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Somebody Stole 7 Milliseconds From the Federal Reserve

Posted by Soulskill on from the time-flies-when-you're-making-billions-of-dollars dept.

An anonymous reader writes "Three to seven milliseconds before the fed moved interest rates, billions of dollars of trades were input that took advantage of the changed rates, reaping huge profits. According to a report at Mother Jones, 'Last Wednesday, the Fed announced that it would not be tapering its bond buying program. This news was released at precisely 2 pm in Washington 'as measured by the national atomic clock.' It takes 7 milliseconds for this information to get to Chicago. However, several huge orders that were based on the Fed's decision were placed on Chicago exchanges 2-3 milliseconds after 2 pm. How did this happen?'"

42 of 740 comments (clear)

  1. What, you thought this was a fair market? by smittyoneeach · · Score: 5, Funny

    Looks like you picked the wrong week to stop sniffing glue.

    --
    Get thee glass eyes, and, like a scurvy politician, seem to see things thou dost not.--King Lear
    1. Re:What, you thought this was a fair market? by ShanghaiBill · · Score: 5, Insightful

      Markets are never 100% fair, or 0% fair. So instead of focusing on perfection, we should be focusing on improvement. An obvious way to have made the market more fair in this case would have been to make the announcement after the markets were closed for the day. Another possibility would have been to halt trading for a few minutes before and after the announcement, for the news to settle. I suspect that the person responsible for making the decision to announce in the middle of the trading day was also someone who, directly or indirectly, benefited from the cheating. Cui bono?

    2. Re:What, you thought this was a fair market? by rtb61 · · Score: 5, Insightful

      Far more likely, some group created a series of methods for intercepting internal communications (NSA) and passed this information onto another group (CIA) with deep links with major contracting firms (the whole global military industrial complex and it's financiers). Insiders risk getting caught and actually being punished where as, thanks to a whole range political communications interceptions, the other groups will blatantly commit crimes with no fear of prosecution.

      --
      Chaos - everything, everywhere, everywhen
  2. I do not understand why this is a story by kruach+aum · · Score: 5, Funny

    Or why it is framed as 'banks break physics' rather than 'someone talked and then fraud happened'.

    1. Re:I do not understand why this is a story by kruach+aum · · Score: 5, Insightful

      That would give away their predictive edge to other traders.

    2. Re:I do not understand why this is a story by Lord+Kano · · Score: 5, Informative

      By waiting until the information was public, they weren't engaged in insider trading.

      LK

      --
      "Hi. This is my friend, Jack Shit, and you don't know him." - Lord Kano
    3. Re:I do not understand why this is a story by jandrese · · Score: 5, Insightful

      Because then they would get busted for insider trading. This guy set his timers so that he wasn't doing the trade until after it was officially announced, but forgot about the speed of light delay and got busted anyway. Not that the FTC gives a damn about insider trading anyway, it's hilariously and blatantly rampant but they're powerless to do anything about it.

      --

      I read the internet for the articles.
    4. Re:I do not understand why this is a story by MozeeToby · · Score: 5, Insightful

      Lets list the facts:

      This type of insider trading is illegal.
      The leak that allowed this is a firing offense and also illegal.
      Trades were executed in Chicago after the change was announced in Washington D.C. in a classical physics sense.
      Trades were executed in Chicago before the change was announced in Washington D.C. in a relativistic physics sense.

      What does all that imply?
      Someone at the Federal Reserve leaked the information before it was announced.
      Someone else wanted to use this information but also not get caught.
      That someone doesn't understand relativistic physics.

    5. Re:I do not understand why this is a story by mythosaz · · Score: 5, Insightful

      The information was widely available about 5 minutes in advance:
      http://www.zerohedge.com/news/2013-09-24/tip-box-fed-made-it-possible-many-people-leak-it

      Someone had the order all queued up, and was waiting for word. He got word of the interest rate move, and keyed in his order, which his computer would execute at 2:00:00:002, forgetting that such an order was impossible without giving away he was cheating by having gotten the announcement early.

    6. Re:I do not understand why this is a story by green+is+the+enemy · · Score: 5, Interesting

      Correct. Now the question is: Can they be prosecuted for insider trading? This is an interesting situation where the speed of light may factor into the legality of their action.

    7. Re:I do not understand why this is a story by TheCarp · · Score: 5, Informative

      Did they really? The information was, at the time the trade was executed, already announced and public. I do believe that, if a person has insider information, the restriction on them is that they cannot use it until it becomes public information.

