12 ms·

Einstein and the Great Fed Robbery

253 points by mcphilip 13y ago

mcphilip 13y ago
This research is done by the same guys at nanex that broke a story earlier this year about another early release of prominent data, ultimately leading to Reuters acknowledging that it was responsible for the leak: http://www.cnbc.com/id/100792260 http://www.cnbc.com/id/100792260
CrunchyJams 13y ago
Awesome analysis. Keep in mind that while it tells a very compelling story, that it isn't necessarily proof that there was a leak. All it would take is for one major player to take a view on what was going to happen without hearing the fed data in an attempt to beat the market. Other algos then see that and act on it, playing the other players instead of the data, as algos are known to do frequently. All of this could happen in the time it takes for the actual data to get there. There were tons of people who expected yesterday's announcement to turn out just as it did. I'm not saying that's what happened, just that it's a possibility to keep in mind before jumping to conclusions.
- mcphilip 13y ago
  The Fed's decision was a very big surprise to most, from what I've read. Just google "taper surprise" to see for yourself. Also, this was a massive move upwards, so the argument is that over a billion dollars of bullish bets made at the exact same milliseconds is hard to explain away as another contrarian play that payed off well. Still, skepticism is healthy, and it's possible that no scandal is involved.
  - CrunchyJams 13y ago
    The mainstream financial headlines generally regurgitate what the Fed wants to message. While certainly 'most' were surprised, many weren't. Tapering was dependent on econ data, which simply hasn't been there to support it. I know plenty of people who were betting that it wouldn't happen, myself included. Good overview of why from before the announcement here: http://www.moneyweb.co.za/moneyweb-safm-market-update/r-1805 http://www.moneyweb.co.za/moneyweb-safm-market-update/r-1805
    - strongvigilance 13y ago
      Yes - most journalists/analysts prefer to be wrong together than wrong alone, so there is usually a lot of groupthink. The previous fed minutes suggested that most members wanted to wait to taper, unless data improved, and data didn't improve. It seemed obvious to me that the taper was nowhere near a done deal.
- murbard2 13y ago
  You're right to be skeptical but your alternative does not stand up to scrutiny. If a player indeed had a strong bite, milliseconds after the announcement would be the worst time to execute. This is a time where almost all the liquidity goes away as market participants stand pat. If you had such a view, you would build your position over time, and certainly not incur the huge cost of making large trades at the lowest point in liquidity.
  - CrunchyJams 13y ago
    Not if your goal is to make other traders (algos) think that you're acting on market data
- pintglass 13y ago
  > All it would take is for one major player to take a view on what was going to happen without hearing the fed data in an attempt to beat the market. But why would they wait then? "Guessing" or working with known public information is perfectly legal. They should act upon that data immediately. A leak is much more likely, as they would be afraid of an investigation when they "guessed right". They were almost certainly trying to trade as if there were no leak, but they forgot to add the slight delay.
yock 13y ago
When I first started reading the story I was afraid I wouldn't understand it. Nanex took great care in explaining the phenomenon here with very accessible language. The charts are still mostly indecipherable to me, but the story makes it clear. If the situation really is as straight-forward as they make it out to be, someone has some explaining to do.
fluidcruft 13y ago
Is the time-keeping precision at the multiple sites accurate enough that local drifts can be excluded as a factor in the differentials?
- anonymoushn 13y ago
  Local drifts of multiple millis can be excluded. Millis are huge.
- JackFr 13y ago
  I'm no expert, but if both Chicago and New York are synching their clocks to NIST(Gaithersburg, MD) or the Naval Observatory (Washington DC), the a message from Washington sent at the same instant, should arrive at the same instant, as measured in local time. A more 'science' way to make the claim that Nanex is making, would be to compare the same products on other Fed meeting dates.
  - davidmr 13y ago
    Any time synchronization protocol I know of takes into account network latency and attempts to compensate. As measured by perfectly synchronized clocks against the same reference source (leaving aside for the moment that there is no such thing), the received timestamps of a message originating from one location and being received by two locations at different lengths of cable from another will reflect the difference in the time it took to get from one to the other.
