US macro data is being leaked to traders, ECB report warns
Traders in US stock markets have been accused of enjoying leaked macroeconomic data ahead of official release times, according to a report by the European Central Bank that has warned of "substantial" insider trading.
Scrutinising stock index and Treasury futures markets around releases of US data reports, the ECB found seven out of 21 market-moving announcements showed evidence of "substantial informed trading before the official release time".
"Prices begin to move in the 'correct' direction about 30 minutes before the release time. The pre-announcement price drift accounts on average for about half of the total price adjustment," the report said.
"These results imply that some traders have private information about macroeconomic fundamentals," it added, but acknowledged that some of the pre-announcement drift was likely to be due to a mixture of "information leakage and superior forecasting".
The ECB said there had been higher announcement impact and a stronger pre-announcement drift since 2008.
Based on a rough calculation, the researchers estimated that since 2008 the S&P E-mini futures market alone saw around $20m a year in profits associated with trading prior to the official announcement.
The report said the early information – leaked or self-calculated – does not need to be precise in order to a have a large price impact and so it called for "strict release procedures" for all market-moving announcements, including announcements originating from private sector data providers, in order to ensure fairness in financial markets.
Three announcements with the least secure release procedure - the CB Consumer Confidence Index, Industrial Production and Pending Home Sales, which are pre-released to journalists electronically - were among the seven strong drift announcements.
Ensuring market participants receive all market-moving macroeconomic data at the same time was pointed out as being complicated by the fact that some data is collected and released by private entities that are not subject to the PFEI guidelines.
For example, Thomson Reuters created a high-speed data feed for paying subscribers where the Consumer Sentiment Index prepared by the University of Michigan was released two seconds earlier to an exclusive group of subscribers before being made available to the public.
Also, the report suggested that economists participating in 'consensus forecast' surveys by Bloomber who have an informational advantage "might have no incentive to reveal their information truthfully, and, therefore, the Bloomberg expectations may not give a comprehensive picture of the information in the market. But even if they do, the aggregation of individual responses implemented by Bloomberg might further bias the surprise variable."