      So maybe they broke the law in how they got the information, but by waiting until its public to execute the trade, they seem to have, in actuality, complied with at least a lay understanding of the relevant regulations. My own company sends out reminders at various times to be wary of making statements because of worries about insider leaks, but as far as any training I have ever had to take has said, once the information is public, trading based on it is fair game.

      So how about this.... trader came about insider information, knew when it was to be announced, and timed his trade for as soon as possible after the announcement in an attempt to profit while still being in compliance?
      Does the law/regulation take into account information travel time from the point of announcement in determining the order of events?

      Not saying its wrong to, clearly its right by any understanding of physics that I have, but, isn't expecting people to understand such nuances a bit unrealistic?

      --
      "I opened my eyes, and everything went dark again"
    8. Re:I do not understand why this is a story by isorox · · Score: 5, Interesting

      "This is an interesting situation where the speed of light may factor into the legality of their action."

      I don't see what's "interesting" about it. They broke the law. Physics proves it pretty clearly.

      Washington to Chicago is 596 miles via a great circle, however the Earth's curvature will reduce that, but only by about a mile.
      Light travels at 186 miles per second, thats 3.2ms

      In the case of antipodes, you certainly see the effect
      Auckland to Malaga, 12392 miles (67ms) as the great circle goes, but dig a hole through the earth and you can do it in under 8,000 miles (42.5ms)

      Physicists will claim that an event occuring at 1400UTC in Auckland will not have occurred until 1400+42.5ms in Malaga, however there's no way for anyone in malaga to receive data until +67ms at the earliest. If I executed the trades at +50ms, technically it's happened. At +40ms, we have arguments about whether it's happened or not (an impartial observer who is equidistant from both points will agree that the rate changed, then my trade was executed). Even at -40ms there's no way for me to impact the event.

      However on a more practical scale, as we can't encode data in neutrino bursts, the only way for a trade at +60ms in Malaga would be to have pre-knowledge of what happens in Aukland. But from a physics point of view, you could theoretically know.

      So you've got the following key points

      135959+933ms last time I can practically* do something in malaga to affect the auckland release
      135959+957.5ms last time I can do something in malaga to affect the auckland release
      140000+0 event occurs in Auckland
      140000+42.5ms theoretically I could know about it
      140000+67ms I could know about it

    9. Re:I do not understand why this is a story by quarterbuck · · Score: 5, Insightful

      Longer version of the story is this
      The fed announces the decision at 2 pm (EST). But press people are taken to a safe room ten minutes in advance and told the contents of the Fed release. They have 10 minutes to prepare their brief. Them and the editors are banned from communicating this to the outside world before 2pm.
      Probably what happened is that a press guy communicated the announcement with his editor with the understanding that the news will not be released until 2pm. The editor probably spread the news to multiple locations, again with the 2pm restriction. The editor held his side of the agreement, and released it at 2pm (EST) in Chicago.
      The news was legally released at 2pm, but just location shifted. They probably did not break the letter of the agreement. Of course, the slobs on Wall Street got creamed, if they were hoping that they could trade faster than Chicago by a millisecond.
      This is one rare case in real life where the agreement should have used the relativistic definition of time-space and have the agreement describe the time co-ords for release for each location. But then, since New York is closer to DC than Chicago (an Philly even more so), it would be advantaging some locations more than others.

      --
      http://slashdot.org/submission/1062723/Cheap-mobile-data-plan?art_pos=2
    10. Re:I do not understand why this is a story by khallow · · Score: 5, Insightful

      The information was, at the time the trade was executed,

      Not in Chicago. Chicago was not in the light cone of the information release at the time that the trades were executed and hence, the information wasn't public. I must admit to being a bit surprised that there is a non empty intersection of relativity and finance law.

      But if they had waited those few more milliseconds, they would have been in compliance and yet still most likely beating anyone who had to process the Fed announcement first.

  3. But.... by Anonymous Coward · · Score: 5, Funny

    they STILL didn't get first post, did they?

  4. Re:Uh... by daniel.garcia.romero · · Score: 5, Insightful

    Can someone explain this to me in idiot? I don't see what the problem is, nor why I should care.

    If you don't see a problem, then no amount of idiot will make you care.

  5. Re:Uh... by mythosaz · · Score: 5, Informative

    Can someone explain this to me in idiot? I don't see what the problem is, nor why I should care.

