Tuesday, September 24, 2013

Today's most ridiculous news story

Somehow, it wasn't anything Ted Cruz said.

No, it's this:
The Federal Open Markets Committee released its decision not to taper bond purchases last Wednesday at exactly 2 p.m. eastern time. The news should have taken 7 milliseconds to travel at the speed of light from Washington to Chicago. But Chicago markets began moving in response to that news only 3 milliseconds after 2p.m. Is news traveling faster than the speed of light now? 
The time difference at stake is way less than a blink of an eye (it takes a person 300 or 400 million milliseconds to do that), but in trading, it matters. Trading computers are so smart now that you can plug high-speed data feeds into them, and the computers will "analyze the news as it comes in and execute pre-programed trading strategies," CNBC reports. Again, in Chicago, trades shouldn't have happened until 7 milliseconds after 2p.m. But Nanex Research, a firm that "has been at the forefront of discovering market abuses, particularly in the area of high-frequency trading," discovered a buying increase in the eMini futures market in Chicago just 3 milliseconds after 2p.m. Gold futures started accelerating just 1 or 2 milliseconds after 2p.m. 
The Fed is now investigating whether or not a media organization may have leaked the "no taper" news early. CNBC reported on Tuesday on the conditions surrounding the embargoed news — reporters were literally locked in a room in Washington at 1:45p.m. on Wednesday. The reporters got copies of the Fed's statement at 1:50p.m., but were not allowed to breathe a word of it until 2p.m. (according to the national atomic clock in Colorado).
I was part of of pretty long debate today about whether this is something we should care about.  And I really just can't see how it is.  It's definitely true that the Fed's announcements are important for the market; billions of dollars are riding on the FOMC's decisions.  It's also true that enough money is on the line to encourage Wall Street to take some pretty ridiculous measures.  But what's that to us?  For everyone that isn't a giant firm, the whole exercise is pretty aggressively zero-sum. So if banks want to invest tens of millions of dollars in setting up communications systems that will transmit the Fed's decisions back to their trading computers and make trades at speeds that approach the absolute physical limit, well, so be it. Why should we pay any attention to this absurd game?

And building from that, why should the Federal Reserve, a government body, be so invested in setting up safeguards that ensure a level playing field?  All the security measures--reporters must remain in a locked room, unable to speak, until an exact precise moment as determined by an atomic clock--are disturbingly solicitous of the interests of a handful of Wall Street banks.

Lots of market-moving information is communicated by the government in lopsided, asynchronous ways.  The best example of this is Supreme Court decisions, of which there are dozens every year with potentially major economic consequences.  Despite this, you don't see some sort of strange system where all the Supreme Court reporters are lined up at the starting line, waiting for Roberts to fire a pistol and signal the precise moment everyone is allowed to call the networks.  Instead, everyone piles into a courtroom, the judges read an opinion, and if someone figures out the holding first, so be it.  If they screw up and report the wrong result, that's also something that can happen.  In the end, it doesn't matter to America whether Trader A or Trader B gets an arbitrage opportunity, so long as someone takes it eventually.  The market will take care of itself.

And I mean, where does this end?  Like, have we factored in the speed of sound? The time it takes for a reporter's voice to travel to a phone receiver might disadvantage the reporter vis-a-vis another reporter who, say, uses a series of light signals and video chat.  What about reporters sitting towards the back of the room?  Their signals have to travel further than someone communicating over a shorter length of wire!  Yes, the difference is minuscule... but once you're talking about the the amount of time it takes light to travel from DC to Chicago, stupid little things like this become relevant.

To me, the fact that the Fed is wringing its hands over this stuff demonstrates badly misplaced priorities.  Because really, what's the philosophy behind doing it the way we currently we do it?  Fairness?  It's true, the current system does make sure everyone has a equal opportunity to arbitrage FOMC announcements--provided, of course, you've got a bleeding-edge supercomputer and a billion dollars in investment capital.  I'm sure some bank would cry foul if FOMC decisions were reported, by, say, Bernanke standing in front of a TV camera and reading off a sheet of paper.  It's not fair, they'd moan.  Citibank's guy was standing closer and heard first, and those .0215 seconds made ALL the difference.  To which we ought to respond, So friggin what?  This is the game you got into, and you're not allowed to complain if you lost.  Your stupid play, your money, your problem. 

No comments:

Post a Comment