Several US Eco Data Leaked To Some Traders Up To 30 Minutes In Advance - ECB Research
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The following are excerpts from a working paper published Monday authored by the research staff of the European Central Bank that tentatively suggests several U.S. macroeconomic reports are known by some traders as much as 30 minutes in advance (The full working paper is available at https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1901.en.pdf)::
Macroeconomic indicators play an important role in business cycle forecasting and are closely watched by financial markets. Some of these indicators appear to influence financial market prices even ahead of their official release time. This paper examines the prevalence of pre-announcement price drift in U.S. stock and bond markets and looks for possible explanations.
We study the impact of announcements on second-by-second E-mini S&P 500 stock index and 10-year Treasury note futures from January 2008 to March 2014. The study is based on 21 market-moving announcements among a sample of 30 U.S. macroeconomic announcements. Eleven out of these 21 announcements exhibit some pre-announcement price drift in the "correct" direction, i.e., in the direction of the price change consistent with the announcement surprise. For seven of these announcements the drift is substantial. Prices start to move about 30 minutes before the official release time, and this pre-announcement price move accounts on average for about a half of the total price adjustment.
These facts are uncovered by an outlier-robust procedure (MM weighted least squares), but are similarly striking in cumulative average return graphs and order flow imbalances. The paper shows that these results are robust to controlling for, among others, outliers, data snooping, nearby announcements and the choice of the event window length. Extending the sample period back to 2003 with minute-by-minute data reveals both a higher announcement impact and a stronger pre-announcement drift since 2008, especially in the S&P E-mini futures market. Based on a back-of-the-envelope calculation, we estimate that since 2008 in the S&P E-mini futures market alone the profits associated with trading prior to the official announcement release time have amounted to about 20 million USD per year.
The late start of pre-release price drift, which becomes significant only about 30 minutes before the official release time, reveals an interesting property of prevalent trading strategies. Assuming that informed traders possess their informational advantage already more than 30 minutes ahead of the release, the question arises why they wait with trading on their knowledge until shortly before the release time. A possible explanation is that trading close to the release time minimizes the exposure to other risks that are unrelated to macroeconomic announcements.
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We use second-by-second E-mini S&P 500 stock index and 10-year Treasury note futures data from January 2008 to March 2014 to analyze the impact of 30 U.S. macroeconomic announcements that previous studies and financial press consider most important. Eleven out of the 21 announcements that move markets exhibit some pre-announcement price drift in the "correct" direction, i.e., in the direction of the price change predicted by the announcement surprise. For seven of these announcements the drift is substantial. Prices start to move about 30 minutes before the official release time, and this pre-announcement price move accounts on average for about a half of the total price adjustment.
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The U.S. macroeconomic data prepared by government agencies is generally considered closely guarded with strict measures aimed at preventing premature dissemination. However, some private data providers have been known to release information to exclusive groups of subscribers before making it available to the public. These documented early releases are in the range of seconds, i.e., shorter than our pre-announcement drift interval, but the fact that early releases exist renders earlier data leakage a possibility worth exploring. In our analysis, announcements released by organizations that are not subject to PFEI guidelines exhibit a stronger pre-announcement drift.
With respect to release procedures, we are interested in the safeguards against premature dissemination. Surprisingly, many organizations do not have this information readily available on their websites. We conducted an extensive phone and email survey of the organizations in our sample. The release procedures fall into one of three categories. The first category involves posting the announcement on the organization's website at the official release time, so that all market participants can access the information at the same time. The second category involves pre-releasing the information to selected journalists in "lock-up rooms" adding a risk of leakage if the lock-up is imperfectly guarded. The third category, previously not documented in academic literature, involves an unusual pre-release procedure used in three announcements: Instead of being pre-released in lock-up rooms, these announcements are electronically transmitted to journalists who are asked not to share the information with others. Three announcements in this category are among the seven announcements with strong drift.
While these findings are suggestive, a conclusion that leakage causes pre-announcement drift is premature for two reasons. First, the small number of market-moving announcements precludes proving leakage based on public trading data alone. Second, other possible causes of informed trading exist. In particular, we consider information generated by informed investors and impounded into prices through their trading (French & Roll, 1986). Some traders may be able to collect proprietary information or analyze public information in a superior way to forecast announcements better than other traders. This knowledge can then be utilized to trade in the "correct" direction before announcements. We show ECB Working Paper 1901, May 2016 7 that proprietary information permits forecasting announcement surprises in some cases. Based on an extensive forecasting exercise with public information, we are indeed able to forecast surprises of some announcement variables. However, we find no relation between the forecastability of the surprise and the pre-announcement drift.
While the overall evidence points to leakage and proprietary data collection as the most likely sources of pre-announcement drift, reprocessing of public information may also contribute to some extent. Further research is needed to definitively determine the source of informed trading. Such an investigation would be timely especially following a recent press release by the Securities and Exchange Commission (SEC) about charging two hackers who hacked into news wire services and sold the information on upcoming corporate earnings announcements to traders in six countries including the U.S. which resulted in over $100 million in illegal profits (SEC, 2015).
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