- sseveran 13y ago
  Real market data uses PTP driven by GPS calibrated clocks.
  - phyalow 13y ago
    Correct, most brokers use PTP also.
- mrab 13y ago
  I'm also curious about how they prove this. The article assumes the times were in sync.
deleted 13y ago
[deleted]
jstalin 13y ago
When you combine this article with others, like the fact that JP Morgan had zero days of trading losses over an entire quarter, you realize that the market is clearly rigged by the big guys: http://www.zerohedge.com/news/2013-05-08/jp-morgan-has-zero-trading-losses-first-quarter http://www.zerohedge.com/news/2013-05-08/jp-morgan-has-zero-...
- pfortuny 13y ago
  Well, that is like statistically impossible. I mean either you are a magician or there is something wrong with you and the market. Assume the probability of a losing day is just .02 (i.e. 2%, which is rather good). A quarter has 60 trading days. Then .98^60 = .297+ which means it happens just once every 3 times. But that is a magician doing business. If the probability of a single losing day is .1 (one out of ten, good for humans, I guess), then the odds are .9^60 = .00179+ (once every 500 times) =(less than once in a century) So, really really spooky. Of course "once in a lifetime" events happen quite easily in the Stock Markets, but they tend to be negative (Long-term Capital Management, today's crisis...) Sorry (lots of edits because term=60 days)
  - yetanotherphd 13y ago
    You are assuming that profits on successive days are uncorrelated. And in any case, all you have proven is that we can reject the null that the distribution of JP morgans daily returns this year, was different to the distribution of their daily returns in previous years. Let's leave guilty-by-rejecting-the-null-in-an-artificial-model to the courts and not let their logic infect HN too. All that's been shown is that JP Morgan have had 0 days with a trading loss. No one has actually shown they did anything wrong, or even explained what they might have done wrong.
  - cperciva 13y ago
    Having zero days of trading losses in a quarter is easy -- just arrange your trades so that your risks are highly asymmetric. For example, you could sell billions of dollars worth of options tied to the fed rate; you'll make a small amount of money every day until the fed rate changes... and then you'll lose lots and lots of money all at once. Odds are that you'll have several quarters of consistent daily profits first though.
moultano 13y ago
Below a certain time accuracy, all trading is zero sum. The only reason to be able to trade in milliseconds is to beat someone else. No value is created. Suppose instead that exchanges buffered all orders for, say, 1 hour. At the end of the hour they perform a stable matching algorithm to pair up bids and asks, and execute those trades simultaneously. Are there any downsides to this? It seems like it would eliminate all of this zero sum behavior, and at the same time, increase liquidity, particularly for people who aren't on a fiber line one block from the exchange. You could additionally require all material information to be released at the top of the hour, to ensure a full hour of analysis before any trades are executed.
- msandford 13y ago
  Even every 5 minutes would be great. Or even every 30 seconds. Microsecond latencies don't do much for investing; it's all about trading. Trading (or speculation) even has value so long as it's pulling information from the future to the present. That's the value it provides. If it's pulling the now plus 1ms future to now, I can't see that providing a lot of value.
- tlb 13y ago
  With thousands of hedge fund PhDs all trying their damndest to exploit the market, adding delay will change the game but not eliminate it. Only by when the market is efficient (in the technical economic sense) is it non-exploitable by smart guys. Efficient markets require all players to be rational, so not in this world.
  - minikites 13y ago
    I think buyers and sellers both having perfect information is a prerequisite and a much larger barrier than rationality. https://en.wikipedia.org/wiki/The_Market_for_Lemons https://en.wikipedia.org/wiki/The_Market_for_Lemons
    - FD3SA 13y ago
      Precisely. Information asymmetry is what allows the exchanges to be profitable. It is a continuous wealth transfer along the information gradient, with the most knowledgeable investors capturing most of the wealth from the least knowledgeable. As long as this asymmetry exists, the vast majority of trades will constitute a zero sum wealth transfer.
beefman 13y ago
"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." At which millisecond was the information "officially released"? Which of Bernanke's phonemes were decisive? Or do we know to the millisecond when the Fed's site was updated? I suppose the coincidence between Chicago and New York is still a thing. Everyone receiving the leak agreed to fire at a particular time, and nobody jumped the gun?
