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Regulators Look Into Timing of Trades After Fed Statement

U.S. regulators are looking into how trading in financial instruments linked to gold in New York and Chicago occurred so quickly after the release of a Federal Reserve statement in Washington last week.

“It’s standard practice to look at moves like this from a surveillance perspective,” Bart Chilton, a Democratic commissioner at the Commodity Futures Trading Commission, said in a statement today.

The Federal Reserve is asking news organizations to review their procedures for publishing stories based on central bank releases from so-called lock-ups, according to David Skidmore, a Fed spokesman.

Trading in gold futures and exchange-traded funds linked to gold intensified within 1 millisecond of 2 p.m. eastern time on Sept. 18, when the Fed released a statement saying it would refrain from tapering its $85 billion in monthly bond purchases, according to Nanex LLC, a firm that analyzes high-frequency trading.

The quick response is unusual because information takes seven milliseconds to travel to Chicago from Washington, where the Fed statement is released, according to Nanex. The time between Washington and New York is two milliseconds, Nanex said. The trading wasn’t possible unless the statement had been available in those financial centers before the 2 p.m. embargo time in Washington, Nanex said.

High-Speed Trading

Elite investors with high-speed trading systems who gain early access to sensitive information are a growing threat to the integrity of U.S. financial markets, New York Attorney General Eric Schneiderman said today at a conference.

Schneiderman said at the Bloomberg Markets 50 Summit in New York that his office is looking at combating the advantages won by securing early access to market-moving data. Calling the issue “Insider Trading 2.0,” Schneiderman said the combination of high-speed trading and early data access unfairly sets up a small group of investors to reap enormous profits.

“A new generation of market manipulators has emerged,” Schneiderman said. Average investors aren’t “going to invest if they think the markets are rigged,” he said.

The Fed’s unexpected decision last week affected prices of stocks, bonds, currencies and commodities. The price of gold climbed to 1,364.02 an ounce on Sept. 18 from 1,310.64 the day before. The Standard & Poor’s 500 Index climbed 1.2 percent to 1,725.52, the highest on record.

‘Just Unbelievable’

“It’s just unbelievable how much really goes down in the first 10 or 20 milliseconds,” said Eric Scott Hunsader, the chief executive of Winnetka, Illinois-based Nanex. “This is very explosive information.”

The Fed releases its market-moving policy statements through lockups at the press room of the Treasury Department. Journalists in the lockup are given the statement about 10 minutes early on condition that they refrain from publication until 2 p.m. as measured by the U.S. Naval Observatory’s master clock. Bloomberg News is a participant in the lockup.

“We will be conducting follow-up conversations with news organizations to ensure our procedures are completely understood,” Skidmore said in a statement.

Journalists at the lockup agree to make no public use of documents distributed by Fed staff, including broadcasting or posting on the Internet, until the specified time.

Trading Centers

The agreement doesn’t address whether news organizations may store the information in advance on remote servers and time it for release at 2 p.m. Such servers could be located in trading centers such as Chicago or New York, eliminating the time it takes for the data to travel from Washington, according to Robert Stowsky, a senior analyst at the Aite Group in Boston, an industry research firm that studies market infrastructure and high frequency trading.

The data could then be picked up by clients of news agencies that engage in high-speed and algorithmic trading, in which computers are programmed in advance to respond to news and execute trades automatically, Stowsky said.

“If the information was pre-released to servers in Chicago and New York and that information went out at fairly high speed to a trading algorithm system in those two places, that could definitely account for the lack of time it took for those trades to start taking place,” Stowsky said.

“Most of these machines are co-located to the exchange systems,” he said. “Instantaneous is not the correct word, but it’s fairly close.”

The procedure for FOMC lock-ups was changed in March. Prior to March, journalists in the lockup were told they could send their stories at the sound of a bell. That meant they couldn’t time their stories for release in advance.

To contact the reporters on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net; Silla Brush in Washington at sbrush@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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