" of high-frequency trading (HFT) and getting important information before everyone else:
SANTELLI: Here's my issue: Everybody at the desk raise their hand if they understand that for years subscribers could pay extra money and get it before the press gets it, do we all know that sitting there? This has been going on for years. Now, HFT (high-frequency trading), nobody likes it and the extra two seconds, many didn't know about it, so Eamon, my hats off to you. But it's an HFT story because for years, for years you could pay a little dough and get it ten minutes early. So my issue is, there was no outrage for years and years and years. What's changed, really?
This caused Jim Cramer to respond and note how "the rich people" used to get information and how that has apparently changed. Rick Santelli jumped in and questioned what it is he means by "rich people" since he is one too.
CRAMER: It did change. It used to be that -- we changed that. Arthur Levitt decided there should be a level playing field and that this was wrong. It's true. During the '90s, I mean, the CFO would talk to you. It wasn't like he talked to everyone else, he'd talk to you and if you wanted, you got the information. And it was a quiet period, but before that we used to have it so that rich people got it routinely. The SEC decided thatâ€¦
SANTELLI: What do you mean rich people? What's the rich people, Jim, come on. I hate the secret little underlying themes.
CRAMER: Me, okay?
SANTELLI: You're not poor.
CRAMER: I was a hedge fund manager.
CARMER: This is what you did, before Reg-FD (Regulation Full Disclosure). You got information, it was legal. They weren't going to speak to little people. They didn't have time to you. They spoke to big shareholders. That was the deal.
SANTELLI: University of Michigan has had a paid privilege for a long time, that's all I'm saying.
CRAMER: I just told you what Reg-FD meant. I mean Reg-FD meant that Arthur Levitt thought it wrong that the big mutual funds and hedge funds got the information early, he did.
At the end of the segment, Cramer gave a huge mea culpa about assuming everyone knew that some traders got early access to consumer confidence numbers.
I'll tell you how little I knew. I thought that when we break away to give it to Rick to disclose the number, I thought we were doing it instantaneously. I apologize to our audience, I led you think that we were giving it to you first.
Note: An earlier version of this post claimed the consumer data was from the federal government, when it is actually provided by the University of Michigan.