Nanex ~ 18-Sep-2013 ~ The Machines Win
Market reaction to the FOMC news was instant. Within a thousandth of a second, the move
was already over. What any human saw was like reading yesterdays newspaper.
See also: charts of all the stocks during the announcement.
The Fed news had to be released early to a news service that pre-loaded machines timed
to release the news at exactly 14:00:00.000. The reaction in Chicago was at the same
exact millisecond as the reaction in New York - both cities separated by about 5-7 milliseconds
of time. Compare the charts of ES Futures (traded in Chicago) with SPY (traded in New
York, well, technically New Jersey).
Why is the Fed giving early access to market impacting news (an understatement)
to private news services who turn around and sell this data to co-located high frequency
traders? This is not privately compiled information. This is information paid for by
all U.S. Taxpayers.
Update: September 19, 2013
We are surprised at how many people don't realize that information does not travel instantly
from point A to point B. It is limited by the speed of light, which under ideal conditions,
takes 1 millisecond to travel 186 miles. 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 Washington DC is
closer to Chicago than New York, the path between the two cities is not as straight
or optimized: so it takes information a bit longer, about 7 milliseconds, to travel
between Washington and Chicago. It takes about 2 milliseconds between Washington and
if information is released in Washington, then New York will see it 2 milliseconds later,
and Chicago will see it 7 milliseconds later. Which means we should see a reaction in
New York (where stocks trade) about 5 milliseconds before a reaction in Chicago (where
many futures, including the eMini trades). And this is in fact what we normally see
when news is released in Washington.
However, the data, reflected in the charts below (compare
2 and 3), clearly shows that the reaction in New York was in the same millisecond
as the reaction in Chicago. Also, the reaction was within 1 millisecond, meaning
it couldn't have possibly reached New York. Then there is the case that the information
on the Fed Website was not easily parse-able - not enough for someone to commit well
over a billion dollars to effectively buy all stocks, futures and options at any price.
We'd also like to note, that even
Bloomberg was not aware of this practice, and when they asked
the Fed, the reply was "no comment".
1. December 2013 Gold (GC) Futures trades.
Gold jumped the gun by 2.5 minutes. Lucky guess, or sneak peak?
2. SPY Showing Trades color coded by exchange. This is 150 milliseconds of time.
3. December 2013 eMini (ES) Futures trades.
Compare to the chart above. The eMini trades in Chicago, about 7 milliseconds of time
away due to the speed of light.
4. GLD Showing Trades color coded by exchange.
5. December 2013 Gold (GC) Futures trades.
6. SPY Showing Trades color coded by exchange. Zooming out to 1 second of time.
7. December 2013 eMini (ES) Futures trades. Zooming out to 1 second of time.
8. December 2013 Gold (GC) Futures trades. Zooming out to 1 second of time.
9. GLD Showing Trades color coded by exchange. Zooming out to 1 second of time.
10. SPY Showing bids and asks color coded by exchange.