- andyzweb 13y ago
  for those who didn't spot it the parent commenter stated they had a short position in GLD before the edit
  - beefman 13y ago
    True. I try to make such disclosures whenever there's a chance it could influence what I'm writing. I decided this comment didn't need one. I put a tremendous amount of effort into writing accurately, concisely, and without commercial or other influence. Feel free to google me. I'm beefman here and on Wikipedia, Carl Lumma or clumma everywhere else.
blahbl4hblah 13y ago
conspiratards.
minimax 13y ago
It would be nice to hear a little bit more about how the FOMC results get into the electronic news feed. If anything, it seems more fair to release the news simultaneously in NY and Chicago so that traders in NY couldn't pick-off market makers in Chicago and vice versa.
- mcphilip 13y ago
  Good question. I can't find any specific information about how the FOMC statement gets parsed into cyberspace, but as recently as 2011, a malfunctioning printer significantly delayed the FOMC statement release [1] since the press in the Treasury lockup room couldn't get access to physical copies to write articles about it in time for the a scheduled 2:15 ET press release. A FAQ on the Richmond Fed's website [2] says that FOMC statements are released on the federalreserve.gov website [3] at 2:15 ET on the final day of each FOMC meeting. Unless there is an alternative statement provided elsewhere by the Fed, I assume that the FOMC statement is parsed by machines checking for differences in language use with the previous Fed statement -- doing a diff on successive FOMC statements is a common practice when reporting on a statement release [4]. [1]http://www.foxbusiness.com/markets/2011/09/21/copy-that-fed-statement-delayed-by-printer-glitch/ http://www.foxbusiness.com/markets/2011/09/21/copy-that-fed-... [2]http://www.richmondfed.org/faqs/fomc/ http://www.richmondfed.org/faqs/fomc/ [3]http://www.federalreserve.gov/monetarypolicy/fomccalendars.htm http://www.federalreserve.gov/monetarypolicy/fomccalendars.h... [4]http://www.zerohedge.com/news/2013-09-18/fomc-shocker-no-taper http://www.zerohedge.com/news/2013-09-18/fomc-shocker-no-tap...
bcoates 13y ago
The Fed announcement may or may not have been known, but the fact that there would be an announcement at a given time was known. The market always jumps one way or another at the last moment before an announcement, because it's the last chance to place your bets in what is essentially gambling. There was no information propagation delay because there was no information. Sometimes the blind consensus guesses right, sometimes wrong. If you actually had leaked information there's no reason you'd need to wait until the very last moment, that's when people who know nothing place their bets and their actions would be more likely to mess up your scam than cover up for it.
- strongvigilance 13y ago
  Indeed - it's worth noting that on the non-farm payroll figure (which is closely watched by markets) this month, most markets jumped in the wrong direction a split second early, before violently reversing.
rektide 13y ago
Ole Roemer, a Danish astronomer, proved suspicions of many such as Empedocles (490-435 B.C.) that light has a speed. 1676. C/o Speed of Light: Case History. http://www.is.wayne.edu/MNISSANI/A&S/light.htm http://www.is.wayne.edu/MNISSANI/A&S/light.htm Ug easy sensationalism via namedropping. Now, in another 50 years, I look forward to fingerprint analysis of a scale 1/1000th as fine: we caught you obeying the the speed of light, but you forgot to compensate for relativistic drift in X fashion. GUILTY!
Eliezer 13y ago
The question which occurs to me is who took the other side of this trade. You would think market actors would know enough to say, "If somebody suddenly wants to buy my stock right around 2pm and I haven't yet integrated the Fed info, it means my stock is more valuable and I should not sell."
schainks 13y ago
The ironic thing to me is the NSA is clearly in a position to present evidence for this - unless 'insider' conversations are happening in an analog medium.
- smsm42 13y ago
  That would be very bad if they did. When you have hammer that huge, everything starts looking like a nail, but this kind of power is switched to easily from going after the "bad guys" to going after the guys that inconvenience people in power. We're watching it happen right now.
wprl 13y ago
These graphs are crazy.
strongvigilance 13y ago
As far as I'm aware, the exact time of release of the FOMC statement can vary by a few seconds. Nanex seem to have assumed that the release comes from Washington, but I would guess that one of the agencies that receives the embargoed data has permission to distribute it at multiple locations simultaneously. That seems like the simplest explanation for Chicago and New York reacting at the same time.
aba_sababa 13y ago
Well, how do we know the Fed's clock was canonical?

