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There’s A Good Reason Why Reuters and Dow Jones Are In Play For Large Premiums – They Produce The World’s Most Valuable Commodity – No, Not Oil, Gold, Diamonds, Platinum, Or Copper But Rather All-Powerful News On Which Millions Can Be Made Or Lost Every Second

Philip Stone May 7, 2007

It really should not come as any surprise that Reuters and Dow Jones, two of the biggest producers of the world’s most valuable commodity – the news that drives global financial markets -- should be in play for large premiums. These organizations produce products on which millions of whatever currency you care to name can be made or lost in a matter of seconds. For in the financial markets world, he or she who has the news first is all-powerful; he or she who gets it second is often powerless. It’s really impossible to put a true value on their product.

To understand that value one must appreciate the definition of what news is and what it is not. News is NOT that something has occurred; News IS the reporting of that event – when you and I know that something has occurred. And in the financial markets the sooner a trader knows the news the sooner a trade can be made on that news. It’s obvious, therefore, that those who get the news first can make a financial killing before a competitor.

For several years this writer was the News Products Manager for Reuters in Europe, Middle East and Europe. The job basically entailed ensuring that financial traders in that Area had the best and most accurate news possible in the shortest period of time. During that time, Reuters introduced its revolutionary News 2000 service and Reuters Financial Television, the latter since gone in a cost-cutting move.

The excellence of the Reuters news product was without reproach. Sales people did not have to go out and “sell” it. It was a commodity all traders wanted, if they could afford it.  The communications system was such that it was almost incomprehensible for the layman to understand  that when a journalist in, say, Tokyo, pushed the computer button to send a story around the world that it would show up on European screens within a couple of seconds. If it took longer there would be all sorts of internal investigations to find out why.  The race was to cut down as much as possible the time between when the journalist learned information until the time the Reuters client had that information. Hard as it may be to fathom, Reuters today processes close to 100,000 updates a second on its networks.

Talking to financial traders brought home that the real jewel in Reuters crown was its news product. Yes, it had plenty of analytics to help traders figure out what they should do and when, but everything was really driven by the news. Often traders would ask if they could just buy the Reuters news that was part of their overall product they were buying. Of course, the answer was no. So the banks and trading houses bought all the other offerings Reuters had, but it was the news above all that was worth every penny they paid for the entire product.

And while Reuters’ journalists should be proud of their reputation for the completeness and fairness of their news coverage, and the perception within the world at large for what they produce, the reality on the trading floor would really make them shudder. For traders are not interested in their marvelous prose, or the writing beauty of their 750 – 1,000 word stories. What they want, and they want very quickly, are, as Sgt. Joe Friday used to say on Dragnet, “Just the facts, m’am, just the facts.”

And to the trader that meant the one line alert in red that would appear on the Reuters screen giving first word of a breaking news story. Many traders said they traded just on that one line. On major stories there would be several such one-line alerts each giving a different fact and after a short while would come the one paragraph bulletin and then the take-out. But for the trader, the job was basically already done before the bulletin even appeared.

It’s because of the need to have the information first to make the trade first that the professional buys a news service like Reuters, Dow Jones, Bloomberg, or Thomson—to gain an advantage over anyone else. We at home or in our office can get stock market quotes for free but they are with a 15-20 minute delay. We have access on the Internet for free to news produced by those agencies, but we don’t see their one line alerts and by the time their bulletins appear on our home screens the professional traders who pay through the nose for the privilege have all the information first to do the necessaries.

And that is the major point that makes outfits like Reuters so attractive in today’s digital world. Reuters is an all-electronic business. No dead trees. Reuters charges its clients big money to access its news and analytics software.  On the Web we may have much of that information available later for free, but that’s the catch – it is later –and for those who make their huge commissions from making the right trade at the right time the money paid to the information agencies is tiny compared to the returns.

And how quickly can news move markets? Just take a look at what happened last week with announcements that Dow Jones and Reuters themselves were in play.  When news came of Rupert Murdoch’s bid for Dow Jones then literally within seconds the DJ shares were on the move up and had increased by some 50% before you or I could say “Boo”. But the smart traders with that information also said to themselves, “If Dow Jones, a financial information company, is in play, then maybe other financial information companies might be in play,” and before you knew it in the UK the shares of Reuters and Pearson, publisher of the Financial Times, were swiftly on the move up. All that happened before you or I, monitoring our Internet news, would have any idea of what was going on.

And then Friday, at 8:46 a.m. UK time Reuters told the London Stock Exchange that there was a possibility of a bid. No suitor was named but dealers quickly figured it was most likely Thomson, but others including Google, were also named. The 15 minute delayed shares listing on Yahoo and Google financial services one moment showed the shares in the low 500 pence area and the next moment they were climbing into the 600s. But this information – news if you will—was delayed by 15 minutes. The alerts had all been filed to the professional traders well before you and I saw news bulletins on the Internet or saw the markets moving. Everything that the professionals needed to do had already been done before you and I had a chance to get in.

In fact, there may well have been a leak of some sort beforehand because the shares started their climb dramatically before the announcement. Someone, or some persons, got that information first and got in earlier than anyone else. A true financial killing, but will the London Stock Exchange investigate?