    FTFA

    There would seem to be three possibilities: 1) Some trader was extraordinarily lucky, placing a massive bet just before a major announcement that would make that bet highly profitable. 2) There was a leak, either by a media organization with early access to the data or even someone at the Fed. Or 3) The laws of physics have been violated as the information traveled from Washington to Chicago faster than the speed of light.

  6. Re:Uh... by larry+bagina · · Score: 5, Informative

    Big money interests are engaged in insider trading.

    In idiot: Bad men do bad thing. Touch you in bad place.

    --
    Do you even lift?

    These aren't the 'roids you're looking for.

  7. Once again by jbeaupre · · Score: 5, Funny

    I'm pretty sure it was Billie Ray Valentine and Louis Winthorpe. They did this previously and managed to bankrupt Mortimer and Randolph Duke in the commodities market.

    --
    The world is made by those who show up for the job.
  8. can I once again point out... by MickyTheIdiot · · Score: 5, Insightful

    ...that if the timing is down to milliseconds then the system is broken. It's automatically an unfair playing field tipped towards the largest competitors that have the computing power and programing to operate on that time scale.

    Of course nothing about Wall Street is about fairness anymore and usually they don't care about the law, either.

    1. Re:can I once again point out... by sqrt(2) · · Score: 5, Insightful

      Just put a small, fraction of a penny, fee on every trade executed. It won't even be noticed by people using the market for its intended purpose; long term bets on a company's quality. It would stop the high frequency trading nonsense since that relies on, of course, high speed trades and the fact that an essentially unlimited number of trade orders can be made.

      --
      If you build it, nerds will come. Soylentnews.org
  9. Re:Uh... by Russ1642 · · Score: 5, Funny

    I'm pretty sure it was a speed of light violation. We should announce to the rest of the world this marvelous discovery.

  10. Possible explaination by PPH · · Score: 5, Insightful

    Several large orders betting the other way may have been placed a few milliseconds after 2:00 PM as well. But there is a 'feature' in on-line trading that allows high frequency traders to cancel or abort trades that they claim were made as a result of 'system errors'.

    --
    Have gnu, will travel.
  11. The info was already distributed by carlcmc · · Score: 5, Informative

    http://www.zerohedge.com/news/2013-09-24/tip-box-fed-made-it-possible-many-people-leak-it

  12. Re:Corruption by jandrese · · Score: 5, Interesting

    The Insider in this case would have the information well before it was announced in DC. He has the trades all setup and ready to execute, and then set the timer to have it happen at exactly 2PM. He forgot about the speed of light delay however and accidentally outed himself. After a decade or so the FTC might slap him with a couple of thousand dollar fine or something to make sure he never abuses insider information to make a billion dollars in a millisecond again.

    --

    I read the internet for the articles.
  13. Just the tip of the iceberg by EMG+at+MU · · Score: 5, Insightful

    If people knew half the shit that Wall Street does they wouldn't like it. I think articles like this actually make it harder to have a productive conversation about the fairness of Wall Street because it makes it seem like this type of abuse is the exception rather than the norm.

    There is a revolving door between Wall Street, Corporate board rooms, and the Fed. Not only do people go through that revolving door but so does information, so does hits about what might happen in the markets or what might come out of the Fed. Go watch Wall Street, either one, it's dramatic but its accurate enough for the average person to get a idea of what goes on behind those closed doors.

  14. Re:7ms? less than 3.6ms. by Anonymous Coward · · Score: 5, Insightful

    Light doesn't propagate through fibre as fast as it does through a vacuum.

  15. Re:"based" on the decision by Dahamma · · Score: 5, Interesting

    Of course there is a story here.

    And of course it doesn't have to involve breaking the speed of light. It has to do with the Fed failing to properly enforce a supposedly very complex information lockdown and the information likely being either leaked or pre-loaded on remote servers, resulting in (according to the article) over $600M in trades via high-speed computer trading in the few milliseconds after the information was released - and now the Fed is investigating.

    It's both related to technology and possibly involving criminal activity (or at the very lease a failure in information security). Sounds like a relevant story to me...

  16. They might have only barely had enough time. by mozumder · · Score: 5, Informative

    From: http://www.cnbc.com/id/101056168

    "Inside a room on the top floor of the William McChesney Martin, Jr. building, Fed officials instructed reporters not to send information about that decision to the outside world before precisely 2 p.m. as measured by the national atomic clock in Colorado.

