
Einstein and the Great Fed Robbery - mcphilip
http://www.nanex.net/aqck2/4436.html
======
jstalin
When you combine this article with others, like the fact that JP Morgan had
zero days of trading losses over an entire quarter, you realize that the
market is clearly rigged by the big guys:
[http://www.zerohedge.com/news/2013-05-08/jp-morgan-has-
zero-...](http://www.zerohedge.com/news/2013-05-08/jp-morgan-has-zero-trading-
losses-first-quarter)

~~~
ChuckMcM
I've read a lot of articles like the OP and the zerohedge one. What rises out
of noise is not so much 'good' or 'evil', 'correct' or 'incorrect', or even
'legal' or 'illegal' but an continual sense of anger that person A is getting
away with cheating and I want to cheat too but can't because of condition Y. I
suppose at some level its "fair" only if everyone can cheat.

I watched a very strange film, a comedy, called Kung Fu Mahjong [1] in which
the central theme are ladies that play Mahjong. And what struck me, perhaps as
a westerner, or perhaps it was intentional, was that _everyone in the movie
cheats_ in some way or another, and _everyone knows it._ It reminded me of the
kinds of things you would read about in the HFT blogs and forums. You could
make a 'Kung Fu HFT' movie with the same theme.

The bottom line is that I have very little sympathy for these guys. As the
'early release' scandal broke and then was documented it felt like more crap
to shovel out of the door and not like any sort of progress toward a more
durable system.

[1]
[http://en.wikipedia.org/wiki/Kung_Fu_Mahjong](http://en.wikipedia.org/wiki/Kung_Fu_Mahjong)

~~~
mcphilip
Market microstructure is such a massively complicated topic that few insiders,
much less the SEC, thoroughly understand it.

For instance, after NASDAQ went down for 3 hours on August 22, the SEC asked
the NYSE and NASDAQ for a detailed timeline of events. Each exchange blamed
the other. The SEC's response? It told the exchanges to cooperate and please
fix the problem, declining to make any further public comment [1].

Trading at high speeds is like the wild west right now with little to no
threat of law enforcement.

[1][http://uk.reuters.com/article/2013/08/27/uk-nasdaq-halt-
nyse...](http://uk.reuters.com/article/2013/08/27/uk-nasdaq-halt-nyse-
idUKBRE97Q04M20130827)

~~~
minimax
_Market microstructure is such a massively complicated topic that few
insiders, much less the SEC, thoroughly understand it._

It's actually not super complicated. A limit order book is a straightforward
thing. If you can do FizzBuzz, you can probably whip up a toy implementation
of a matching engine in an afternoon. People _think_ it's complicated because
of all the FUD (c.f. the comments on this story), but the basic mechanics of
how a modern exchange operates are remarkably simple.

~~~
mcphilip
>People think it's complicated because of all the FUD (c.f. the comments on
this story), but the basic mechanics of how a modern exchange operates are
remarkably simple.

I'm referring to market microstructure in terms of the complex interactions
amongst exchanges, the impact of Reg NMS, etc. Obviously the underlying
algorithms can be boiled down to simple components.

For those interested in learning something about market microstructure, I
highly recommend "Trading and Exchanges: Market Microstructure for
Practitioners" as an introduction to the basics:

[http://www.amazon.com/Trading-Exchanges-Market-
Microstructur...](http://www.amazon.com/Trading-Exchanges-Market-
Microstructure-Practitioners/dp/0195144708)

~~~
saraid216
> I'm referring to market microstructure in terms of the complex interactions
> amongst exchanges, the impact of Reg NMS, etc.

I've heard that the financial interconnections are remarkably similar to
ecologies. Would be interesting to get some more of that tooling for analyzing
ecologies like fisheries available to financial regulators.

------
mcphilip
This research is done by the same guys at nanex that broke a story earlier
this year about another early release of prominent data, ultimately leading to
Reuters acknowledging that it was responsible for the leak:

[http://www.cnbc.com/id/100792260](http://www.cnbc.com/id/100792260)

------
moultano
Below a certain time accuracy, all trading is zero sum. The only reason to be
able to trade in milliseconds is to beat someone else. No value is created.

Suppose instead that exchanges buffered all orders for, say, 1 hour. At the
end of the hour they perform a stable matching algorithm to pair up bids and
asks, and execute those trades simultaneously.

Are there any downsides to this? It seems like it would eliminate all of this
zero sum behavior, and at the same time, increase liquidity, particularly for
people who aren't on a fiber line one block from the exchange. You could
additionally require all material information to be released at the top of the
hour, to ensure a full hour of analysis before any trades are executed.

