Nanex ~ 20-Sep-2013 ~ Einstein and The Great Fed Robbery

May 13, 2014

Business week reports ("Trading Patterns Point to Leaks Ahead of Federal Reserve Announcements") on a research paper that found “robust evidence” that some traders have been getting early news of U.S. Federal Reserve rate announcements and then trading on it during the Fed’s media lockup.

December 4, 2013

The Fed Robbery Revisited

We revisit the controversial release of FOMC news on September 18th 2013 using the time stamps generated by the exchanges and included in their raw feed. Our analysis is consistent with a simultaneous release of the information at the CME and at the Nasdaq colocation centres exactly at 2:00:00 pm .

It should be noted that McKay Brothers, LLC, is a leading provider of specialty microwave telecom services between financial datacenters such as Chicago and New York and should be considered an expert on this topic. A few quotes from the paper:

We can safely conclude that the handover of the FOMC announcement did not occur in DC , it was not a lockup release.

, it was not a lockup release. The data is not consistent with a release in the lockup facility in Washington DC, even at a time slightly before 2:00 pm.

Our conclusion is that the most likely scenario is that the FOMC data was released under embargo at 2:00 pm exactly both at Aurora and at Carteret .

October 25, 2013

Original Paper

The Data

Please enable javascript

Update: September 26, 2013

Please enable javascript

Conclusion

1. A Timed News Release by a News Organization

The Fed news was condensed by a news service into a simple "No Tapering" message (something easily readable by a machine) and then placed on news servers co-located next to trading machines in both New York and Chicago at some time before 2pm. The news machines are programmed to release the information at precisely 2pm, allowing the algos to react immediately at both locations. This is how some news services release privately compiled statistics like the Consumer Confidence or Chicago PMI. In those cases, we see the exact behavior as in the last chart above - an immediate reaction in New York and Chicago. But the Fed news was released from a lock-up room which prevents transmission of any information to the outside world. Also, if it was a timed news release, the data was released before 2pm relative to Washington (when it's 2pm in Chicago, it's actually 1:59:59.995 relative to Washington). Given that several large news organizations were recently caught clandestinely sending news early we think it's less likely they would do something so bold, so soon.

2. Leaked to Wall Street

The Fed news was leaked to, or known by, a large Wall Street Firm who made the decision to pre-program their trading machines in both New York and Chicago and wait until precisely 2pm when they would buy everything available. It is somewhat fascinating that they tried to be "honest" by waiting until 2pm, but not a thousandth of a second longer. What makes this a more likely explanation is this: we've found that news organizations providing timed release services aren't so good about synchronizing their master clock - and often release plus or minus 15 milliseconds from actual time. Their news machines in New York and Chicago still release the data at the exact same millisecond, but with the same drift in time as the master clock. That is, we'll see an immediate market reaction at say, 15 milliseconds before the official scheduled time, but in the same millisecond of time in both New York and Chicago. Historically, these news services have shown a time range of about 30 milliseconds (+/- 15ms), and since this event started within 1 millisecond, it means the odds favor a leak over a timed news service.



What also makes this the more likely conclusion is this: we know the Bureau of Labor Statistics has recently hardened access to their lock-up room, weeding out all but respected news organizations. So imagine a reporter for one of these news organizations who is tasked with distilling the Fed news into a simple message that machines could read in less than a millisecond and interpret to mean, "buy all the things now". It's unlikely that Wall Street would place so much responsibility on one news reporter. Unless that reporter was a skilled - perhaps, dare we say, incentivized - trader. We think it's unlikely that a respected news organization would tolerate this clandestine behavior. Too much like crooks sneaking around at night.

Regardless of which possibility is correct (it could even be a combination of the two), the Fed news was certainly present in trading centers in Chicago and New York before 2pm. The evidence is overwhelming. It is unknown how many people had access to this information - for a timed news release, it would have been at least an administrator, probably Q.A. and others. What we do know is the resulting explosion of trading just 1 thousandth of a second after 2pm, was unprecedented in the history of Fed news announcements, and much of that trading was based on information obtained before the set Federal Reserve Board release time.

Update: September 25, 2013

Update: September 26, 2013

Update: October 3, 2013

Update: October 28, 2013