Pirate in a Fly Bottle?

Brokerage Firms File Suit Against theflyonthewall.com:

NEW YORK (WSJ) — Three brokerage firms sued theflyonthewall.com in federal court in Manhattan on Monday, alleging the Web site misappropriated and infringed on the copyrights of their proprietary equity-research reports.

A financial content aggregator, “designed to bridge the gap between Wall Street’s big players in ‘the know’ and those who want into their club,” bumps up against the emerging “broker-dealer as media company” paradigm.

In their copyright lawsuit, the brokerage units of Morgan Stanley, Lehman Brothers Holdings Inc. and Merrill Lynch & Co. claims the New Jersey-based Web site has republished their “confidential, time-sensitive equity research” verbatim often within minutes of its release to clients, citing more than a dozen reports from February 2005 as examples.

The complaint also alleges the Web site, which charges a monthly or annual fee, has since modified its practice of reproducing significant portions of the research reports word-for-word at the firms’ request.

However, theflyonthewall.com continues to infringe on the copyrighted reports by “posting, in summarized and slightly reworded form, the substantive core of the firms’ equity research,” the lawsuit claims. It gives four reports from June, July and August of last year as examples.

“Without the slightest pretext of generating original equity research on its own, Fly systematically and impermissibly accesses the firms’ proprietary equity research and — free riding on these significant research efforts — rushes to market with the intent and effect of undermining the firms’ enormous investments in providing clients and other authorized recipients with exclusive and time-sensitive financial-market analysis,” the lawsuit says.

The complaint said the value of the research to the firms’ clients lies in “the high quality of analysis, the timeliness with which that analysis reaches potential investors and the limited dissemination of that analysis.”

Actionable, real-time trading data and analysis are the only things brokerages and exchanges have to sell, now that transaction costs are aysymptotically approaching 0 and information arbitrage windows opportunities stay open for a matter of microseconds — like a game of Whack-a-Mole updated by the folks who brought you Tron.

Despite what all the program trading infomercials promise you about “beating Wall Street,” and despite Regulation FD, designed to ensure that market-moving information is disclosed to everyone at the same time, getting information without delay — or distortion — is the only information worth paying for.

Getting price movements in a fraction of microsecond is not the same as getting them with a 15 or 20 minute delay.

Even the LSE has just hired its first-ever marketing director to focus on its data business.

From what I read, the Fly business model resembles a couple of other controversial models based on redistribution: (1) FON’s “social WiFi router,” designed to hook up many users to a “hot spot” drawing off one paid broadband connection; and (2) real-time market data piracy schemes in China, which observers speculate rely on a combination of (1) cracking satellite crytpo and (2) massive “one to many” redistribution of content from a single legitimate brokerage subscription.