Nanex Research

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

Stephane Tyc, cofounder of McKay Brothers, LLC, weighed in on the Fed News release and published The Fed Robbery Revisited: that paper agrees with our findings. It begins: 
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:

Note: The High Frequency Trading Firm Virtu's attempt to discredit our findings severely backfired after closer inspection of their numbers revealed bizarre logic and bad science. In fact, Virtu's own data agrees with our conclusion. Read, and decide for yourself.

Alexandre Laumonier posted a great write up on Stephane Tyc's new paper.

October 25, 2013

Our findings led to policy changes at the Fed.


Original Paper


One of Einstein's great contributions to mankind was the theory of relativity, which is based on the fact that there is a real limit on the speed of light. Information doesn't travel instantly, it is limited by the speed of light, which in a perfect setting is 186 miles (300km) per millisecond. This has been proven in countless scientific experiments over nearly a century of time. Light, or anything else, has never been found to go faster than 186 miles per millisecond. It is simply impossible to transmit information faster.

Too bad the bad guys on Wall Street who pulled off The Great Fed Robbery didn't pay attention in science class. Because hard evidence, along with the speed of light, proves that someone got the Fed announcement news before everyone else. There is simply no way for Wall Street to squirm its way out of this one.

Before 2pm, the Fed news was given to a group of reporters under embargo - which means in a secured lock-up room. This is done so reporters have time to write their stories and publish when the Fed releases its statement at 2pm. The lock-up room is in Washington DC. Stocks are traded in New York (New Jersey really), and many financial futures are traded in Chicago. The distances between these 3 cities and the speed of light is key to proving the theft of public information (early, tradeable access to Fed news).

We've learned that the speed of light (information), takes 1 millisecond to travel 186 miles (300km). Therefore, the amount of time it takes to transmit information between two points is limited by distance and how fast computers can encode and decode the information on both sides. Our experience analyzing the impact of hundreds of news events at the millisecond level tells us that it takes at least 5 milliseconds for information to travel between Chicago and New York. Even though Chicago is closer to Washington DC than New York, the path between the two cities is not straight or optimized: so it takes information a bit longer, about 7 milliseconds, to travel between Chicago and Washington. It takes little under 2 milliseconds between Washington and New York.


Click for an animation

Therefore, when the information was officially released in Washington, New York should see it 2 milliseconds later, and Chicago should see it 7 milliseconds later. Which means we should see a reaction in stocks (which trade in New York) about 5 milliseconds before a reaction in financial futures (which trade in Chicago). And this is in fact what we normally see when news is released from Washington.

However, upon close analysis of millisecond time-stamps of trades in stocks and futures (and options, and futures options, and anything else publicly traded), we find that activity in these instruments exploded in the same millisecond. This is a physical impossibility. Also, the reaction was within 1 millisecond, meaning it couldn't have reached Chicago (or New York): another physical impossibility. Then there is the case that information on the Fed Website was not readily understandable for a machine - less than a thousandth of a second is not enough time for someone to commit well over a billion dollars that effectively bought all stocks, futures and options.

The Data

Fortunately for us, in the minutes before the Fed announcement at 14:00 on September 18, 2013, there was significant activity in Comex Gold Futures (traded in Chicago) and the ETF symbol GLD (traded in New York). This gives us an opportunity to measure closely, the exact (to the millisecond) amount of time between trading activity in Chicago and New York. The first chart shows about 3.5 minutes of time around the Fed Announcement release, giving us an overview. The stack of charts that follow allow you to easily compare between GLD (New York) and GC Futures (Chicago) for 6 different active periods. You will see that in the first 5 pairs - before the announcement, activity first shows up in GC Futures, followed by activity in GLD between 5 and 7 milliseconds later. In the last pair, which compares activity at exactly 2pm (14:00:00), you will see both GC futures and GLD react in the same millisecond of time.

See also: CIA and The Fed (new), More Charts of Evidence, Wallpaper-sized chart of all stock trades at 2pm

1. Animation of December 2013 Gold (GC) Futures (Chicago) followed by GLD stock (New York) on September 18, 2013 from 13:57 to 14:00:30.

2. Zooming in 150 milliseconds of time for 6 different high activity periods minutes before and during the annoucement.
Each chart shows first, Gold Futures (GC - traded in Chicago) followed by GLD (traded in New York). The first 5 charts show events minutes before the news release: you can clearly see that Gold Futures (GC) trades before GLD. But the last chart shows the event at 14:00:00, where Gold Futures trades at the exact same time as GLD stock. This is physically impossible unless information was already present in Chicago and New York. It's easiest if you compare the bottom panels of each chart which shows trading volume for each millisecond.

   

Update: September 26, 2013

Here are examples from two other dates where the markets were driven by data from Washington: Employment Situation (Jobs) April 5, 2013 and September 6, 2013. The Jobs data is released by the Bureau of Labor Statistics in Washington DC. Read this interesting FAQ on their news release procedures.

The charts below show that stocks in New York react about 5 milliseconds before futures in Chicago. All examples on this page use the same source of time stamps: from the exchanges. Which means anyone will be able to reproduce these charts from exchange data.

   

Conclusion

There are 2 possibilities, and both aren't good news for Wall Street.

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

A few articles covering this are focusing on trading in Gold. We singled out gold, is because it was one of the few instruments with high activity in the minutes before the 2pm announcement. This high activity preceeding the release allowed us to verify that the exchange time stamps we used later, were accurate.

It wasn't just gold. It was everything that traded. In fact, the 1/100th of a second after 2pm was the most active 10 milliseconds in the history of the U.S. Stock an Futures markets. See charts here and here.

Update: September 26, 2013

We added charts (see below) that compare market reactions from previous events driven by news from Washington DC. These clearly show how New York markets respond about 5 milliseconds before Chicago.

Update: October 3, 2013

The FIA Principal Traders Group (FIA PTG), a major lobbyist group for High Frequency Traders (HFT), has come out with a statement along with this Financial Times article that corroborates our findings: that the Federal Reserve FOMC "no taper" information was in Chicago and New York before it was released at 2pm in Washington, D.C. Reading between the lines, it appears the leak was from one or more news services which secretly uploaded this valuable news to computers in Chicago and New York minutes before 2pm. This scenario is possibility #1 that we wrote in our conclusion below. The FIA PTG also confirms that Virtu's (a major HFT that attempted to discredit this paper) analysis was wrong, which we debunked here.

Update: October 28, 2013

The Fed will install an Internet Kill Switch for future releases. More here.


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