Fed Offers Wrong Response To Millisecond Heist

  • by , Featured Contributor, September 27, 2013
There’s a kerfuffle going on. Here’s how I understand it: last week, the Federal Reserve announced that it would “not be tapering its bond buying program.” This information was released at 2 p.m. precisely, from the Reserve’s headquarters in Washington, D.C. This is known as “market-moving information,” in that it will have a significant effect on stock and bond markets, and, as such, its release is tightly controlled.

Milliseconds after the announcement, trades were initiated in response. But some trades seemed to happen too quickly. Specifically, trading started in Chicago just 2-3 milliseconds after the announcement -- despite the fact that information ought to take 7 milliseconds to get there from DC. So how did the Chicago traders get access to the information? Nobody knows.

The Fed, of course, is investigating. You don’t just yoink 4-5 milliseconds off the central banking system of these United States of America without incurring a bit of wrath. But they’re investigating the wrong thing. The problem isn’t how the folks in Chicago got access to the info; it’s how a difference of 4-5 milliseconds can produce such an advantage. It’s the fact that the Fed’s system for disseminating information means that if you’re in D.C., you win -- New York, a little less; Chicago, a little less again; California, you lose.



Markets have always offered an unfair advantage to those who could get there first, but the ability to “get there first” has become the exclusive domain of algorithms, machines, dedicated fiber cables laid out along the shortest possible trajectory. Decisions have to be made at the speed of light, and humans can’t possibly compete.

There’s a fair amount of discussion about these issues in the media. Back in 2011, Kevin Slavin gave a TED talk on the power and danger of the algorithms that shape our world, focusing specifically on those that control the financial markets:

"…what could go wrong? What could go wrong is that a year ago, nine percent of the entire market just disappears in five minutes, and they called it the Flash Crash of 2:45. All of a sudden, nine percent just goes away, and nobody to this day can even agree on what happened because nobody ordered it, nobody asked for it. Nobody had any control over what was actually happening… And that's the thing, is that we're writing things, we're writing these things that we can no longer read. And we've rendered something illegible, and we've lost the sense of what's actually happening in this world that we've made."

And at the beginning of this year, Nick Baumann wrote a piece for Mother Jones called ”Too Fast to Fail: Is High-Speed Trading the Next Wall Street Disaster?” In it, he describes the challenge:

"Despite efforts at reform, today's markets are wilder, less transparent, and, most importantly, faster than ever before. Stock exchanges can now execute trades in less than a half a millionth of a second—more than a million times faster than the human mind can make a decision. Financial firms deploy sophisticated algorithms to battle for fractions of a cent… these programs exploit minute movements and long-term patterns in the markets, buying a stock at $1.00 and selling it at $1.0001, for example. Do this 10,000 times a second and the proceeds add up."

Baumann outlines a few potential solutions designed to reduce high-frequency trading and churn: a minimum quote life, or a tax on each trade. In the case of the Fed’s leaked information, the answer could be much simpler: issue the information simultaneously from all 12 Federal Reserve Banks, including the one in Chicago.

One thing is clear, though: when we’re dealing with milliseconds and microseconds, operating at speeds that eliminate the possibility of human participation, it’s time to reevaluate. There’s no going back on machine trading in the financial markets. But there is such a thing as going too far.

7 comments about "Fed Offers Wrong Response To Millisecond Heist ".
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  1. Christopher Taylor from Successful Workpace, September 27, 2013 at 11:45 a.m.

    We're absolutely dealing with fractions of a second and that's unlikely to change. It's a bit of a spy vs. spy world (think of Mad Magazine) as each player tries to find new ways to move data faster. It won't get better any time will get more and more challenging.

    The number of times data is routed from machine to machine is called a 'hop' and the big bets now are on eliminating those hops. Putting messaging software on Internet switches, using purpose-built appliances, and other tricks are the latest moves to shave even the smallest amounts of time.

  2. Frank Maggio from Maggio Media, LLC, September 27, 2013 at 1:14 p.m.

    This is the tip of the proverbial iceberg. We are drawn to focus on these details while a much larger and toxic secret looms below the surface. I can assure you with great certainty that the impact of usury - interest charged for the use of money that is created out of thin air - is far more lethal to our planet, then microseconds of advantage to those who are legally gambling on the responses of gamblers. That said, I LOVE the focus on finance and unfairness - keep up the investigation.

  3. Paula Lynn from Who Else Unlimited, September 27, 2013 at 6:25 p.m.

    Kalia, can't they find a great position for you in the treasury or something ? Dead on. A tax would be only passed on to the little investors and pensions funds and mutuals et al. Slowing it down legally is the only way to manage (can't see that happening due to the powers and controls) however Frank's point is downright right and scary. The creation of the Euro was based on what Frank describes and the cost of money valuations and exchanges, not to make it easier for the consumer.

  4. Frank Maggio from Maggio Media, LLC, September 27, 2013 at 8:14 p.m.

    There are a few details concerning central banking that we fail to recognize and which are obfuscated by academia and media - the source and nature of "currency," and the mid and long term implications of usury on those who use this currency. The usury virus is embedded within it at its genesis, and like a parasite, it destroys the value of the currency over time, while giving the illusion that the currency name (dollar) is the same as its value (worth a dollar). It's truly a most diabolical alchemy!

  5. Kaila Colbin from Boma Global, September 29, 2013 at 3:07 a.m.

    Thanks, guys. @Frank, you may enjoy this blog by my friend Raf Manji: He's got a lot to say about the debt-based monetary system and has forgotten more on the topic than I will ever know.

  6. Frank Maggio from Maggio Media, LLC, September 29, 2013 at 7:39 a.m.

    Brilliant. Monetary dialysis!

    We are awake. Who will do more than read? Who will lead?

  7. Kaila Colbin from Boma Global, September 29, 2013 at 1:25 p.m.

    Raf is leading... He's running for City Council locally, and has a good chance of getting in. How about you? :)

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