No matter, it is trading on such information that truly millions and millions of your favorite currency can be made and lost every second of the day depending on how traders interpret the news before them and how quickly they make their trades. It was no mistake that when Reuters published a book on its history in 1992 it wasn’t titled “How To Make Trading Room Profits” or “Great Analytics” but rather The Power of News.

Take a look at the financial quarterly reports of world’s major banks -- many of them this year already reporting huge profits. Much of that comes from their trading. Many of those trades are spurred by the red line alerts on their news screens. Just how can you put a value on all of that?

And the newest technical advancement negates the need even for the human to read the news story. Last year Reuters launched NewsScope that codes and delivers news stories in machine-readable formats so they can be interpreted at high speed by trading engines and used to make trading decisions.

Terminals on desks are how the major financial information providers judge their success.  Reuters used to be the market leader before Bloomberg came and stole its thunder, particularly in the fixed income area. Inside Market Data Reference said last month that Bloomberg is the market leader with 33%, Reuters next at 23% and then Thomson at 11% . 

With the Dow Jones bid, much is made of Murdoch’s desire to be the publisher of the Wall Street Journal – arguably one of the most prestigious newspapers in the world. It is read by the rich and powerful – what a wonderful group in which to be influential. But much of the news in the Journal is available to professional traders many hours before via the Dow Jones newswires. Those journalists could be all-important as Murdoch progresses the launch of his cable TV financial news channel, even though the Wall Street Journal has an editorial cooperation agreement with CNBC lasting through 2012, and the last thing CNBC would want to do is to let Dow Jones out of that so it can help a competitor. Although the ruling Bancroft family’s initial response is “no deal” it’s still early goings.

At Reuters, a proposed buyer must get by what is called the Founders Share which gives the Founders Share Company the right to cast whatever numbers of votes are necessary to defend various Reuters Trust principles. It is basically an anti-takeover measure that can be used to ward off unwelcome bid approaches, and it also ensures the integrity of Reuters news reporting.

As it turned out it was clever to have the Founders Share system in place when Reuters when public in 1984. An original and large investor for many years was a Kuwaiti investment fund,  -- a smart financial investment as it turned out  -- but had the Founders Share not been in place many people might have questioned what influence the Kuwaitis had on Reuters’ reporting. With the Founders Share in place it never became a big issue.  

The Founders Share chairman is Pehr Gyllenhammar, the former boss of Volvo who for many years served with distinction on the Reuters Board.  He rather shocked the Reuters Establishment in 2002 when he told the Sunday Telegraph that he would not be opposed to a Reuters takeover given the right conditions. “If there was a friendly approach to Reuters Group, and if they were interested, and if the shareholders were interested and if the people making the approach supported the trust’s principles and agreed to uphold them and maintain the structure, then you could imagine the trust would independently come to a conclusion where we would say yes.” Before then it had always been presumed the Founders Share would be used to stop any takeover attempt.

The directors of Reuters Founders Share Company, a group of media luminaries from around the world are Gyllenhammar, Len Berkowitz; The Hon Mrs. Anson Chan GBM CBE JP; Sir Michael Checkland; Uffe Ellemann-Jensen MP; Bertrand Collomb; Sir Christopher Mallaby GCMG GCVO; Mammen Mathew; John H McArthur; The Rt Hon The Baroness Noakes, DBE; Sir William Purves CBE DSO; Jaakko Rauramo; Dr Mark Wossner; Dr Frene Ginwala, Joseph Lelyveld; John Fairfax; Jiri Dienstbier and Alejandro Junco. Their usual annual function is to enjoy a good feast, but this year is going to be different. They can make or break any possible sale.

But it may not be quite that simple. The EU does not like the Founders Share system, and neither does the European Court of Justice, both saying it inhibits the flow of capital across the EU, so if The Founders Share was to be used to stop a deal, then with or without the spurned suitor complaining the EU could possibly step in.

The greatest frustration for this news marketing manager was how the Reuters senior management at the time didn’t’ really seem to recognize the power and value of Reuters news. Most attention was thrust upon new trading machines and analytics and news was seen as a nice add-on, yet all they really need to do was talk to traders to learn that all of those marvelous machines with their software were pretty useless without the instant breaking news. 

In Europe, Middle East and Africa, Reuters most profitable Area, the company used to make millions by charging an additional fee for its financial news products (something not done by other Reuters' regions at all or if they did they did at very low prices). But then the Bloomberg fear so occupied senior corporate management  that  when Reuters launched its so-called “Bloomberg Killer” it had to do so at a competitive price and news was just “thrown in” at no additional cost. At the time this news marketing manager figured that decision cost Reuters in Europe some £40 million pounds annually from that “brilliant” marketing move. Enough to make a grown marketing manager cry. Of course, the “Bloomberg Killer” never remotely lived up to its name.

When a trader makes millions from getting news first, what value can you put on the company providing that information? It really makes one believe those companies really need to re-examine their news pricing policies.

Perhaps with the consolidation that the Reuters and Dow Jones bids bring to the industry that news “wealth” will finally be unlocked.