400ms of insider information

High frequency (insider) trading.

Nanex Research has found what looks like insider trading in the natural gas market prior to the release of the US Energy Information Administration's natural gas report. The quirk is that that insider trading happened just 400 milliseconds before the report was released:

On January 31, 2013, approximately 400 milliseconds before the official release of the EIA Natural Gas Report, trading activity exploded in Natural Gas Futures and ETFs such as UGZ, UNG and BOIL. Now that the Feds have stated (as claimed by a recent WSJ article) that they don't think there is merit in prosecuting people who get news information earlier than others by milliseconds, is it any wonder?

It is worth pointing out that the EIA Natural Gas Report comes out weekly (every Thursday at 10:30) and the market reacts within a few milliseconds. This is because the report centers on one number which makes it easy for machines to process and take action.

As Nanex points out, a recent SEC investigation into whether some news organisations gave investors access to economic data "a fraction of a second before the official release time" resulted in no charges being brought. At the time, it was speculated that there were two reasons for that: the first being that such a prosecution would stretch the definition of insider trading, and the second being that it was difficult to conceive of such a head start leading to any measurable advantage.

Insider trading is typically defined as acting on information which has not yet been made public (the legal definitions are far more complex than that, but that's largely owing to the byzantine nature of financial regulation). The problem with prosecuting news organisations for that is that typically, information hitting the newswires is the definition of it being made public. This has caused problems before: last year, Netflix's CEO faced trouble from the regulators for announcing on his Facebook page that the company had had over a billion cumulative viewing hours in one month. Facebook is not, apparently, "public" enough for the SEC.

If one of the newswires publishes information a fraction of a second before the others, that might constitute a broken embargo, or an undesirable leak; but it probably doesn't constitute insider trading, because the very act of publishing made formerly private information public (even the etymology's the same! "Publish" literally means "to make public").

But the second argument was that, in the seconds leading up to a potentially market-moving data release, trading slowed down and waited for the news. After all, there's no one — not even an algorithm — which isn't going to think a trade a fraction of a second before a data release offered at a markedly different price isn't a tiny bit suspicious.

That argument might not hold as much water if Nanex's data is accurate, though. It shows a definite collapse in the price of a natural gas exchange-traded fund (ETF) over the course of a hundred milliseconds. A fall of one per cent — even one which is then followed by an even greater fall once the actual data is released — is not to be sniffed at.

It's not clear who the counterparties in these trades were — who, that is, was convinced to make trades milliseconds before a major data release — but it's pretty likely that they were also algobots. Insofar as this represents a transfer of income from one set of computer-owners to another set, it's not the most concerning news. But it does raise further questions about how the market for information is shaped in the near future, and whether the simple dichotomy between public and not public information can hold up in that new world.

"UNG showing trades color coded by exchange between 10:29:59 and 10:30:04." Chart: Nanex Research

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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David Cameron's speech: a hymn to liberalism from a liberated PM

The Prime Minister spoke with the confidence of a man who finally has a full mandate for his approach. 

At every one of his previous nine Conservative conference speeches, David Cameron has had to confront the doubters. Those Tories who rejected his modernisation of the party from the start. Those who judged it to have failed when he fell short of a majority in 2010. Those, including many in his own party, who doubted that he could improve on this performance in 2015. Today, rather than confronting the doubters, he was able to greet the grateful. As the first majority Conservative prime minister for 18 years, he rightly savoured his moment. "Why did all the pollsters and pundits get it so wrong?" he asked. "Because, fundamentally, they didn't understand the people who make up our country. The vast majority of people aren't obsessives, arguing at the extremes of the debate. Let me put it as simply as I can: Britain and Twitter are not the same thing." Labour should pin that line to its profile. 

With a full mandate for his approach, Cameron went on to deliver his most unashamedly liberal speech to date. Early on in his address, he spoke with pride of how "social justice, equality for gay people, tackling climate change, and helping the world's poorest" were now "at the centre of the Conservative Party's mission". A lengthy section on diversity, lamenting how "people with white-sounding names are nearly twice as likely to get call backs for jobs than people with ethnic-sounding names", was greeted with a standing ovation. Proof, if needed, of how Cameron has changed his party beyond recognition. The former special adviser to Michael Howard, who avowed that "prison works", told his audience that prison too often did not. "The system is still not working ... We have got to get away from the sterile lock-em-up or let-em-out debate, and get smart about this." From now on, he declared, the system, would "treat their [prisoners'] problems, educate them, put them to work." 

There were, of course, oversights and lacuna. Cameron reaffirmed his commitment to a budget surplus but glossed over the unprecedented, and many believe undeliverable, that will be required to achieve it (and which may fail to do so). He hailed the new "national living wage" with no mention of the tax credit cuts that will leave the same "strivers" worse off. His "affordable" starter homes will be unaffordable for average-earning families in 58 per cent of local areas. But it is a mark of Cameron's political abilities that it was easy to forget much of this as he spoke. Like George Osborne, he deftly appropriated the language of the left ("social justice", "opportunity", "diversity", "equality") to describe the policies of the right. Cameron is on a mission to claim ownership of almost every concept associated with Labour. The opposition should not sleep easily as he does so. 

There was little mention of Labour in the speech, and no mention of Jeremy Corbyn by name. But when the attack came, it was ruthlessly delivered. "Thousands of words have been delivered about the new Labour leader. But you only really need to know one thing: he thinks the death of Osama bin Laden was a 'tragedy'". The description of Corbyn as the "new Labour leader" shows the Tories' ambition to permanently contaminate the party, rather than merely the man.

There are plenty of potential landmines ahead for Cameron. The comically lukewarm applause for his defence of EU membership was a reminder of how divided his party is on this issue. But today, he spoke as a man liberated. Liberated by winning a majority. Liberated by not having to fight an election again. Like a second-term US president, he was able to speak of how he was entering "the second half of my time in this job". Tributes to Osborne (the "Iron Chancellor) and Boris Johnson (greeted with a remarkable standing ovation) alluded to the contest to come. But whoever succeeds him can be confident of assuming a party in good health - and more at ease with the modern world than many ever thought possible. 

George Eaton is political editor of the New Statesman.