What a difference seven milliseconds makes.
That is the amount of time it takes information to travel from the Federal Reserve bank to Chicago’s trading firms. That is light-speed. One week ago today, the Fed announced that it, in order to continue pumping cash into the U.S. economy, would not cut down on buying bonds.
That, of course, is extremely important news if you’re a bond trader -- or for that matter if you’re an anything trader. Stocks, gold, currency. There isn’t a market that would remain unaffected by the Fed’s news.
Futures traders in Chicago’s commodities exchange would be especially hungry to get the news early.
And they did. Seven milliseconds early. Someone made a huge gold futures buy -- that is, a bet on the future price of gold -- no more than two milliseconds after 2 pm last Wednesday, when the Fed made its announcement -- an announcement that sent the price of gold as well as stocks and bonds zooming upward.
But what about that seven millisecond delay? In trading time, seven milliseconds is huge. Market analysts say that $600 million in deals could go down in that time. How did the gold traders in Chicago get their hands on the Fed’s announcement early?
As one columnist for the Washington Post points out, there are three possibilities: 1) Someone made an incredibly lucky guess. 2) Einstein’s theory of relativity was disproved because the information traveled faster than the speed of light. Or 3) someone leaked the story.
"The very first thought I had when I looked at this closely was this is a low latency service," Eric Hunsader of the market analysing firm Nanex told the business news network CNBC. "We have just very recently looked closely at some of these low latency releases and seen that they are indeed at the same exact millisecond. We have immediate history behind it."
A “low latency service” is news organization that sends the latest market news directly into trading firm computers at millisecond-level speed. The computers are programmed to take the incoming data and make trades based on the info, also at near-light speed.
In other words, option 3. Somebody leaked it.
Media organizations receives the Fed’s announcement a few minutes early, but their representatives were locked in a room -- literally, locked in a room -- with no communication allowed until precisely 2 pm.
So who figured out how to get the news out early?
Investigators are looking into it. But as of now, the mystery of the missing milliseconds remains just that. A mystery.
SOURCES: Washington Post, CNBC, Mother Jones