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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Theresa May's U-Turn may have just traded one problem for another

The problems of the policy have been moved, not eradicated. 

That didn’t take long. Theresa May has U-Turned on her plan to make people personally liable for the costs of social care until they have just £100,000 worth of assets, including property, left.

As the average home is valued at £317,000, in practice, that meant that most property owners would have to remortgage their house in order to pay for the cost of their social care. That upwards of 75 per cent of baby boomers – the largest group in the UK, both in terms of raw numbers and their higher tendency to vote – own their homes made the proposal politically toxic.

(The political pain is more acute when you remember that, on the whole, the properties owned by the elderly are worth more than those owned by the young. Why? Because most first-time buyers purchase small flats and most retirees are in large family homes.)

The proposal would have meant that while people who in old age fall foul of long-term degenerative illnesses like Alzheimers would in practice face an inheritance tax threshold of £100,000, people who die suddenly would face one of £1m, ten times higher than that paid by those requiring longer-term care. Small wonder the proposal was swiftly dubbed a “dementia tax”.

The Conservatives are now proposing “an absolute limit on the amount people have to pay for their care costs”. The actual amount is TBD, and will be the subject of a consultation should the Tories win the election. May went further, laying out the following guarantees:

“We are proposing the right funding model for social care.  We will make sure nobody has to sell their family home to pay for care.  We will make sure there’s an absolute limit on what people need to pay. And you will never have to go below £100,000 of your savings, so you will always have something to pass on to your family.”

There are a couple of problems here. The proposed policy already had a cap of sorts –on the amount you were allowed to have left over from meeting your own care costs, ie, under £100,000. Although the system – effectively an inheritance tax by lottery – displeased practically everyone and spooked elderly voters, it was at least progressive, in that the lottery was paid by people with assets above £100,000.

Under the new proposal, the lottery remains in place – if you die quickly or don’t require expensive social care, you get to keep all your assets, large or small – but the losers are the poorest pensioners. (Put simply, if there is a cap on costs at £25,000, then people with assets below that in value will see them swallowed up, but people with assets above that value will have them protected.)  That is compounded still further if home-owners are allowed to retain their homes.

So it’s still a dementia tax – it’s just a regressive dementia tax.

It also means that the Conservatives have traded going into the election’s final weeks facing accusations that they will force people to sell their own homes for going into the election facing questions over what a “reasonable” cap on care costs is, and you don’t have to be very imaginative to see how that could cause them trouble.

They’ve U-Turned alright, but they may simply have swerved away from one collision into another.  

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.

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