According to a recent academic study, some investors may have pocketed between $14 mln to $256 mln in profits by getting early word on Fed policy changes between 1997 and 2013.
The study, written by Gennaro Bernile, Jianfeng Hu and Yuehua Tang from Singapore Management University, called “Can information be locked up? Informed trading before macro-news announcements” revealed statistically significant price movements and imbalances in buy and sell orders that were consistent with the subsequent surprises in the Federal Reserve’s announcement of whether it was tightening or loosening its monetary policy.
The unexpected market moves took place before and during the period that journalists had information about the upcoming Fed policy announcements, but before they were officially released called the “lock up period”.
The authors analyzed whether the E-mini S&P 500 futures contract, E-mini Nasdaq 100 futures, the SPDR S&P 500 ETF, and the PowerShares QQQ ETF tracking the Nasdaq 100 index moved before the FOMC release.
What the researchers found was “robust evidence” that significant order imbalances that accurately predicted the post-release market reaction tended to arise in the E-mini S&P 500 futures market between 10 minutes and 20 minutes before the scheduled release of the FOMC’s policy statement.
In the 10 minutes prior to the release of the statement, E-minis rose on average 0.2% more on days when the announced policy decision was a surprise, compared with days when the decision was in line with the market consensus, the authors said.
The study concluded that the impact of early access to Fed policy decisions when the announcements were unexpected totaled roughly between $14 million and $256 million.
Lock Up Process
The Federal Open Market Committee (FOMC) regularly releases statements announcing the Fed’s decision about policy including where they are setting short-term interest rates, what their targets are for the money supply, and other actions to stimulate or reign in the economy like purchasing Treasury or mortgage-backed securities.
Historically, the Federal Research released a statement of the FOMC’s policy decision in the U.S. Treasury Department press room approximately 10 minutes before the official release time. This gave journalists from accredited news organizations time to write their stories. Once the embargo time was reached, journalists were allowed to submit their stories for publication.
Unfortunately, this process was not terribly strict. While journalists promised to respect the embargo, computer lines weren’t blocked enabling them to surreptitiously communicate with the outside.
Issues with the Fed’s process for releasing the FOMC policy statement came under attack after trading in gold futures and exchange-traded funds linked to gold on the New York and Chicago commodity exchanges took place within one millisecond of the 2 p.m. ET embargo time for the FOMC release on September 18th, 2013.
This prompted the Fed, starting with its FOMC policy statement release on Oct. 30th 2013, to tighten up its regulation of the lockup.
Under new procedures, journalists gather in a room at Fed headquarters in Washington. They are forbidden to carry phones into the lockup, and lines connecting their computers to the Internet are blocked.
Journalists are given the FOMC statement 20 minutes before its release to the public, enabling them to prepare their stories. When the embargo time is reached, lines of communications are opened and journalists are allowed to transmit their stories.
Other Government Releases Clean
The Singapore Management University study found no evidence that investors were getting early access to other US government releases, including the Bureau of Labor Statistics’ monthly employment, wholesale inflation, or consumer inflation reports. In addition, there didn’t appear to be any evidence that the Bureau of Economic Analysis’ quarterly GDP report was being leaked to certain investors.