    The doors were locked at 1:45 p.m., and Fed staffers handed out copies of the statement at 1:50 p.m., allowing reporters a few minutes to digest the complicated document before reporting on its contents. At 1:58 p.m. television reporters were escorted out of the room to a balcony where cameras had been prepositioned. The Fed's security rules dictated that television reporters were not allowed to speak before precisely 2 p.m. Print reporters were told they were allowed to open a phone line to their editors at headquarters offices a few moments in advance of the hour, but not allowed to interact with people on the other end of the line until exactly two p.m."

    So many hacked communications channels are still possible from this. The print writers can signal the editors when making phone calls before 2pm, without talking to them. For example, the editor can instruct the reporter to call them on landline if it's a sell, or his mobile number if it's a buy. The TV reporter can wear a jacket if it's a sell, or remove it if it's a buy, so someone across the building can monitor the balcony for pre-release signals... etc.

    Also, from the http://www.nanex.net/aqck2/4436.html:
    "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."

    This was a major, major hack, and they waited as late as they could wait, without signaling their competitors.

  17. Re:7ms? less than 3.6ms. by Pseudonym+Authority · · Score: 5, Informative

    Light only travels about 200000km/s in fiber optic cable, which means 5.5ms to travel that distance. With routing delays and stuff, it's probably about 7ms away.

  18. Re:wrong two words by gameboyhippo · · Score: 5, Interesting

    Sure it's plausible. Atomic clocks. What the exploiter did was try to time the leak so that it happened exactly after the fed announced its decision before anyone else had a chance to react on it. They performed the trades at exactly 2:00 so that it all looked kosher. The problem was that they did it faster than what is physically possible and thus what was a plan to give plausible deniability backfired and thus exposed that they had insider knowledge.

  19. Re:wrong two words by Spazmania · · Score: 5, Insightful

    Well, yes, yes it would. Did the fed time their release for exactly 2:00 and slave their clocks to the naval observatory (as many modern computer systems do)? Does the financial community know this? The financial community has hyper-accurate knowledge of timing in their own systems as well as exactly how many milliseconds it takes to complete a trade.

    Suppose you have information leaked an hour ahead of time. You can't act on it then because it'd be obvious that you had leaked information and you know they're looking for that. So, you have to wait until everybody else has it. But if you wait until everybody else starts to react to the news, your leaked information is worthless.

    You also only have an hour to think about what to do, so you can't change your IT system and whatever plan you come up with you have to either act immediately or not. So, you tell your existing IT system that is already capable of hyper-accurate timing to execute a trade just after the announcement.

    Later on you realize that everybody has hyper-accurate timing, not just you.

    Seriously, I've been contacted by maybe a dozen financial company recruiters who want me to squeeze another quarter millisecond out of their trading network. I'd sooner flip burgers. Millisecond trading is theft. Period. Even when it happens enough milliseconds after receiving information to have broken no law.

    --
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  20. Re:Uh... by dgatwood · · Score: 5, Funny

    When did we start talking about airport security?

    --

    Check out my sci-fi/humor trilogy at PatriotsBooks.

  21. Re:wrong two words by ebno-10db · · Score: 5, Insightful

    Apparently the great minds of the Masters of the Universe aren't familiar with the speed of light. No matter for them though - the head of any major financial institution could rob the president at gunpoint on live TV, and still not be prosecuted for it.

  22. Misinformation... by SplawnDarts · · Score: 5, Informative

    As someone who makes a good part of my living trading bonds, there's a lot of misinformation here.

    1) There is no such thing as "insider trading" in treasury bonds or their futures (or commodities futures or foreign exchange or options on any of the above). The reasoning is that the majority of the participants in those markets are knowledgeable insiders. Corporate bonds are a grey area but no one has ever been prosecuted and numerous people have openly traded on insider info. The SEC brought one case related to trading on credit default swaps, but it didn't go anywhere. Insider trading on stocks and stock options is illegal by case law.

    2) if you had information about the Fed's future rate policy, you could make you bet in the spot or futures markets well ahead of the announcement. You would get a better price on your bet by doing so assuming it was a large bet, because markets tend to thin out before announcements (for technical reasons irrelevant to this discussion - just know it happens reliably).

    I would guess the most likely explanation here, as with most apparent violations of the speed of light, is poor clock synchronization or other measurement issues.

  23. Re:Uh... by cusco · · Score: 5, Funny

    If Comcast is doing the routing, Oregon.

