On Sept. 18, gold futures surged nearly $20 in the 30 seconds after the US Federal Reserve released the news that it would not “taper” the monetary stimulus it’s feeding the economy. Someone made a lot of money off of that—potentially by dubious means.
According to research from Nanex LLC, a Chicago-based research firm that monitors trading activity, a mountain of orders placed at exactly 2:00:00 PM ET—and the activity following those orders—indicate that someone almost definitely had bets in early. Eric Hunsader, Nanex’s founder, calls the evidence “overwhelming.”
News from the Federal Reserve is released from a lock-up room in Washington, DC, so that reporters can write stories ahead of the actual release. In other lock-ups, special “black boxes” prevent reporters from transmitting the news until the exact millisecond the data are officially public. The Federal Reserve does this somewhat differently, but says it has a system in place to ensure that the data are released at exactly 2:00 PM ET. After that, information takes 2 milliseconds to travel from DC to New York City (really, computers in New Jersey), where stocks trade, and 7 milliseconds to travel to Chicago, where futures trade.
But Nanex finds that a large pile of trades—both in a gold ETF (GLD) traded in New York and in gold futures traded in Chicago—happened exactly at 2:00 PM ET, but not a thousandth of a second later. The news simply wouldn’t have had the chance to travel this distance in that time.
Could it just have been dumb luck? Probably not. Based on the data, Hunsader believes that the bet came from a single actor who would have had to “commit well over a billion dollars,” meaning it was too large a gamble to take lightly or blindly. Hunsader believes someone had the information early.
Could a reporter have leaked it? As we’ve previously written, the lock-ups haven’t always been as secure as they should be. But given recent publicity about leaks, Hunsader thinks that’s unlikely.
Could a news organization have sent the data in advance to its own servers in both New York and Chicago and programmed them to release it at the exact same moment? They are allowed to do that with certain kinds of data, Hunsader writes, but in the case of last week’s Fed announcement that shouldn’t have been possible. And even if they had, such releases typically happen up to 15 milliseconds too early or too late because the servers’ clocks aren’t precisely set. In this case the spike in trades began on the very millisecond of 2pm.
“This is not a bad technology case. This is a somebody’s-hand-is-in-the-cookie-jar case,” Hunsader told Quartz.
“The Fed news was leaked to, or known by, a large Wall Street Firm who made the decision to pre-program their trading machines in both New York and Chicago and wait until precisely 2 PM when they would buy everything available,” he writes. ”It is somewhat fascinating that they tried to be ‘honest’ by waiting until 2pm, but not a thousandth of a second longer.”
It’s not clear how the US government would attempt to track down the source of the leak. But it could certainly investigate the trades that took place. At the very least, the laws of physics combined with the laws of the land seem to make it impossible for a firm to have had information that it appears to have traded on at the time that it appears to have traded on it.
Clarification: An earlier version of this post implied that the Federal Reserve uses black boxes to disseminate data, like the Labor and Commerce Departments. The Fed does this differently, but wouldn’t provide Quartz with any details on the exact process.