Fed leak rumours shine spotlight on bigger problems with ‘media’ lock-ups

Government never intended to become part of the high-speed trading infrastructure, but it can’t extricate itself without alienating Wall Street

Lock-ups, like the one the Fed is now investigating for a leak, make no sense in the age of the internet. The Fed and other agencies that announce potentially market-moving data could far more easily release it on the web, as Google’s Executive Chairman Eric Schmidt argues they should in this interview. But this is unlikely to happen anytime soon due to the simple fact that lock-ups have, over the past few years, become part of the infrastructure for so-called high frequency trading or HFT as its known.

Wall Street, a major donor to both U.S. political parties, would go ballistic if it no longer had access to the lock-ups through special fibre optic lines and, as of late, microwave networks. Instead of the data travelling straight to the Street via so-called machine readable feeds that allow profitable trades to take place in milliseconds, hedge funds and traders would have to figure out a way to get the data from the internet so they could then trade on it. It might take seconds like it did in the past and this is something, the masters of the universe wouldn’t be prepared to live with.

As a result of this most recent Fed leak investigation, several other leak and lock-up stories this year, and various ongoing SEC and FBI investigations, we’re likely to see two things happen in the very near (but far longer than milliseconds away) future. One, expect to hear more and more that lock-ups — originally conceived  to ensure the public received clear information in a timely fashion — have become obsolete in this era of global communications. And two, prepare for Wall Street to push back and tell us there will be market chaos if lock-ups are done away with. Financiers will argue that such a change would make the system unfair and susceptible to the horrible vagaries of regular old internet connections.

Access to lock-ups is so important to the HFT crowd that over the past decade, several trading companies have set up their own “news agencies” (yes, those are scare quotes) to gain the coveted entry key. Chicago’s JED Capital funded Need to Know News and then sold it to the Deutsche Börse. The Montreal-based proprietary trader Vigilant Global (formerly Vigilant Futures) founded the now-defunct Canadian Economic Press (CEP News) and, as a result, received direct feeds from lock-ups in Ottawa, Washington, London and Frankfurt. A Slovakian firm, World Business Press Online, cropped up in Bratislava, and started attending lock-ups around the world. Then came Econolive, also know as Empire News, which appears to be an Israeli firm, but this can’t be confirmed because no one there will return phone calls and their reporters don’t have the foggiest idea who owns the company. And last but not least there’s Buffalo-based RTTNews which — unlike many of the aforementioned new players — has been around since early internet days. In recent years, it’s had a makeover, however, and it too is now an active lock-up attendee.

All this activity eventually attracted the interest of the FBI, but failed to result in any arrests or prosecutions. Apart from the U.S. Department of Labor’s decision to kick Need to Know News and RTTNews out of its lock-ups in the spring of 2012, everyone’s still attending Washington’s other lock-ups and many go to similar lock-ups in the UK, Germany and Canada.

According to anonymous but proven-to-be reliable sources, it was never clear that there was indeed any illegal leaking by the new “news agencies.” Despite the suspicion and investigations, no evidence of malfeasance was ever found. Multiple insiders, who did not want to give their names, said the new “news agencies” profited simply because they were both more nimble and more sophisticated than bigger, better established news operations, which made them significantly faster in the age of HFT.

“While I can’t say if any of these (new) news companies were cheating, I can say they were light years ahead technology wise over DJ, Reuters, Bloomberg, AP, etc,” said one source in an email.  “They built highly optimized networks to transfer this data through ultra low latency switches and lines that the other guys never thought of.  They also were optimized to this single rifle shot of data through a network where the big legacy guys were using systems/networks optimized for throughput and continuously publishing hundreds or thousands of stories simultaneously and continuously.”

Since the invasion of the small news agencies beginning in 2005,  the big players have mostly caught up and just about everyone now offers machine readable feeds (you program your computer with algorithms that allow trades to be carried out in the blink of an eye) and low latency (ultra high-speed) services.

Many of the traders associated with new “news agencies” are said to have their own microwave networks, which are supposedly faster than even the newest fibre optic lines. In a study released after reports of the September 18 Fed leak, the large trading firm Virtu Financial confirmed that certain companies receive their data via microwave radio signals, a topic that traders usually don’t mention in public.

In August of 2012, the Chicago Tribune reported:

These microwave networks require a dish every 30 miles or so and Federal Communications Commission approval. High-speed traders, however, try to cloak their routes in secrecy. FCC filings do not list the traders themselves but limited liability companies with such nondescript names as Webline Holdings.

For this reason, it was unusual to see Montreal’s Vigilant Global publicly named when it requested antennae permits in both the U.S. and Great Britain. According to a source, Vigilant, Virtu and Jump Trading are confirmed to have their own microwave networks. Other firms who may own them are Allston Trading, Tower Trading Group, which owns the mysterious Latour Trading, and Final, an Israeli company that is a top volume player on the CME.

While some traders have said that they think the ongoing investment in proprietary millisecond-shaving networks is a costly war of diminishing returns, others are not yet ready to lay down arms. Jump is supposed to have “bought a de-commisioned NATO telco tower in Belgium to secure the fastest London-to-Frankfurt route,” said the source.

The source added that any one of these trading companies might own and/or be (exclusive) clients of the smaller news agencies accessing lock-ups. This conflict-of-interest situation is a huge annoyance to the legacy news agencies, who don’t make multi-million dollar trades on the side and must earn their profits solely by providing news. They’ve tried on many occasions to have the new players booted out of the lock-ups and their press passes revoked, but these efforts have been foiled partly due to governmental bureaucratic inertia and partly due to haphazard media accreditation systems devised by press gallery members themselves.

The whole situation is further complicated by the fact that it’s not just Wall Street that would be in trouble if lock-ups were abolished; Bloomberg,Thomson Reuters and Dow Jones would be cut right out of their profitable middleman role, which would undermine their entire business model. Last year, when Statistics Canada attempted to put information on the web before it was released from lock-ups, it was immediately forced to back down. Reuters reported that it and other news organizations had made “strenuous representations” to StatsCan and the minister in charge to block the change.  StatsCan was supposed to come up with an alternative proposal shortly, but there’s been radio silence ever since.

As much as the internet makes it possible to do away with lock-ups, powerful vested interests won’t let go of the keys to the money-making chambers without a fight.