~~~
tlb
With thousands of hedge fund PhDs all trying their damndest to exploit the
market, adding delay will change the game but not eliminate it.

Only by when the market is efficient (in the technical economic sense) is it
non-exploitable by smart guys. Efficient markets require all players to be
rational, so not in this world.

~~~
minikites
I think buyers and sellers both having perfect information is a prerequisite
and a much larger barrier than rationality.

[https://en.wikipedia.org/wiki/The_Market_for_Lemons](https://en.wikipedia.org/wiki/The_Market_for_Lemons)

~~~
FD3SA
Precisely. Information asymmetry is what allows the exchanges to be
profitable. It is a continuous wealth transfer along the information gradient,
with the most knowledgeable investors capturing most of the wealth from the
least knowledgeable.

As long as this asymmetry exists, the vast majority of trades will constitute
a zero sum wealth transfer.

------
CrunchyJams
Awesome analysis. Keep in mind that while it tells a very compelling story,
that it isn't necessarily proof that there was a leak.

All it would take is for one major player to take a view on what was going to
happen without hearing the fed data in an attempt to beat the market. Other
algos then see that and act on it, playing the other players instead of the
data, as algos are known to do frequently. All of this could happen in the
time it takes for the actual data to get there.

There were tons of people who expected yesterday's announcement to turn out
just as it did. I'm not saying that's what happened, just that it's a
possibility to keep in mind before jumping to conclusions.

~~~
murbard2
You're right to be skeptical but your alternative does not stand up to
scrutiny. If a player indeed had a strong bite, milliseconds after the
announcement would be the worst time to execute. This is a time where almost
all the liquidity goes away as market participants stand pat. If you had such
a view, you would build your position over time, and certainly not incur the
huge cost of making large trades at the lowest point in liquidity.

~~~
CrunchyJams
Not if your goal is to make other traders (algos) think that you're acting on
market data

------
yock
When I first started reading the story I was afraid I wouldn't understand it.
Nanex took great care in explaining the phenomenon here with very accessible
language. The charts are still mostly indecipherable to me, but the story
makes it clear. If the situation really is as straight-forward as they make it
out to be, someone has some explaining to do.

------
Eliezer
The question which occurs to me is who took the other side of this trade. You
would think market actors would know enough to say, "If somebody suddenly
wants to buy my stock right around 2pm and I haven't yet integrated the Fed
info, it means my stock is more valuable and I should not sell."

------
bcoates
The Fed announcement may or may not have been known, but the fact that there
would be an announcement at a given time was known. The market always jumps
one way or another at the last moment before an announcement, because it's the
last chance to place your bets in what is essentially gambling. There was no
information propagation delay because there was no information. Sometimes the
blind consensus guesses right, sometimes wrong.

If you actually had leaked information there's no reason you'd need to wait
until the very last moment, that's when people who know nothing place their
bets and their actions would be more likely to mess up your scam than cover up
for it.

~~~
strongvigilance
Indeed - it's worth noting that on the non-farm payroll figure (which is
closely watched by markets) this month, most markets jumped in the wrong
direction a split second early, before violently reversing.

------
beefman
_" Therefore, when the information was officially released in Washington, New
York should see it 2 milliseconds later, and Chicago should see it 7
milliseconds later."_

At which millisecond was the information "officially released"? Which of
Bernanke's phonemes were decisive? Or do we know to the millisecond when the
Fed's site was updated?

I suppose the coincidence between Chicago and New York is still a thing.
Everyone receiving the leak agreed to fire at a particular time, and nobody
jumped the gun?

