Researchers in Singapore say millions of dollars in profit was generated illegally by traders in the United States who took advantage of privileged Federal Reserve policy decisions disclosed to them before becoming publicly available.
According to that study, “robust evidence” exists suggesting that traders who knew in advance about Fed rate announcements traded during an embargo period, unlawfully benefiting by cutting those deals at the most opportune moment possible and in turn pocketing upwards of $256 million during a 16-year span.
Price movements between September 1997 and June 2013 noted by the researchers were “statistically significant and in the direction of the subsequent policy surprise,” Gennaro Bernile, Jianfeng Hu and Yuehua Tang wrote in their paper published out of Singapore Management University and first reported on Tuesday this week by BusinessWeek journalist Peter Coy.
Those buying and selling orders, Coy wrote, occurred mere minutes before Fed announcements were made official, but after members of the media were provided with details.
In October 2013, the Fed changed the rules applying to that media blackout “to better protect the information against premature release,” central bank spokesman Joe Pavel told the Los Angeles Times. Prior to then, journalists were given details about Fed announcements 10 minutes in advance and were expected to respect an embargo that prohibited them from breaking the news until cleared.
Since October, however, journalists have been provided those details 20 minutes early — on condition that they stay in a lockup room where cell phones aren’t allowed and internet access is blocked off.
“We review our processes and controls on an ongoing basis and make adjustments as necessary to address any issues,” Pavel told the Times.
According to the SMU researchers, however, the Fed’s late-2013 decision may have come too little too late.
"Consistent with information leakage, we find robust evidence of informed trading during lockup periods ahead of the Federal Open Market Committee (FOMC) monetary policy announcements," they claim in the study, entitled "Can information be locked up? Informed trading before macro-news announcements."
“Back-of-the-envelope calculations indicate that the aggregate dollar profits … range between $14 [million] and $256 million across the four markets that we examine,” the report reads. The four markets include 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, CNBC reported.
"Our analysis informs the ongoing policy debate surrounding lockup practices by testing whether macro-news lockups are associated with informed trading, consistent with information leakage," the researchers wrote. "Our results raise serious questions about the appropriateness of FOMC policy announcements' embargoes, either because information may directly leak from the news media with pre-release access or from other FOMC insiders with incentives to mimic such behavior."