Somebody Stole 7 Milliseconds From the Federal Reserve 740
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?'"
Re:Corruption (Score:5, Interesting)
Re:"based" on the decision (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...
Another possibility (Score:5, Interesting)
Another possibility is that it was a big player like Buffet or Sachs, counting on profiting one of two ways: a) precede the market b) bet wrong but cause the market to reverse, triggering massive losses to those who told their broker to trade according to the news, with a stop-loss protection.
To carry out B, you have to be able to place a second bid greater in magnitude but opposite sign to the first, about ten minutes after the news breaks. You also have the liquid assets to do it. since the bailouts doubled the national debt and gave it to banks in interest free loans with no set date of repayment, then yes, itmay be possible that investment banks did it.
Re:I do not understand why this is a story (Score:5, Interesting)
Re:wrong two words (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.
Re:7ms? less than 3.6ms. (Score:4, Interesting)
(I am not a physicist...)
How about a couple quantum entangled particles?
Is the Fed going to increase the rate? This is a question with two possible answers, yes and no. You get the answer in D.C. and mark a particle there. The entangled particle in Chicago would get the appropriate mark at the speed of light (or instantly?) where it is read and triggers a buy or sell appropriately.
The Count of Monte Christo Hack (Score:5, Interesting)
Of course, this hack isn't even new. There's the value of delaying a radio broadcast was documented in the movie The Sting. And before that there was the Count of Monte Christo who did a man in the middle injection of fake tweets into France's Semaphore packet system to ruin a banker.
I would assert that High frequency trading is simply parasitic. Many people have suggested a transaction tax could fix this. It would damp the frivolous trades yes, but it would not fix these mega scale singleton trades that can happen like this.
my proposal: What one should do I think is fix this by injecting random delays into the trading system itself. That is you would queue up all trades for the last 100 milliseconds into a block. Then randomize their order. then execute the trades in that new order. This would erase any value of a trade that depended on beating another trade by a few millisconds. You'd still have some edge cases to worry about (i.e. racing to be in the block before the next block). But you could fix that too (dither the interval size between 80 and 120 milliseconds at random, so no one would know where the block boundaries were.
For this to be viable enough people would have to agree that HF trades have no actual value added. Additionally, one would have the potential problem of exchanges popping up that did not honor this. But those would not likely have enough liquidity to matter.
Re:Uh... (Score:5, Interesting)
The clocks weren't quite synchronized
Yes, it's so difficult to synchronize clocks these days. A GPS receiver will only get you a time reference accurate to within tens of nanoseconds.
Re:Uh... (Score:4, Interesting)
No, not at all. The first link mentions another possibility a grey area.
3) CNBC is suspected of transferring the information before the 2pm to chicago, but not releasing it to the outside world until 2pm. No faster than light speed needed. The rule was stated as disclose from the room to the public. Is a server in chicago public? No. Is it outside the room ? , yes. So my understanding is that CNBC might be in trouble, or might not if the rule was ambiguous enough.
Never break laws or regulations that can simply be bent to your will.
Re:I do not understand why this is a story (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
Re:Uh... (Score:3, Interesting)
Some people have some odd ideas that the stock market creates money, that more money comes out than goes in, etc. by some magic. It doesn't actually work that way; the stock market is a zero-sum game played in multiple non-fixed units. Some units can become relatively bigger or smaller than others. This is itself an illusion, as only the money matters.
In short: you spend $25 for a stock, but then the stock is worth $50. You keep 1 stock, but it's equivalent to $50. This gives the illusion that you've gained profit by the stock becoming worth more dollars.
The next stage in this illusion is that you sell the $50 stock and get $50. Somebody else who has $50 trades you $50 for that stock. So it seems the same number of dollars and the same number of stocks are in the game, just now your stock is worth more dollars equivalent.
This should raise a red flag, and it does.
The only thing in the market is dollars. The rest is lies.
Let's say the market has exactly $10,000 in it, no more. 100 stocks worth $100 each, people have bought them, they now have $10,000 of stocks and $10,000 of money. Then the stock becomes worth $200, and people start selling. As they sell, that $10,000 of money moves *very* quickly; soon there is little money, say $1,000 of money, but there are still 55 stocks left. People will try to hold onto their money, we could conjecture; or we could extrapolate that you may try to sell 10 stocks but that's $2,000 and there are only $1,000. In either case, you need to roll back the price of that stock to sell it. To sell it all off, you'll have to deal with a downward price spiral--lower the price as the last bits of money dry up, until people are buying the stock off you cheap.
In the real market, liquidity rarely runs dry. More money is always put into the market than needed; and more stock is available than desired. When a stock becomes more desirable--the price appears to be increasing, the news indicates it may be desirable, etc--the price goes up high. This is when "smart money" unloads the stock onto "dumb money"--that is, the bright traders give you overvalued pink slips and take your money. Eventually the amount of liquidity from selling causes a price dip, and the desirability of the stock starts to slide. The stock comes down, and then the dumb money panics and sells. The dumb money then walks away with less cash, while the smart money buys back these cheap stocks to cycle again.
The short of it is: You should care because investment bankers basically live by robbing your retirement account dry. Whenever somebody gains money, somebody else loses it. If somebody is cheating, they're cheating people out of their money.
This is why I focus on decreasing my debt rather than making retirement savings; and why my savings are primarily low-risk and cash based. It's hard to rob people blind by playing the game better than them. I can do it, but it's really fucking hard and it's kind of a career-type thing. Sorry, I have better things to do. I'll take an honest job. If I'm not playing to win, I'm not putting my money into the pot to watch it get stolen.
Re:Obvious answer 4 pm (Score:3, Interesting)
There's always aftermarket (which used to be when I bought/sold most things).
Additionally, this would then spike out the Aussie and Japanese markets, and the latter are particularly sensitive these days and could start an Asia-wide trading spike that would magnify the effect much more than it should be to such "news" (if lack of news is news).
Re:wrong two words (Score:5, Interesting)
you do realize that 50% of all current trades last less than 100ms right? That is right folks 50% of the current volume is nothing but hot air. that is why the stock market has had 10-15% growth but the economy is barely doing 1-2%.
The fact this happened shouldn't surprise anyone. this is the problem of HFT.
Re:can I once again point out... (Score:4, Interesting)
Also, keep in mind that they produce nothing except destabilizing factors to the economy. High time to make long-term stock investments the only option. Randomized delay in the minute ranges for trades, no way to cancel trades, significant transaction tax.
Re:This is not insider trading! (Score:4, Interesting)
Indeed, if it's criminal, it'll be wire fraud... and that's the big IF here, since I don't know whether the Fed's embargoes are criminal to breach... But if a reporter releases embargoed information before the agreed time, and you as a trader should know that the information is embargoed (you did get a license, right?), by trading ahead of release you and the reporter have likely engaged in a conspiracy to commit wire-fraud, which is actually a much easier deal to prove than insider trading.