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The Almighty Buck Crime United States

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?'"
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Somebody Stole 7 Milliseconds From the Federal Reserve

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  • by smittyoneeach ( 243267 ) * on Wednesday September 25, 2013 @04:04PM (#44952177) Homepage Journal
    Looks like you picked the wrong week to stop sniffing glue.
    • Looking good, Billy Ray!

    • by ShanghaiBill ( 739463 ) on Wednesday September 25, 2013 @07:20PM (#44954483)

      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?

      • by rtb61 ( 674572 ) on Wednesday September 25, 2013 @09:17PM (#44955261) Homepage

        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.

  • by kruach aum ( 1934852 ) on Wednesday September 25, 2013 @04:06PM (#44952203)

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

    • by i kan reed ( 749298 ) on Wednesday September 25, 2013 @04:08PM (#44952241) Homepage Journal

      If someone talked, why would they need to wait until 2? They could "speculate" ahead of the curve.

      • by kruach aum ( 1934852 ) on Wednesday September 25, 2013 @04:13PM (#44952349)

        That would give away their predictive edge to other traders.

      • by Samantha Wright ( 1324923 ) on Wednesday September 25, 2013 @04:14PM (#44952359) Homepage Journal
        They probably couldn't count to 7 and figured no one would notice; I bet no one would know about any of this if they'd waited 2 or 3 more milliseconds. The less of a lead time, the less time others have to react, and the less time your assets spend locked up waiting.
      • by Lord Kano ( 13027 ) on Wednesday September 25, 2013 @04:15PM (#44952379) Homepage Journal

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


        • by green is the enemy ( 3021751 ) on Wednesday September 25, 2013 @04:28PM (#44952573)
          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.
          • "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.

            • by TheCarp ( 96830 ) <sjc@carpane3.14t.net minus pi> on Wednesday September 25, 2013 @05:06PM (#44953127) Homepage

              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?

            • by isorox ( 205688 ) on Wednesday September 25, 2013 @05:37PM (#44953545) Homepage Journal

              "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

              • by Jane Q. Public ( 1010737 ) on Wednesday September 25, 2013 @06:50PM (#44954221)

                "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"

                Wrong in several respects.

                (A) Curvature doesn't reduce the distance. Communications lines are on the surface.

                (B) As someone else mentioned, it's 180,000mps.

                (C) Electricity does not travel as fast in wires as light does in a vacuum. In a coax cable, it's only about 2/3 the speed of light. And even if it were fiber, not wires, you then have the speed of the circuits that do the conversion and switching... still adding significant delay. So you can't use light speed as a measure, unless you're trying to establish a ridiculously unachievable lower bound.

                "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)"

                As already mentioned, this is a specious argument, since the communications are not traveling in a straight line, but on the surface.

                At 596 miles, the speed of light is indeed 3.2ms. Add in switching delays, etc. and you get closer to 5ms, and that's assuming fiber.

                But ALL of this is really beside the point. The knowledge that they were going to do it was presumably public. And even if not, and it was "insider" knowledge, it's still beside the point. Because they traded too early. 7ms advantage today is a significant advantage for HST.

          • by Sarten-X ( 1102295 ) on Wednesday September 25, 2013 @04:49PM (#44952851) Homepage

            It's not that interesting. They can be committing "insider trading" even if they'd waited until after the information had arrived, because they'd still have had an unfair time to decide what to do with it. As others have pointed out, in this case someone probably prepared an order plan ahead of time, and sent it off just ahead of everyone else. Even today's computers still take some time to process the incoming data.

      • by jandrese ( 485 ) <kensama@vt.edu> on Wednesday September 25, 2013 @04:16PM (#44952383) Homepage Journal
        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.
      • by MozeeToby ( 1163751 ) on Wednesday September 25, 2013 @04:19PM (#44952443)

        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.

        • by pspahn ( 1175617 )

          That someone doesn't understand relativistic physics.

          It's quite possible they do understand the physics, it's just that a massive financial gain clouded their judgement and they overlooked the delay.

        • ...But it happened in Chicago.... The boss says nothing happened, so nothing happened. I know that analyst said something happened, but he's an idiot. Look how dumb he is now! He's trying to swim with concrete shoes! You're not that dumb, are you?

        • by jmv ( 93421 ) on Wednesday September 25, 2013 @05:20PM (#44953317) Homepage

          Trades were executed in Chicago before the change was announced in Washington D.C. in a relativistic physics sense.

          Actually, in relativistic physics sense, the trades in Chicago where outside of the light cone of the Washington event (neither in the future cone nor in the past cone). That being said, since Washington and Chicago do not move at relativistic speed with respect to each other, the trades are still at a later time than the announce, even if there's no possible causality.

      • by Sir_Sri ( 199544 )

        This is I think part of it. If someone knew... 15 minutes in advance, they could have places a series of bets that looked like well, bets.

        Knowing a small number milliseconds in advance is a very very odd thing (in this case 4-5). It's possible someone knew very well in advance, and was able to try and program the trades to beat everyone by a small number of milliseconds and hoped no one would notice, and that seems the most likely case.

        Any other scenario creates a lot of very tricky technical problems whi

        • by mythosaz ( 572040 ) on Wednesday September 25, 2013 @04:27PM (#44952547)

          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 [zerohedge.com]

          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.

          • by quarterbuck ( 1268694 ) on Wednesday September 25, 2013 @06:19PM (#44953931)
            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.
      • by mozumder ( 178398 ) on Wednesday September 25, 2013 @04:27PM (#44952553)

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

        "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 [nanex.net]:
        "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.

