High-Speed Traders Beat Laws Of Physics, Steal 5 Milliseconds From US Federal Reserve

High-Speed Traders Beat Laws Of Physics, Steal 5 Milliseconds From US Federal Reserve

A week ago, the US Federal Reserve announced that it would be buying fewer bonds, a move that sent the bond market into a frenzied orgy of bond loading and unloading. So what, right? The markets quiver whenever the Fed does anything. Well, weirdly, it appears the information got out five milliseconds early. Which wouldn’t matter, except that those tiny fractions of seconds are a lifetime to the high-speed trading computers that run our markets.

So here’s what happened. Somehow, somebody in Chicago got the news early. Usually, it takes seven milliseconds for the news to travel from where it’s sent out in New York to Chicago. But some traders in midwest appear to have cheated physics, because they started trading 2-3 milliseconds after the news hit the wire, giving them an ever-so-slight theoretical advantage.

Five milliseconds is nothing. Unless you’re thinking in terms of clock speeds. In cycles per second, it’s an eternity.

Traders reacting to news from the US Federal Reserve don’t even have time to think. They don’t have to. Instead, pre-programmed, high-frequency trading systems react for them the instant news hits, buying and selling and hedging and gambling faster than the speed of light. They’re all hoping to gain the tiniest edge on the market. So, in fact, five milliseconds could mean everything.

The simplest explanation for this particular situation is that somebody got the news early. Reporters and analysts are given the news in advance, but they’re all bound by an embargo and following the Federal Reserve’s strict lock-up procedure. They’re literally locked in a room and forbidden from communicating with the outside world. According to CNBC though, these lock-up procedures are under investigation, as it seems it’s not clear whether communicating with the outside world includes preemptively loading information into a server.

An inadvertently broken embargo might just explain the five-millisecond advantage. Because even the fastest, low-latency trading system in the world can’t beat the laws of physics, right? RIGHT?! [CNBC via MoJo]