253 points by mcphilip 13y ago

This research is done by the same guys at nanex that broke a story earlier this year about another early release of prominent data, ultimately leading to Reuters acknowledging that it was responsible for the leak: http://www.cnbc.com/id/100792260 http://www.cnbc.com/id/100792260

CrunchyJams 13y ago

Awesome analysis. Keep in mind that while it tells a very compelling story, that it isn't necessarily proof that there was a leak. All it would take is for one major player to take a view on what was going to happen without hearing the fed data in an attempt to beat the market. Other algos then see that and act on it, playing the other players instead of the data, as algos are known to do frequently. All of this could happen in the time it takes for the actual data to get there. There were tons of people who expected yesterday's announcement to turn out just as it did. I'm not saying that's what happened, just that it's a possibility to keep in mind before jumping to conclusions.

mcphilip 13y ago
The Fed's decision was a very big surprise to most, from what I've read. Just google "taper surprise" to see for yourself. Also, this was a massive move upwards, so the argument is that over a billion dollars of bullish bets made at the exact same milliseconds is hard to explain away as another contrarian play that payed off well. Still, skepticism is healthy, and it's possible that no scandal is involved.
- CrunchyJams 13y ago
  The mainstream financial headlines generally regurgitate what the Fed wants to message. While certainly 'most' were surprised, many weren't. Tapering was dependent on econ data, which simply hasn't been there to support it. I know plenty of people who were betting that it wouldn't happen, myself included. Good overview of why from before the announcement here: http://www.moneyweb.co.za/moneyweb-safm-market-update/r-1805 http://www.moneyweb.co.za/moneyweb-safm-market-update/r-1805
  - strongvigilance 13y ago
    Yes - most journalists/analysts prefer to be wrong together than wrong alone, so there is usually a lot of groupthink. The previous fed minutes suggested that most members wanted to wait to taper, unless data improved, and data didn't improve. It seemed obvious to me that the taper was nowhere near a done deal.
murbard2 13y ago
You're right to be skeptical but your alternative does not stand up to scrutiny. If a player indeed had a strong bite, milliseconds after the announcement would be the worst time to execute. This is a time where almost all the liquidity goes away as market participants stand pat. If you had such a view, you would build your position over time, and certainly not incur the huge cost of making large trades at the lowest point in liquidity.
- CrunchyJams 13y ago
  Not if your goal is to make other traders (algos) think that you're acting on market data
pintglass 13y ago
> All it would take is for one major player to take a view on what was going to happen without hearing the fed data in an attempt to beat the market. But why would they wait then? "Guessing" or working with known public information is perfectly legal. They should act upon that data immediately. A leak is much more likely, as they would be afraid of an investigation when they "guessed right". They were almost certainly trying to trade as if there were no leak, but they forgot to add the slight delay.

yock 13y ago

When I first started reading the story I was afraid I wouldn't understand it. Nanex took great care in explaining the phenomenon here with very accessible language. The charts are still mostly indecipherable to me, but the story makes it clear. If the situation really is as straight-forward as they make it out to be, someone has some explaining to do.

fluidcruft 13y ago

Is the time-keeping precision at the multiple sites accurate enough that local drifts can be excluded as a factor in the differentials?

anonymoushn 13y ago
Local drifts of multiple millis can be excluded. Millis are huge.
JackFr 13y ago
I'm no expert, but if both Chicago and New York are synching their clocks to NIST(Gaithersburg, MD) or the Naval Observatory (Washington DC), the a message from Washington sent at the same instant, should arrive at the same instant, as measured in local time. A more 'science' way to make the claim that Nanex is making, would be to compare the same products on other Fed meeting dates.
- davidmr 13y ago
  Any time synchronization protocol I know of takes into account network latency and attempts to compensate. As measured by perfectly synchronized clocks against the same reference source (leaving aside for the moment that there is no such thing), the received timestamps of a message originating from one location and being received by two locations at different lengths of cable from another will reflect the difference in the time it took to get from one to the other.
sseveran 13y ago
Real market data uses PTP driven by GPS calibrated clocks.
- phyalow 13y ago
  Correct, most brokers use PTP also.
mrab 13y ago
I'm also curious about how they prove this. The article assumes the times were in sync.