    --
    "Think about how stupid the average person is. Now, realise that half of them are dumber than that." - George Carlin
  24. Re:Uh... by Kaenneth · · Score: 5, Insightful

    Utah, at the new NSA data center.

  25. Re:Uh... by hairyfeet · · Score: 5, Insightful

    Well I will take a crack at it....you see the problem is the current system is designed to allow the parasites, those that have made insane amounts of money by rigging and manipulating the government and the system to keep their elite status by being able to pull shit like this which ordinary folks can't do because they don't have the capital required to "buy in" at the correct facilities to beat the wire.

    When i see shit like this, along with both parties seeming not to give a shit about being scene outright kicking the poor when they are down i have to wonder....how much time does the USA really have left? After all as has been pointed out several times the unemployment numbers are bullshit and if you figure in all those that they just magically drop from the rolls we are looking at a good 23%+ unemployment, meanwhile you have the right wing being so damned vicious to the poor you might as well replace the elephant with Monty Burns and then to add the shit icing on the asshole cake you have shit like this which allows the really nasty leeches like Goldman Sachs to make mountains of money off of the American people.

    So I have to wonder if this isn't the root cause of why all empires fall, those at the top become so fucking greedy that they tilt the system so damned far out of balance the whole thing collapses. It pretty obvious that in the last 4-5 years or so many in power have stopped caring about the kayfabe of giving a fuck about anyone but the elite, the working poor and unemployed, which outnumber the top 1% by a good 10,000 to 1 (because in reality its more like 0.01% that get a good 70% of the wealth consistently) are just being bombarded with story after story like this where the elite scam billions and the only thing the government does is ask if they want a task break, and the war on poverty by attacking food stamps, medicaid/care, disability, welfare, etc makes it real clear to the poor folks that the elite really want them gone...so is this how it ends? With the poor getting everything taken away until their is nothing to lose and we have own own Arab Spring?

    I don't know but I can tell you the flyover states are beginning to look like the depression, small businesses that were here for generations closed and the factories gone so that huge chunks of land are nothing but abandoned buildings, and instead of helping the broke and starving poor those in government seem to be doing everything they can to curbstomp poor folks and take away any benefits they may get. Hell I got a disabled relative that if he isn't able to win against them taking his disability he'll be homeless by Xmas, and I hear similar stories from all my customers, women and kids sleeping in cars because they found a way to take away what pitiful benefits they were getting, tents popping up all over the place because folks got nowhere to live, it makes me wonder if the whole French "let 'em eat cake" situation is repeating here and will end with the same result. The teeming poor have nothing to lose and their ranks grow by the day, its seriously bad here folks.

    --
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  26. This is not insider trading! by MeanGene · · Score: 5, Insightful

    In the U.S. of A. the term "insider trading" applies only to share/stock trading, where it is illegal.

    Those not trading stocks - such as commodities, bonds or spot FX need not concern themselves with such nonsense. Trading on material non-public information is perfectly legal in those markets.

  27. Re:It was the Dukes! by s.petry · · Score: 5, Funny

    Which of you stole 7ms to post at exactly the same time as the other?

    Sorry, couldn't resist... :)

    --

    -The wise argue that there are few absolutes, the fool argues that there are no probabilities.

  28. Re:wrong two words by timeOday · · Score: 5, Informative

    Is someone trying to suggest that if the press release was given at 2:00:00 in a machine readable format, a computer parsed the information... and made a decision to trade without human interaction/vention, it would have been kosher?

    Ummm, what? That's exactly how most trades originate.

    Here: "Today, when Bloomberg releases a market-moving headline, on average it takes 4 seconds for the markets to move after the news story hits. Bloomberg machine-readable news can help you get ahead of that window.... Bloomberg's Event-Driven Trading feed offers clients instant, machine-readable delivery of Bloomberg's world-class news and data, including breaking headlines, exclusive worldwide market-moving coverage, structured financial data from company releases, news analytics, and global economic data."

    Trying to compete with these guys by websurfing is really no different than reading the evening paper.

    Well, here's a recent article that says the percentage of trades that are automated has been falling and may only be slight majority now.

  29. Special relativity solves your problem by Michael+Woodhams · · Score: 5, Insightful

    If (and only if) the trade occurred before the light-travel time from Washington, then (by special relativity) there exists a reference frame in which the trade occurred before the information was released in Washington.

    It would be so fun to see this argument play out in court.

    --
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