The Federal Reserve is contacting news organizations regarding information lock up procedure, essentially confirming recent suspicions that the decision not to taper was leaked by some members of the press.

Federal Reserve Fed

There is no way for trading algorithms in Chicago and New York

Suspicions started when Nanex showed that there was an instantaneous reaction from traders when the news was released. Because of the extra distance, there is no way for trading algorithms in Chicago and New York to react at exactly the same moment. There should be at least a couple millisecond delay between the two markets. The immediate suspicion was that someone had leaked the information internally so that it could be released in a more uniform manner.

“The very first thought I had when I looked at this closely was this is a low latency service,” said Nanex founder Eric Hunsader, Eamon Javers of CNBC reports. “We have just very recently looked closely at some of these low latency releases and seen that they are indeed at the same exact millisecond. We have immediate history behind it.”

The Fed releases information to reporters ahead of its official announcement, but it doesn’t allow them to record anything or interact with colleagues until exactly 2pm, so it seems like transmitting data via a low latency service would also break the rules. But when Javers contacted the Fed, they wouldn’t confirm or deny if that was true.

Fed is giving itself room to act like everything is fine

Dow Jones, Thomson Reuters, and Market News International have not denied transmitting the information out of the room before 2pm. No other explanation for how the information could have gotten to Chicago so quickly has even been offered, so it’s clear that someone cheated (though the Fed is giving itself room to act like everything is fine).

The incentive for news companies is clear – algo trading needs information as quickly as possible, and news organizations that can provide it a few milliseconds faster have a clear competitive advantage when selling subscriptions. And while the transmissions violate the spirit of the information embargo, it might be true that there is no specific rule prohibiting what just happened.

The Fed puts a stop to the practice now

The danger is that information released can be intercepted, giving one side an enormous advantage in the market. With so much money at stake, it will eventually happen unless the Fed puts a stop to the practice now.