Trading in economic data
Barclays Capital trader Mario Picone watches a computer screen while working on the trading floor at the New York Stock Exchange in New York City.
Kai Ryssdal: The government releases economic data all the time. Not just the biggies like unemployment, but all kinds of things, crop prices, gas prices, housing numbers. All of which are closely guarded secrets until the officially designated time. Business reporters typically get access early so they can write their stories. But those reporters are actually locked in a room at the Labor Department until 8:30, or whatever the official time is. There's concern, though, that traders might be able to somehow get data in advance, which would be a bad thing markets-wise, so the government is tightening up on its security.
Scott Patterson is a staff reporter at the Wall Street Journal. He's also the author of a book called "Dark Pools," about high-speed trading, which is at the root of the government's worries. Welcome to the program.
Scott Patterson: Thanks for having me.
Ryssdal: So what happens, run me through what happens if instead of at 8:30:00 in Washinton, someone gets these numbers at 8:29:30. What can they do?
Patterson: OK, so these firms have the ability to react so quickly to information that they can transmit that data into a buy or sell order on the stock market within fractions of a second.
Ryssdal: These are trading firms doing this.
Patterson: Yes, these are what is known as high frequency traders. They could have the data at, you know, 8:29:59 and beat everybody else to the market. I've actually heard stories of firms that have put up microwaves dishes next to government offices, like the Bureau of Labor Statistics, and that microwave technology allows them to transmit data extremely fast across the country so they may even be transmitting data to Chicago so they can trade on futures markets on this information.
Ryssdal: All right, so I get the whole high frequency trading and speed of trading, what is the worst cast scenario, they get the numbers early and what?
Patterson: Well, I think that the worry is they move before everybody else to profit on the move ahead of time, and then when you know, your average Joe trader comes to the market, the market has already moved up.
Ryssdal: Or down, right? It could be a sell order too, right?
Patterson: Yeah, it could be a sell order. I mean this is illegal behavior essentially. You are not supposed to be able to act on information ahead of others. It's supposed to be a level playing field.
Ryssdal: Yeah, that's very important, it's a crime.
Patterson: Yeah, it is a crime and if it's going on then it should be stopped. The government has been looking into this and the FBI has looked into it, and they haven't said that they've actually caught anybody leaking the information ahead of time, so I think that is the fear. But, what is definitely happening is this information is put out in so-called machine readable form. These firms have artificial intelligence systems that can read that machine readable data and react far quicker than any human being, so they already have an advantage because they are getting the data quicker than anybody else and that just makes it ridiculous.
Ryssdal: Good. Scott Patterson is a staff reporter for the Wall Street Journal, his book on all this kind of stuff, on high speed trading and all of that, is called Dark Pools. Scott, thanks a lot.
Patterson: Thanks for having me.