“This morning, in 15 milliseconds, 28 million dollars changed hands in the stock market before data was made available to other investors. That space of time is less than the blinking of one’s eye. The report was on CNBC, I am following the markets due to what is happening in Japan. This is a new level of high frequency trading that ought to be outlawed, no wonder the individual investor has no chance…………”)
– Unraveling Monday’s Early Data Release to Traders (CNBC, June 5, 2013):
Monday’s market-moving ISM manufacturing data was inadvertently sent early by Thomson Reuters to a select group of high-frequency traders, many of whom immediately traded on the information before it was available to the wider market, CNBC has learned.
The ISM manufacturing data, which on Monday came in disappointingly low and sent traders scrambling to sell shares, was set to be released at precisely 10 a.m. by the Institute for Supply Management, a private entity that puts out the data each month.
But analysts at Nanex LLC, a Chicago-area analysis firm spotted a sharp downward market reaction just before 10 a.m., setting up a mystery: How did some traders appear to know the data would disappoint the market before the scheduled release time?
Nanex shared its data with CNBC, showing sharp downward moves in the SPY ETF, which often serves as a broad way for traders to bet on the overall direction of the market.
Nanex showed a spike in SPY trading volume 15 milliseconds before 10 a.m., and a corresponding move down in the price ahead of the official release time of the information as computer trading algorithms processed the data and executed trades.
That downward spike was warranted on Monday: The disappointing report showed that economic activity in manufacturing contracted in May for the first time since November 2012.
Fifteen milliseconds may not seem like a significant amount of time—it is literally shorter than a human blink of an eye, which takes 300 to 400 milliseconds. But in the age of super-high-speed computerized trading, Wall Street firms need less than a millisecond to execute a trade.
The Nanex data show as many as 30,000 shares of SPY traded in 1 millisecond during the course of the 15 millisecond gap. In addition, Nanex said it saw downward moves in 369 stocks during the 15 milliseconds.
All told, Nanex calculated that $28 million worth of shares were exchanged in a short time before the official release of the ISM data.
ISM, which puts out the data, told CNBC on Monday that it believed the data were not released early over its normal distribution method, PR Newswire. In a statement, ISM Senior Associate Rose Marie Goupil said, “ISM’s data was not released early today, nor is it ever released before 10:00 a.m. Eastern time.”
But ISM also explained that in 2012 it entered into an exclusive agreement with Thomson Reuters to offer “a low-latency economic data feed of the data.”
This super-high-speed computerized service, ISM said, included just the data contained in the report and not its full text, which makes it easier for computer trading programs to process the data quickly.
“This feed,” ISM wrote, “offers subscriptions to low-latency programmatic traders worldwide who have the proper equipment and trading algorithms.”
Thomson Reuters is a news service that calls itself “the world’s leading source of intelligent information for businesses and professionals.” On Wednesday, Thomson Reuters released a statement to CNBC confirming that it had, in fact, released the data early.
“We have identified that there was a minor clock synchronization issue Monday causing this data to be released 15 milliseconds early,” the company said in statement. “We are taking measures to minimize clock synchronization issues in order to ensure that release of the data is as close as possible to the official release time of 10 am ET.”
Thomson Reuters said that the manufacturing data are just one of more than 1,300 economic indicators available on its high-speed news feed direct service. The company said it would not disclose how much it pays ISM for early access to the data or what it charges subscribers for its high-speed service.
A source familiar with the situation characterized Monday’s incident as a “minor, isolated, clock synchronization issue,” and said Thomson Reuters is “taking measures to make sure that synchronization is completely up to speed in the future.”
ISM also declined to spell out its contract terms with Thomson Reuters. And when informed that Thomson Reuters had indeed sent the data early, ISM responded, “ISM never releases the data for the ISM Report on Business prior to 10:00 a.m. ET.”
Eric Hunsader, the software developer at Nanex who discovered the early trading, said he’s not satisfied with the explanation that Monday’s incident was a minor clock synchronization problem.
“How is it we live in a world of microsecond trading where a news agency sells premium advanced news data using a clock with an accuracy of plus or minus 15000 microseconds,” he asked. “The problem with releasing data early is that it adds uncertainty to the market. Markets abhor uncertainty.”
The super-fast Thomson Reuters feed is not the only way ISM transmits its figures. ISM also distributes them to the broader non-high-frequency trading market via PRNewswire, a press release service.
David Korvath, a spokesman for PRNewswire, said its service is not calibrated to the millisecond. To build in a cushion, he said, information set for a 10 a.m. release would be put out 1 second after 10. “We want to make sure we’re covering ourselves and the client,” he said. “We set it to the second.”