Frequent readers are aware that one of our favorite topics is forensic market evidence confirming early release of market moving data to select "buyers" of said data, who then can trade ahead of the crowd and make illegal profits. The most recent example of just this took place last Friday when someone or something was leaked the non-farm payroll data as much as three second early [9]. But while various third party profit-seeking intermediaries such as Deutsche Boerse's MNI, UMichigan consumer confidence and others have acknowledged to presell early dissemination of specialized data to subscribers such as well-paying high frequency traders, at least government data was said to be exempt from such a profit motive. At least until now: the WSJ reports [10]that the FBI "has discovered vulnerabilities in the government's system for preventing market-moving economic reports from leaking to traders before public release. Law-enforcement officials found "a number of operational vulnerabilities" involving "black boxes" used by several departments to control the release of sensitive economic data such as the monthly unemployment rate, according to a report by the inspector general at the Commerce Department."
And if there is a data "vulnerability", there is guaranteed to be a long list of candidates who are quietly abusing said data leaks in the shadows (and making millions in profit along the way).
A simple schematic of how the black box is being abused by enterprising data frontrunners:
[11]
Those who may have access to the early data: media firms, HFTs, traders, etc. - essentially anyone who has the ability and the willingness to risk intercepting the early release. And since the opportunity cost is likely millions of dollars in levered profits, and the penalty for getting caught is a handslap, one can see why it is very likely that everyone is in on the scam.
The WSJ has more [10]:
The FBI has long been concerned about what investigators view as suspicious trading activity that occurs just before some government releases of sensitive economic data, according to people familiar with the investigation. Federal agents have spent years trying to determine if that activity is due to misconduct during the formal release period, which is known as a lockup.
The black boxes are key to the government's control of the data. Media firms in the business of reporting economic data are required to connect their computers to the black boxes, which operate like a trapdoor, releasing articles and data streams when the embargoes lift. In theory, all the data should be released at the same time.
The investigative report, which was completed in May and obtained through an open-records request, indicates that the FBI's concerns are based on testing of black boxes at its Quantico, Va. facilities. The report didn't say whether the FBI knows of any specific instance in which anyone knowingly exploited the weaknesses. Many of the technical flaws involve different ways in which the black boxes can be bypassed.
Bloomberg, which reported the data reporting flaws first, will hardly make many friends among the HFT community for which brute early data access it the only thing that matters.
In its own testing, Bloomberg found it could get around the black box in several ways, such as sending data using different electrical current.
Bloomberg reported the flaws to the Commerce Department last summer and didn't use the devices in any data releases, Bloomberg told investigators, according to the report. After Bloomberg alerted the department, the FBI conducted a "consensual seizure" of its computers for testing.
The inspector general at the Commerce Department found "no evidence of an intentional violation" of the law by Bloomberg or its reporters, according to the report. In October, the FBI informed the Justice Department it found "no evidence of any embargo violation(s)" and the case was closed.
Ty Trippet, a spokesman for Bloomberg, said the conclusion "validates what we've said all along: We discovered a technical flaw in the Commerce Department's lock-up security protocols during a testing period sponsored by the department."
Further FBI probing found that it is very likely that every single government data point may and is being leaked well in advance.
The FBI's testing led it to discover other methods to get around the black boxes in ways that could "adversely impact the timed release of sensitive economic data," according to the report.
For one, media firms, if unobserved, could simply turn off the power on the black boxes, the FBI cautioned. Data also could be surreptitiously routed around the black boxes using concealed wireless devices or even a phone line or cable.
Such "concealed IT devices may still be in use" in lockup rooms across the government, according to a summary of the investigative report.
The fact that these devices could be "concealed to intentionally disguise their presence…should be made known to the proper personnel," the FBI said, according to the report.
Yes it should. And what is the proper personnel's reponse?
In November, law-enforcement officials relayed the concerns to officials at the Departments of Commerce, Agriculture and Labor, as well as the Federal Reserve Board and the Office of Management and Budget. Officials at those departments either didn't respond to requests for comment or declined to comment.
In other words, the response is... nothing. Why? Because it is almost guaranteed that government workers across all levels are in on the scam, collecting their pennies on the dollar in "rent" from the firms selling the data to the proper "clients."
Who isn't in on the scam? Why the slow retail investor, of course, aka the sucker at the poker table.