deleted 13y ago

[deleted]

jstalin 13y ago

When you combine this article with others, like the fact that JP Morgan had zero days of trading losses over an entire quarter, you realize that the market is clearly rigged by the big guys: http://www.zerohedge.com/news/2013-05-08/jp-morgan-has-zero-trading-losses-first-quarter http://www.zerohedge.com/news/2013-05-08/jp-morgan-has-zero-...

pfortuny 13y ago
Well, that is like statistically impossible. I mean either you are a magician or there is something wrong with you and the market. Assume the probability of a losing day is just .02 (i.e. 2%, which is rather good). A quarter has 60 trading days. Then .98^60 = .297+ which means it happens just once every 3 times. But that is a magician doing business. If the probability of a single losing day is .1 (one out of ten, good for humans, I guess), then the odds are .9^60 = .00179+ (once every 500 times) =(less than once in a century) So, really really spooky. Of course "once in a lifetime" events happen quite easily in the Stock Markets, but they tend to be negative (Long-term Capital Management, today's crisis...) Sorry (lots of edits because term=60 days)
- yetanotherphd 13y ago
  You are assuming that profits on successive days are uncorrelated. And in any case, all you have proven is that we can reject the null that the distribution of JP morgans daily returns this year, was different to the distribution of their daily returns in previous years. Let's leave guilty-by-rejecting-the-null-in-an-artificial-model to the courts and not let their logic infect HN too. All that's been shown is that JP Morgan have had 0 days with a trading loss. No one has actually shown they did anything wrong, or even explained what they might have done wrong.
- cperciva 13y ago
  Having zero days of trading losses in a quarter is easy -- just arrange your trades so that your risks are highly asymmetric. For example, you could sell billions of dollars worth of options tied to the fed rate; you'll make a small amount of money every day until the fed rate changes... and then you'll lose lots and lots of money all at once. Odds are that you'll have several quarters of consistent daily profits first though.

moultano 13y ago

Below a certain time accuracy, all trading is zero sum. The only reason to be able to trade in milliseconds is to beat someone else. No value is created. Suppose instead that exchanges buffered all orders for, say, 1 hour. At the end of the hour they perform a stable matching algorithm to pair up bids and asks, and execute those trades simultaneously. Are there any downsides to this? It seems like it would eliminate all of this zero sum behavior, and at the same time, increase liquidity, particularly for people who aren't on a fiber line one block from the exchange. You could additionally require all material information to be released at the top of the hour, to ensure a full hour of analysis before any trades are executed.

msandford 13y ago
Even every 5 minutes would be great. Or even every 30 seconds. Microsecond latencies don't do much for investing; it's all about trading. Trading (or speculation) even has value so long as it's pulling information from the future to the present. That's the value it provides. If it's pulling the now plus 1ms future to now, I can't see that providing a lot of value.
tlb 13y ago
With thousands of hedge fund PhDs all trying their damndest to exploit the market, adding delay will change the game but not eliminate it. Only by when the market is efficient (in the technical economic sense) is it non-exploitable by smart guys. Efficient markets require all players to be rational, so not in this world.
- minikites 13y ago
  I think buyers and sellers both having perfect information is a prerequisite and a much larger barrier than rationality. https://en.wikipedia.org/wiki/The_Market_for_Lemons https://en.wikipedia.org/wiki/The_Market_for_Lemons
  - FD3SA 13y ago
    Precisely. Information asymmetry is what allows the exchanges to be profitable. It is a continuous wealth transfer along the information gradient, with the most knowledgeable investors capturing most of the wealth from the least knowledgeable. As long as this asymmetry exists, the vast majority of trades will constitute a zero sum wealth transfer.

beefman 13y ago

"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." At which millisecond was the information "officially released"? Which of Bernanke's phonemes were decisive? Or do we know to the millisecond when the Fed's site was updated? I suppose the coincidence between Chicago and New York is still a thing. Everyone receiving the leak agreed to fire at a particular time, and nobody jumped the gun?

