Do Supreme Court Decisions Move Markets?

Stock traders might want to start paying a bit more attention to the Supreme Court.

That’s according to one research report published this week that says Supreme Court decisions moved the market value of publicly traded companies by a net $140 billion between 1999 and 2014.

But unlike economic data or other typical market-moving news, there is often an hours-long time lag in trading around Supreme Court decisions. The implication, according to the report, is that there might be arbitrage opportunities for savvy traders willing to sift through complex legal rulings.

“This is not a market that’s particularly well understood, so it’s taking a lot longer for traders to sort it out,” said Daniel Katz, an associate professor at IIT Chicago-Kent College of Law, who was a lead author on the report, which was produced by a four-person team including another law professor and a legal analytics consultant.

The team looked at each one of the 1,363 Supreme Court decisions in a 15-year period and determined which ones could have potentially impacted a publicly-traded company. The researchers then studied those companies’ share prices to see if they moved by a statistically abnormal amount after a Supreme Court decision. Their methodology took into account other variables, like broader fluctuations in the S&P 500 Index, that could have also moved the stocks.

If you’re wondering why more trades aren’t focused around Supreme Court cases, consider these caveats.

Only about 6% of Supreme Court cases in the past 15 years moved markets, the report said. A trading strategy around high court decisions would also work best if traders had ways to predict them – an entirely different challenge. (A few of the same researchers who wrote this report also create algorithms that try to forecast Supreme Court decisions.)

Some market impacts of Supreme Court decisions are clear. For instance, when the high court ruled in 2014 that online video start-up Aereo Inc. violated copyrights on programming, shares of broadcasters like CBS Corp. soared because a ruling in Aereo’s favor could have hurt traditional revenue streams for broadcasters. Overall, that decision boosted the market value of broadcasting companies by about $4.4 billion, the research report said.

It’s not always so obvious. In a 2013 opinion, the court ruled that human genes cannot be patented, but cDNA, which is typically used for genetic engineering, can be. This led to a roller coaster ride for shares of Myriad Genetics Inc., the company that had tried to patent human genes. After shares rallied in the initial hours, traders read the decision more closely and realized this was bad for the company’s business interests. Myriad ended up losing $546.7 million in market value in the two-day trading window around the decision, according to the report.

Mr. Katz said the next focus for his research could be lower-court rulings and motions, which occur with much higher frequency than Supreme Court decisions but don’t get much attention from traders.

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