Nanex ~ 24-Sep-2013 ~ CIA and The Fed
Covert Information Asymmetry
Update: September 25, 2013
A few articles covering this are focusing on trading in Gold. We singled out gold
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 at the bottom and also here.
Within a millisecond of the 2pm release of the
September 18, 2013 FOMC Meeting Announcement, the stock market exploded, trading nearly
$400 Million worth of stock in a tenth of a second (a blink of an eye
is 3 times longer), and almost $1 Billion worth in 2 seconds. Over in Chicago, futures trading
also exploded, with about $5 Billion trading in a tenth of a second and more than $10 Billion
in 2 seconds.
The speed of this reaction
stood out in stark contrast to previous FOMC (Federal
Open Market Committee) releases. To get a sense of how unusual
the September 18 reaction was, we pulled data from the two previous FOMC releases
(June 19, 2013, and
July 31, 2013) for comparison. It's hard finding superlatives to
describe just how unique September 18 was.
Incontrovertible: FOMC News was in Chicago and New York Trading Centers before 2pm.
Nearly $800 Million worth of futures contracts traded in Chicago about 7 milliseconds
before the official release time of the FOMC News (when it is 2pm in Washington DC). That's because it takes 7 milliseconds for information to travel from Washington (where news is released)
to Chicago, mostly due to the speed of light. Pease read Einstein and The Great Fed Robbery
where we present incontrovertible
evidence that FOMC news had to be present in Chicago
and New York trading
centers before 2pm.
This surprise revelation leads to
such as: how many computers had access to this information? Who had
access to those computers? Why is the information allowed to be transmitted outside
of the Fed lock-up room? Who else is allowed to do this? Can
anyone start a news service and compete? How much are the news services paying? How
much are they charging? Why was this not clearly disclosed? Why have a lock up room
Covert Information Asymmetry (CIA)
When one group of traders has information that others don't, it creates what
is known as information
asymmetry. A recent, well known case of information asymmetry involved the 2
second early release of the Michigan Consumer Sentiment data to an
elite group of high frequency traders.
We noticed over the years, that significant market
moving events occurred at exactly 9:54:58 on certain days. We found
few people knew
what was causing the market to move at these times.
Getting early access to news is much more profitable, if done in secret.
When the May 17, 2013 Consumer Sentiment news impacted the market 25 milliseconds earlier than expected,
we wrote a paper about it which got
noticed by CNBC.
CNBC reported on the 2 second advantage, the practice became widely known and
there has been
no significant market impact from Consumer Sentiment at 9:54:58. Which confirms what we have suspected for a long time: that
getting early access to news
is much more profitable, if done in secret. It is interesting to note that in the minutes before
9:54:58, uncertainty still creeps into the market causing a
significant drop in liquidity.
Which brings us to the market reaction to the FOMC news on September 18, 2013, which came
earlier than physically possible due to the speed of light, and was therefore unexpected
by many market participants. The end result will be an increase in uncertainty, which
will lead to an even larger decrease in liquidity during the next FOMC announcement. Hopefully, the market won't need the extra support.
1. Compare Futures Trading in Chicago with Stock Trading in New York in the
first 100 milliseconds.
2. Compare trading in NMS Stock during 3 FOMC News Releases.
All charts are scaled in $Millions