andyzweb 13y ago
for those who didn't spot it the parent commenter stated they had a short position in GLD before the edit
- beefman 13y ago
  True. I try to make such disclosures whenever there's a chance it could influence what I'm writing. I decided this comment didn't need one. I put a tremendous amount of effort into writing accurately, concisely, and without commercial or other influence. Feel free to google me. I'm beefman here and on Wikipedia, Carl Lumma or clumma everywhere else.

blahbl4hblah 13y ago

conspiratards.

minimax 13y ago

It would be nice to hear a little bit more about how the FOMC results get into the electronic news feed. If anything, it seems more fair to release the news simultaneously in NY and Chicago so that traders in NY couldn't pick-off market makers in Chicago and vice versa.

mcphilip 13y ago
Good question. I can't find any specific information about how the FOMC statement gets parsed into cyberspace, but as recently as 2011, a malfunctioning printer significantly delayed the FOMC statement release [1] since the press in the Treasury lockup room couldn't get access to physical copies to write articles about it in time for the a scheduled 2:15 ET press release. A FAQ on the Richmond Fed's website [2] says that FOMC statements are released on the federalreserve.gov website [3] at 2:15 ET on the final day of each FOMC meeting. Unless there is an alternative statement provided elsewhere by the Fed, I assume that the FOMC statement is parsed by machines checking for differences in language use with the previous Fed statement -- doing a diff on successive FOMC statements is a common practice when reporting on a statement release [4]. [1]http://www.foxbusiness.com/markets/2011/09/21/copy-that-fed-statement-delayed-by-printer-glitch/ http://www.foxbusiness.com/markets/2011/09/21/copy-that-fed-... [2]http://www.richmondfed.org/faqs/fomc/ http://www.richmondfed.org/faqs/fomc/ [3]http://www.federalreserve.gov/monetarypolicy/fomccalendars.htm http://www.federalreserve.gov/monetarypolicy/fomccalendars.h... [4]http://www.zerohedge.com/news/2013-09-18/fomc-shocker-no-taper http://www.zerohedge.com/news/2013-09-18/fomc-shocker-no-tap...

bcoates 13y ago

The Fed announcement may or may not have been known, but the fact that there would be an announcement at a given time was known. The market always jumps one way or another at the last moment before an announcement, because it's the last chance to place your bets in what is essentially gambling. There was no information propagation delay because there was no information. Sometimes the blind consensus guesses right, sometimes wrong. If you actually had leaked information there's no reason you'd need to wait until the very last moment, that's when people who know nothing place their bets and their actions would be more likely to mess up your scam than cover up for it.

strongvigilance 13y ago
Indeed - it's worth noting that on the non-farm payroll figure (which is closely watched by markets) this month, most markets jumped in the wrong direction a split second early, before violently reversing.

rektide 13y ago

Ole Roemer, a Danish astronomer, proved suspicions of many such as Empedocles (490-435 B.C.) that light has a speed. 1676. C/o Speed of Light: Case History. http://www.is.wayne.edu/MNISSANI/A&S/light.htm http://www.is.wayne.edu/MNISSANI/A&S/light.htm Ug easy sensationalism via namedropping. Now, in another 50 years, I look forward to fingerprint analysis of a scale 1/1000th as fine: we caught you obeying the the speed of light, but you forgot to compensate for relativistic drift in X fashion. GUILTY!

Eliezer 13y ago

The question which occurs to me is who took the other side of this trade. You would think market actors would know enough to say, "If somebody suddenly wants to buy my stock right around 2pm and I haven't yet integrated the Fed info, it means my stock is more valuable and I should not sell."

schainks 13y ago

The ironic thing to me is the NSA is clearly in a position to present evidence for this - unless 'insider' conversations are happening in an analog medium.

smsm42 13y ago
That would be very bad if they did. When you have hammer that huge, everything starts looking like a nail, but this kind of power is switched to easily from going after the "bad guys" to going after the guys that inconvenience people in power. We're watching it happen right now.

wprl 13y ago

These graphs are crazy.

strongvigilance 13y ago

As far as I'm aware, the exact time of release of the FOMC statement can vary by a few seconds. Nanex seem to have assumed that the release comes from Washington, but I would guess that one of the agencies that receives the embargoed data has permission to distribute it at multiple locations simultaneously. That seems like the simplest explanation for Chicago and New York reacting at the same time.

aba_sababa 13y ago

Well, how do we know the Fed's clock was canonical?