  • But.... (Score:5, Funny)

    by Anonymous Coward on Wednesday September 25, 2013 @04:06PM (#44952205)

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

  • LOL (Score:4, Informative)

    by Adult film producer ( 866485 ) <van@i2pmail.org> on Wednesday September 25, 2013 @04:08PM (#44952235)
    They didn't steal 7 milliseconds.. they had the information minutes or more likely a few hours before everybody else. Don't try blaming this on some simple technological advandage.
    • Re:LOL (Score:4, Informative)

      by earlzdotnet ( 2788729 ) on Wednesday September 25, 2013 @04:14PM (#44952361)

      This. To give a few more details as to what the article says though. Basically, even assuming they have some genius computer that can parse the announcement made at 2pm and execute these trades within 1 millisecond or less, it would be physically impossible for the news to have been received that quickly. The trades in Chicago were executed 2ms after 2PM. The speed of light dictates that the news (assuming no barriers or other latency) would take at least 7ms to actually reach Chicago from where it was announced.

      So, in summary, no matter what these crooks try to say to fool a jury with favorable circumstances, it is physically impossible that they did not know about this news before 2PM

    • "Everyone else" has this information too. It wasn't a secret among well informed sorts.

      "Everyone else" just waited until after 2:00:00:002 to execute their orders.

  • Once again (Score:5, Funny)

    by jbeaupre ( 752124 ) on Wednesday September 25, 2013 @04:08PM (#44952253)

    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.

  • by MickyTheIdiot ( 1032226 ) on Wednesday September 25, 2013 @04:10PM (#44952283) Homepage Journal

    ...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.

  • Obvious answer: (Score:4, Informative)

    by ericloewe ( 2129490 ) on Wednesday September 25, 2013 @04:11PM (#44952307)

    Information was leaked and the whole thing setup to look somewhat legitimate. 3ms is the absolute fastest anything can get from Washington to Chicago, so the information was there before the official announcement.

  • by PPH ( 736903 ) on Wednesday September 25, 2013 @04:13PM (#44952335)

    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'.

  • by carlcmc ( 322350 ) on Wednesday September 25, 2013 @04:13PM (#44952339)
  • by feenberg ( 201582 ) on Wednesday September 25, 2013 @04:15PM (#44952371)

    It would seem foolish to trade within milliseconds of 2pm without knowledge of the Fed decision, since the other party could be in DC and in legitimate possession of the information. So it is surprising that the criminal got a counterparty to accept the trade. This trick will probably only work once. There was a time when this sort of information was released after the close of markets.

  • by 0123456 ( 636235 ) on Wednesday September 25, 2013 @04:15PM (#44952377)

    Did they use TCP/IP over neutrinos?

  • by EMG at MU ( 1194965 ) on Wednesday September 25, 2013 @04:17PM (#44952411)
    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.
  • by stox ( 131684 ) on Wednesday September 25, 2013 @04:18PM (#44952431) Homepage
  • by nbauman ( 624611 ) on Wednesday September 25, 2013 @05:18PM (#44953293) Homepage Journal

    It sounds as if news services could have released it at exactly 2pm in Chicago without breaking the Fed's rules. The rules say "public use."

    I often work with material under a press embargo. If I get something on Tuesday with an embargo of 2pm EST Wednesday, that means I can send it to my editor in Chicago (or anywhere else) on Tuesday. That's not public use. My editor will wait until 2pm EST and release it (for public use) at that time in Chicago.


    http://www.cnbc.com/id/101056168 [cnbc.com]

    A key question is whether or not any organization transmitted information out of the lockup room and into its own computer system before 2 p.m. If that was done, the data could have been moved to computer servers near Chicago before 2 p.m. and publicly released the information from there at precisely 2 p.m. – enabling subscribers of that data service to get the information milliseconds before others in Chicago relying on transmissions from the Federal Reserve in Washington to arrive.

    It is not clear whether that would violate the Fed's rules. The Federal Reserve declined to tell CNBC whether or not it would be a violation of their rules to transmit information out of the lockup room before 2 p.m., if that information was pre-loaded into servers in Chicago for release at 2 p.m. ...

    On top of those precautions, every media person entering the lockup – including two employees of CNBC -- was required to sign an agreement that read: "I understand that I may make no public use of the documents distributed by Federal Reserve Board (FRB) staff or the information contained therein, including broadcasting, posting on the Internet or other dissemination, until the time the FRB has set for their public release." [my emphasis]

    Transmitting them to the news service's own computer system in Chicago isn't "public use."

    "No public use" means you can transmit your story to your editor in Chicago, who holds it until 2:00:00 pm EST and releases it immediately in Chicago.

    That would be an unusual news story. It would consist of 1 machine-readable bit meaning "buy." But that's all their readers need.

    Quick, everybody, you've got 7 milliseconds to mod me up to +5 insightful.

  • Misinformation... (Score:5, Informative)

    by SplawnDarts ( 1405209 ) on Wednesday September 25, 2013 @05:34PM (#44953511)
    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.
  • by MeanGene ( 17515 ) on Wednesday September 25, 2013 @06:00PM (#44953781)

    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.

    • by wanax ( 46819 ) on Wednesday September 25, 2013 @11:40PM (#44956139)

      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.

"What the scientists have in their briefcases is terrifying." -- Nikita Khrushchev