~~~
andyzweb
for those who didn't spot it the parent commenter stated they had a short
position in GLD before the edit

~~~
beefman
True. I try to make such disclosures whenever there's a chance it could
influence what I'm writing. I decided this comment didn't need one. I put a
tremendous amount of effort into writing accurately, concisely, and without
commercial or other influence. Feel free to google me. I'm beefman here and on
Wikipedia, Carl Lumma or clumma everywhere else.

------
fluidcruft
Is the time-keeping precision at the multiple sites accurate enough that local
drifts can be excluded as a factor in the differentials?

~~~
JackFr
I'm no expert, but if both Chicago and New York are synching their clocks to
NIST(Gaithersburg, MD) or the Naval Observatory (Washington DC), the a message
from Washington sent at the same instant, should arrive at the same instant,
as measured in local time.

A more 'science' way to make the claim that Nanex is making, would be to
compare the same products on other Fed meeting dates.

~~~
davidmr
Any time synchronization protocol I know of takes into account network latency
and attempts to compensate. As measured by perfectly synchronized clocks
against the same reference source (leaving aside for the moment that there is
no such thing), the received timestamps of a message originating from one
location and being received by two locations at different lengths of cable
from another will reflect the difference in the time it took to get from one
to the other.

------
minimax
It would be nice to hear a little bit more about how the FOMC results get into
the electronic news feed. If anything, it seems more fair to release the news
simultaneously in NY and Chicago so that traders in NY couldn't pick-off
market makers in Chicago and vice versa.

~~~
mcphilip
Good question. I can't find any specific information about how the FOMC
statement gets parsed into cyberspace, but as recently as 2011, a
malfunctioning printer significantly delayed the FOMC statement release [1]
since the press in the Treasury lockup room couldn't get access to physical
copies to write articles about it in time for the a scheduled 2:15 ET press
release.

A FAQ on the Richmond Fed's website [2] says that FOMC statements are released
on the federalreserve.gov website [3] at 2:15 ET on the final day of each FOMC
meeting. Unless there is an alternative statement provided elsewhere by the
Fed, I assume that the FOMC statement is parsed by machines checking for
differences in language use with the previous Fed statement -- doing a diff on
successive FOMC statements is a common practice when reporting on a statement
release [4].

[1][http://www.foxbusiness.com/markets/2011/09/21/copy-that-
fed-...](http://www.foxbusiness.com/markets/2011/09/21/copy-that-fed-
statement-delayed-by-printer-glitch/)

[2][http://www.richmondfed.org/faqs/fomc/](http://www.richmondfed.org/faqs/fomc/)

[3][http://www.federalreserve.gov/monetarypolicy/fomccalendars.h...](http://www.federalreserve.gov/monetarypolicy/fomccalendars.htm)

[4][http://www.zerohedge.com/news/2013-09-18/fomc-shocker-no-
tap...](http://www.zerohedge.com/news/2013-09-18/fomc-shocker-no-taper)

------
schainks
The ironic thing to me is the NSA is clearly in a position to present evidence
for this - unless 'insider' conversations are happening in an analog medium.

~~~
smsm42
That would be very bad if they did. When you have hammer that huge, everything
starts looking like a nail, but this kind of power is switched to easily from
going after the "bad guys" to going after the guys that inconvenience people
in power. We're watching it happen right now.

------
strongvigilance
As far as I'm aware, the exact time of release of the FOMC statement can vary
by a few seconds. Nanex seem to have assumed that the release comes from
Washington, but I would guess that one of the agencies that receives the
embargoed data has permission to distribute it at multiple locations
simultaneously. That seems like the simplest explanation for Chicago and New
York reacting at the same time.

------
rektide
Ole Roemer, a Danish astronomer, proved suspicions of many such as Empedocles
(490-435 B.C.) that light has a speed. 1676. C/o Speed of Light: Case History.
[http://www.is.wayne.edu/MNISSANI/A&S/light.htm](http://www.is.wayne.edu/MNISSANI/A&S/light.htm)
Ug easy sensationalism via namedropping.

Now, in another 50 years, I look forward to fingerprint analysis of a scale
1/1000th as fine: we caught you obeying the the speed of light, but you forgot
to compensate for relativistic drift in X fashion. GUILTY!

------
aba_sababa
Well, how do we know the Fed's clock was canonical?

------
wprl
These graphs are crazy.

