Politics

News organizations respond to Fed lockup questions

The Federal Reserve
Jay Mallin | Bloomberg | Getty Images

The Federal Reserve says it is contacting news organizations to discuss the rules surrounding lock up procedures and the release of market moving information from the Federal Reserve's headquarters in Washington.

But the leading expert on millisecond level trading says he is focusing his attention on a certain type of news organization – those that offer so-called "low latency" services to feed market moving data at high speeds directly into computerized trading systems.

Eric Hunsader, founder of the market analysis firm Nanex, says that's because he saw simultaneous reactions to the Fed's announcement last week in trading in New York and Chicago. That would be theoretically impossible if the information was released from the Fed's headquarters in Washington. In theory, the trading reaction should have begun in New York several milliseconds before it began in Chicago, because information takes several more milliseconds to travel the longer distance.

"The very first thought I had when I looked at this closely was this is a low latency service," Hunsader said. "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."

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Working off of a list provided by the Fed of news organizations participating in last week's lock up, CNBC contacted each of the news organizations that offer low latency data services to ask whether they transmitted any data out of the Fed's lockup room. A key question is whether or not any organization transmitted information out of the lockup room and into its own computer system before 2 p.m. If that was done, the data could have been moved to computer servers near Chicago before 2 p.m. and publicly released the information from there at precisely 2 p.m. – enabling subscribers of that data service to get the information milliseconds before others in Chicago relying on transmissions from the Federal Reserve in Washington to arrive.

It is not clear whether that would violate the Fed's rules. The Federal Reserve declined to tell CNBC whether or not it would be a violation of their rules to transmit information out of the lockup room before 2 p.m., if that information was pre-loaded into servers in Chicago for release at 2 p.m.

A spokesperson for Dow Jones declined to say whether or not the organization transmitted data out of the lock up room before 2 pm., instead emailed a statement to CNBC saying, "We will continue to work with the Fed cooperatively to report in full accordance with their desires."

Similarly, a Thomson Reuters spokesperson emailed a statement to CNBC saying, "We distributed the news per the Fed's embargo process. We did not release prior to the 2pm embargo." The spokesperson also declined to answer questions about whether the organization transmitted information out of the lock up room before 2 p.m.

Two other organizations said that they did not transmit data outside the lockup room before the deadline. A spokesperson from Bloomberg News said that organization did not transmit information before 2 p.m. And Michael Scarchilli, Editor-in-Chief of the publication The Bond Buyer, also said his organization did not transmit information before the deadline.

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Fed probes embargoed info access
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Fed probes embargoed info access

CNBC has contacted one other organization that operates a low-latency service and attended the lockup, Market News International, which is owned by the Deutsche Borse Group. A spokesperson for that organization said it would provide a detailed response as soon as Wednesday.

Despite the Fed's lack of clarity about the specific rules, its staffers took a number of precautions inside the lock up room last week designed to prevent the data from leaving the building early. In advance of the release of the market moving decision, Federal Reserve officials followed a standard procedure to choreograph a tightly planned embargo operation that gave reporters advance copies of the Fed's decision.

Inside a room on the top floor of the William McChesney Martin, Jr. building, Fed officials instructed reporters not to send information about that decision to the outside world before precisely 2 p.m. as measured by the national atomic clock in Colorado.

The doors were locked at 1:45 p.m., and Fed staffers handed out copies of the statement at 1:50 p.m., allowing reporters a few minutes to digest the complicated document before reporting on its contents. At 1:58 p.m. television reporters were escorted out of the room to a balcony where cameras had been prepositioned. The Fed's security rules dictated that television reporters were not allowed to speak before precisely 2 p.m. Print reporters were told they were allowed to open a phone line to their editors at headquarters offices a few moments in advance of the hour, but not allowed to interact with people on the other end of the line until exactly two p.m.

On top of those precautions, every media person entering the lockup – including two employees of CNBC -- was required to sign an agreement that read: "I understand that I may make no public use of the documents distributed by Federal Reserve Board (FRB) staff or the information contained therein, including broadcasting, posting on the Internet or other dissemination, until the time the FRB has set for their public release."

All of the security precautions were taken to prevent the details of the Fed's decision from leaving the building before the precise deadline – to make sure that editors, technicians, producers and even computer techs in media offices all over the country could not learn of the decision ahead of time.

Financial markets reacted to the Fed's announcement last week that it would continue to stimulate the US economy at the speed of light, pushing stocks dramatically higher in just moments. But it looks like the speed of light just wasn't fast enough for somebody: Some traders in Chicago appear to have had access to the Fed's decision before anyone else in the Windy City.

According to trading data reviewed by CNBC, they began buying in Chicago-traded assets just before others in that city could have learned of the decision if the information traveled from the Federal Reserve building in Washington. By one estimate, as much as $600 million dollars in assets changed hands in the milliseconds before most other traders in Chicago could learn of the Fed's September surprise – a sharp contrast to the very low volume of trading ahead of the Fed's decision.

Eric Hunsader, founder of the market analysis firm Nanex, first spotted the unusual trading pattern and alerted CNBC to it.

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It's not exactly clear how the information got to Chicago markets so quickly. But the Federal Reserve is concerned enough about the unusual event that it has begun discussions with news organizations. In response to specific questions about the unusual trading activity, the Fed released a statement to CNBC saying, "We will be conducting follow-up conversations with news organizations to ensure our procedures are completely understood."

And, the Fed said, "As is generally the case with other releases of market-sensitive information by government agencies, news organizations receiving embargoed information from the Federal Reserve agree in writing to make no public use of the information until the time set for its release." A Federal Reserve spokesman declined to name the organizations it is in discussions with. The spokesman did not respond on the record when asked whether any of the organizations broke the Fed's rules.

—By CNBC's Eamon Javers. Follow him on Twitter: