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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Northern Ireland's election: Will Arlene Foster pay the price for a domestic scandal?

The wind is in Sinn Féin's sails. But both parties have to work together after the poll. 

Will voters use the forthcoming elections to the Northern Ireland assembly to punish ministerial incompetence?

After all, these elections are all about the Democratic Unionists’ Arlene Foster and her disastrous mishandling of the Renewable Heat Incentive scheme, the energy subsidy she previously introduced as enterprise minister without putting cost controls in place, thus racking-up a £500m liability for the Northern Ireland Executive.

Her refusal to stand aside as First Minister and allow an independent investigation triggered a sequence of events that collapsed the power-sharing executive that runs Northern Ireland, necessitating this poll.

The electorate offers its verdict on Thursday.

So far, there has been a predictable rhythm to the campaign. Cautious and insular, the parties have all been here before and know how to harvest their vote. Elections in Northern Ireland are effectively a race to see who can shore up their core the most, (made harder by the overall reduction in seats from 108 to 90 across 18 multi-member constituencies).

Foster knows she is fighting for her political life. Her woeful handling of the RHI scandal, exposed her severe limitations as a politician. Brittle and stubborn, she further damaged her reputation at the DUP’s manifesto launch by refusing to take any questions from journalists on the basis she had "man flu".

Her pitch was a sectarian "Project Fear" warning that Sinn Fein might overtake the DUP as the largest party and push for an early referendum on Irish unity. Sinn Féin president Gerry Adams joked after the launch on Twitter: "Just for the record, I didn't give Arlene the flu." 

Foster’s campaign might be ugly, but in Northern Ireland’s hyper-tribal polity, it could prove effective. If the DUP suffers a reversal, however, her colleagues may yet think twice about re-nominating her for First Minister/deputy First Minister.

Meanwhile, as Sinn Féin’s new "leader in the North" Michelle O’Neill finds herself in exactly the same situation as Foster was 12 months ago at the last assembly elections - taking over from a male predecessor who had been a mainstay of the political process for years.

O’Neill is so far proving formidable. She benefits from the fact the wind is blowing in Sinn Féin’s sails. After all, the reasons for this election - the DUP’s incompetence - will play well among republicans and nationalists. 

Sinn Féin’s pitch is therefore about ensuring "equality, respect and integrity", with O’Neill claiming this is "the most important election since the Good Friday Agreement". The Shinners are pushing for the strongest possible mandate in what O’Neill describes as the "short, sharp negotiation" that will take place after the elections. She says she doesn’t want a new agreement, "just the implementation of previous ones".

In terms of the other parties, Mike Nesbitt, a former television journalist turned leader of the Ulster Unionists, deserves credit for trying to appeal beyond the tribe. He has offered his second preference vote to the nationalist Social Democratic and Labour party. Tactically, he has to try something to dislodge the UUP from the political sediment.

Both the UUP and SDLP are essentially fighting for relevance in these elections. They constantly claim the electorate has had enough of the SF-DUP duopoly and wants change, it’s just that the voters never vote for it. 

Following Thursday’s results comes the hard bargaining, if the parties are to get power-sharing up and running again and avoid a period of direct rule from the Northern Ireland Office. Both Foster and O’Neill need to be seen to strike a hard bargain. Foster will be desperate to claim she is still in control of events. O’Neill, the newcomer, will want to show she is no pushover.

If she is smart, Foster will  push for an early restoration of the executive and try to put this mess behind her. If, on the other hand, there is a lengthy delay, the election could become a running sore. After all, as the DUP may yet have to be reminded, power-sharing lies at the heart of the Good Friday Agreement

Kevin Meagher is associate editor of Labour Uncut and a former special adviser at the Northern Ireland office.