Wednesday, September 25, 2013

Only Slightly Suspicious

From The Blaze we learn of some market shenanigans accompanying the Fed's announcement that they would not start cutting back bond purchases.
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.
While the Fed is far more open than it was in the old days under Paul Volker, they keep these details secret until they're openly released to the press.  Since the market will move a thousand bucks on whether Ben Bernanke looks like he had a good bowel movement, this is very important information.  Reporters were indeed briefed, but kept under embargo until the deadline, and they won't openly defy the embargo because they don't want to get busted out of having that place with the insiders.   But seven milliseconds?  

CNBC quotes Eric Hunsader, founder of the market analysis firm Nanex, who specializes in looking at "high frequency traders".  Hunsader says:
...he saw simultaneous reactions to the Fed's announcement last week in trading in New York and Chicago. That would be theoretically impossible if the information was released from the Fed's headquarters in Washington. In theory, the trading reaction should have begun in New York several milliseconds before it began in Chicago, because information takes several more milliseconds to travel the longer distance.

"The very first thought I had when I looked at this closely was this is a low latency service," Hunsader said. "We have just very recently looked closely at some of these low latency releases and seen that they are indeed at the same exact millisecond. We have immediate history behind it."
Mother Jones points out that the distance from Chicago to DC is at least 9 milliseconds at the speed of data on a fiber optic cable so it's not that the Fed released the information and it propagated to Chicago.  When you think about the inherent human differences, simultaneous trades can't possibly happen on the same millisecond.  If two people sit beside each other and count down with the same clock agreeing to hit "ENTER" to execute a trade at the same time, they probably couldn't make the same millisecond.  This can only mean all these organizations had the information ready in their computers programmed to execute at the exact same time.

(Eric Allie)

The Fed is looking into this.  Will anything happen?   If it suits them.  Will anything happen about the high frequency trading?  I don't think so, but this seems to lean toward making it more likely.  A lot of people are alarmed about this trading trend, but I haven't really been alarmed by it; a little concerned but not really alarmed. I might have to reconsider that a bit. 


  1. To me, this proves that there were people who knew what the announcement would be before it was made. In other words, the system is rigged so the well connected make their money before the rest of us even know what happened. This is why the rest of us can't get ahead.
    The article is speculating about high speed communications, quantum physics, etc. The answer is likely MUCH simpler: the system is rigged. Either someone inside the organization is making money by selling the information, or someone is helping his buddies out. Either way, the rest of us pay the price.