The dismissal of an investigation into major media companies suspected of giving clients a sneak peek at crucial data drew great surprise on Wall Street, where traders make their living profiting from blips of information moving at the speed of light.
Federal authorities had been pursuing allegations that various media companies -- including Bloomberg LP, Thomson Reuters and Dow Jones and Co. -- leaked key economic data to select investors, the Wall Street Journal reported Monday. But the investigators dropped the probe, according to the paper, in part because they could not conclusively determine that investors were able to use the advance look at the numbers to extract profits.
Wall Street analysts pronounced that explanation baffling, noting that in modern markets -- fueled by high-frequency trading and robotic transactions -- a mere fraction of a second can be enough to execute trades worth billions of dollars.
“We have certainly reached a point where information advantage in millisseconds, possibly microseconds, definitely means a difference,” said Zach Ziliak, an attorney at law firm Mayer Brown in Chicago, which advises clients on issues surrounding high-frequency trading. “The millions that have been invested in microwave communication between New York and Chicago is a testament to the fact that firms expect to make a profit on informational advantages measured in milliseconds.”
It’s difficult to determine how much such an edge could mean in dollars and cents. But the meltdown suffered in August of last year by market-maker Knight Capital offers an example that helps illustrate how quickly firms relying on algorithmic trading can make or lose money: When a trading algorithm went awry, the company burned through $440 million in just over 45 minutes.
According to the Journal, federal investigators were trying to determine if the news outlets were taking unemployment and economic data provided to them by the Bureau of Labor Statistics and sending it off to clients a few milliseconds before they were allowed to publish the information.
The BLS provides a select group of news agencies with sensitive statistics every month in advance of its legal 8:30 a.m. issue time, allowing reporters to write articles to coincide with the data's public release. But news agencies are forbidden from breaking the embargo, lest the information be used by capital markets traders to gain an edge on competitors.
Spokesmen for two of the companies named in the report, Dow Jones and Reuters, told The Huffington Post they were not aware of an ongoing federal investigation. Ty Trippet, a spokesman for Bloomberg, said that upon noticing some shortfalls in the way the government was securing data in 2012, the news organization "suggested solutions to secure their system and they thanked us for alerting them to the issue."
According to the Journal’s report, the government couldn’t link patterns seen in trading to specific actions by the media companies, and, equally important, didn’t feel it “could prove in court that a time advantage for a trader of a sliver of a second -- as little as a few thousandths -- was enough to conduct profitable trades on confidential information.”
"I don’t know how they could argue that having the information out a second before couldn’t make a difference," said Jason Roberts, a software consultant in Los Angeles who spent most of the past decade building trading systems. "It's like saying you don’t know how much speed is a part of the NFL."
“It’s absolutely amazing they would say that because we've shown it a million times over to be true,” said Eric Scott Hunsader, founder and CEO of market research firm Nanex, which has developed specialty software that can look at market activity at the microsecond level.
Hunsader also points to the behavior of the trading tape in markets for equity futures and Eurodollar options throughout 2011 as evidence that select firms were given statistical data in advance of the official release time. It's “obvious as night and day,” he said, that such activity occurred.
It's not only people with roots in Wall Street trading floors who saw the government's reported explanation for dropping its probe as suspect.
“Seconds now matter, and the incentives are there," said Keith Hall, who was a commissioner at the BLS from 2007 through early 2012 and is now a senior research fellow at George Mason University’s Mercatus Center. For Hall, the issue goes deeper than the fact that traders might be making money off insider information. He believes it puts into question the integrity of at least part of the federal government.
“This data belongs to the American public. Taxpayers have paid a lot” to have it collected, he said. “And it’s a real problem if the government is making this information available to some before others -- even if accidentally -- and they’re profiting from it.”