As far as we know, it is impossible to send information faster than the speed of light.
Yet according to trading data reviewed by CNBC, some traders in Chicago had early access to the content of the Federal Reserve’s announcement last week that it would not scale back its monetary stimulus program. The data suggests certain traders received the relevant information faster than it should have been possible to transmit from Washington. The advantage of milliseconds allowed $600 million in assets to change hands, by some estimates, before other Chicago-based traders could react.
Assuming no news organization has rewritten Einstein’s theory of relativity, the trading activity implies that the rules of the Federal Reserve’s “lockup” may have been broken.
Such a scenario was on my mind last year when I wrote about increased security standards for journalists who get an advance look at market-moving information. That column had to do with information released by the Labor Department, but the point is the same. Government agencies allow journalists the courtesy of early access to news in exchange for their promise not to release such information before the designated time.
As I observed then, the government does not exist to serve the press; both institutions exist to serve the public. Allowing reporters the time to digest the news and prepare their reports is done in the name of the public good. But even with the relatively new security procedures in place, and though the press has overall had a very good track record in respecting so-called embargos, some potential for abuse is probably unavoidable.
Eric Hunsader, founder of the market analysis firm Nanex, spotted the unusual trading pattern in Chicago. He told CNBC that the culprit was probably using a “low-latency” service, which feeds data directly into computerized trading systems, since humans are incapable of reacting usefully at the millisecond level. CNBC, in reporting the story, suggested that “A key question is whether or not any organization transmitted information out of the lockup room and into its own computer system before 2 p.m. If that was done, the data could have been moved to computer servers near Chicago before 2 p.m. and publicly released the information from there at precisely 2 p.m.”
The Fed has declined to say whether, if this is what happened, the move would technically be a violation of its rules. Whether or not it would be a violation of the rule as written, however, the outcome is one the Fed’s staff clearly took active steps to prevent. If a news organization took advantage of a loophole this time, I would expect at minimum that the loophole will be promptly closed. Given that broadcast journalists cannot say anything beyond one government-provided test word before the appointed time, and reporters with a phone line open to their newsrooms must remain completely silent until the appropriate moment, it should be clear to any observer that a transmission of any kind, public or otherwise, was not supposed to occur until the moment journalists got the go-ahead.
News organizations have a high opinion of their own importance to the public. Most of the time, that opinion is justified – but not to the extent that it gives the press the right to make certain people wealthy at others’ expense, whether deliberately or otherwise. Yet when someone has a chance to trade on data before the rest of the world, this is precisely what the press facilitates.
If the Fed had meant to allow news organizations to cue up its stories on servers outside the lockup room in Washington, that intention would have been made clear. Almost certainly, though, this incident violated the intent – if not the precise rules – of the Fed’s embargo.
I hope the Fed gets to the bottom of the apparent leak. If the press was responsible, it may be time for government officials to reconsider whether they want to release market-moving data under an embargo at all. The other option is to release the data on a public website, and let whoever can process and report it fastest reap the benefits. At least that competition would be fair.