The United States Federal Reserve announced last week that it would not draw downits $85 billion-a-month bond-buying program (i.e. no “tapering”). The Fed made the announcement at precisely 2:00 p.m. EST, “as measured by the national atomic clock.”
However, just seven milliseconds after the Fed made its announcement, the Chicago exchanges went crazy with huge orders. Seven milliseconds.
The Fed’s decision, as always, was closely guarded before it was announced.
How did Chicago react so quickly?
First, it’s important to remember that a select number of reporters are usually privy to Fed policy changes before anyone else. But they get the details in secure room and aren’t permitted to communicate any details until the Fed makes the announcement official.
So maybe it was a reporter who leaked the info. Maybe it was someone within the Fed. Either way, considering the effect the Fed has on markets, unethical traders and financial institutions would no doubt pay a huge premium on that type of information.
Game the system.
As of this writing, the Fed is investigating a possible leak and reviewing its policy of informing reporters of its major policy decisions.
Meanwhile, here’s a thought from the Washington Post:
… there’s another useful lesson out of the whole episode. It is the reality of how much trading activity, particularly of the ultra-high-frequency variety is really a dead weight loss for society.
…There is a role in [capital] markets for traders whose work is more speculative…But when taken to its logical extremes, such as computers exploiting five millisecond advantages in the transfer of market-moving information, it’s much less clear that society gains anything…In the high-frequency trading business, billions of dollars are spent on high-speed lines, programming talent, and advanced computers by funds looking to capitalize on the smallest and most fleeting of mispricings.
Those are computing resources and insanely intelligent people who could instead be put to work making the Internet run faster for everyone, or figuring out how to distribute electricity more efficiently, or really anything other than trying to figure out how to trade gold futures on the latest Fed announcement faster than the speed of light.
And as far as that seven-millisecond figure is concerned, here’s an interesting thought from Kevin Drum from Mother Jones:
That [figure] might very well be how long it takes a signal to travel from Washington, DC, to Chicago via a fiber-optic cable, but in fact the two cities are only 960 kilometers apart. At the speed of light, that’s 3.2 milliseconds.
A straight line path would be a bit less, perhaps 3 milliseconds. So maybe someone has managed to set up a neutrino communications network that transmits directly through the earth. It couldn’t transfer very much information, but if all you needed was a few dozen bits (taper/no taper, interest rates up/down, etc.) it might work a treat.
Perhaps Wall Street has now co-opted not just the math geek community, and not just the physics geek community, but the experimental physics geek community.
The Fed, for its part, told CNBC it is doing everything it can to investigate the suspicions Chicago trading activity.
“We will be conducting follow-up conversations with news organizations to ensure our procedures are completely understood,” the Fed said in a statement.
“As is generally the case with other releases of market-sensitive information by government agencies, news organizations receiving embargoed information from the Federal Reserve agree in writing to make no public use of the information until the time set for its release,” it added.
The Fed did not say which news organizations have attracted its attention and declined to say whether any specific rules were broken.
You can read more about the possible Fed leak here.
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