Over the past few years there had been numerous allegations in both the trading community and among the media that critical UK data releases were being mysteriously leaked ahead of time. Back in 2017, Reuters reported that "unusual sterling moves often precede UK data releases", explaining that "on eight occasions over the past 12 months, the pound has moved against the dollar in the minutes before the release of the retail sales numbers, correctly anticipating the direction the currency took once the figures were published" adding that "this has been true even when the retail sales data have gone against the Reuters poll market consensus, leading to speculation among traders about the possibility of leaks of the information before its official publication."
One such example took place on Feb. 17, 2017 when sterling fell by around 20 ticks to $1.2440 in the space of around 15 seconds, around three minutes before the release of the numbers for January. When the figures were published by the ONS, they showed sales had been much weaker than economists had expected, sending sterling down further.
A similar pattern was found to have occurred in seven of the other 12 months for which Reuters analyzed trading data. The moves in sterling were most notable in January, November, October, July and April as well as in February. In five of those months, the official figures were significantly weaker or stronger than forecasts by economists.
Foreign exchange traders posted messages on Twitter saying they believed that the data had been leaked ahead of time, a regular refrain after the monthly retail sales figures.
David Woolcock, chair of the committee of professionalism at the Association Cambiste Internationale Financial Markets Association, a body representing foreign exchange dealers, said his review of the analysis suggested either that some investors were very good at predicting what the data would show, or that it was being leaked.
“Looking at the charts shown to me by Thomson Reuters it seems evident that either a very close correlation in private/public data has been discovered that is allowing traders to pre-position ahead of publication or a leak of the numbers is occurring,” he said.
A separate analysis by the Wall Street Journal of 207 releases of British inflation, industrial production and labor market data, showed that on 59.5% of occasions British government bond futures moved ahead of the data in what proved to be the right direction, confirming that someone was indeed leaking - and trading on - market-moving information ahead of its scheduled release time. Alexander Kurov, an associate professor of finance at West Virginia University who conducted the analysis for the Wall Street Journal, told the newspaper it was “very unlikely that we are looking at a random pattern.”
But where was the leak taking place? As the WSJ noted, the ONS provides a preview of the retail sales figures before their publication to 41 people at the Bank of England, the business ministry, Cabinet Office, Downing Street and the Treasury. Those people had access to the data 24 hours ahead of publication.
Meanwhile, as part of the now infamous reporter "lock up", around a dozen journalists from news agencies including Reuters have access to the data around 40 minutes ahead of publication to help them prepare articles ready to go when the data hits the feed. However, they are only given the information in a locked room without Internet or phone access and under the supervision of ONS staff.
It now appears that we know who the culprit was.
In a press release issued late on Wednesday, the Bank of England said that following concerns raised with the Bank, "we have recently identified that an audio feed of certain of the Bank press conferences - installed only to act as a back-up in case the video feed failed - has been misused by a third party supplier to the Bank since earlier this year to supply services to other external clients."
"This wholly unacceptable use of the audio feed was without the Bank’s knowledge or consent, and is being investigated further", the central bank said.
The BOE's shocking admission was in response to a report earlier in the day by the Times, according to which hedge funds had been eavesdropping on the Bank of England’s press conferences before they are officially broadcast after its internal systems were "hijacked."
As the BOE has since confirmed, the Times report alleged that the central bank has discovered that one of its suppliers has been sending "an audio feed of its press conferences to high-speed traders who hope to profit by acting on the governor’s comments before the rest of the world."
While the company that was behind the audio feed hijacking was not named, "the third-party supplier is understood to be connected to a market news service that promises clients will gain an edge over rival traders in a field where getting information microseconds before others can generate huge profits." While the Bank’s official video feed of press conferences is managed by Bloomberg, the Bank employed contractors to install a separate back-up audio feed several years ago in case the video feed went down. It was never intended to be used by an outsider unless the video failed, and yet for an unknown number of HFTs, it became the primary source of information, and countless profits.
While the BoE said that the gross insider trading started "earlier this year", according to the Times, the supplier hacked into the audio feed since "at least the start of this year", which means the leaks could have been going on for years, and was meant to provide the service to one of its other companies. That service is then sold on to high-speed companies, giving client traders an invaluable edge over everyone when it comes to the most market-moving of events.
According to the Times, since audio is easier to compress than video, hijacking the backup feed gave paying clients a five to eight-second head start on the rest of the market; in other words, a license to print money in violation of every known insider trading rule known to man.
The Bank said that it had “disabled the third-party supplier’s access”. A spokesman added: “This wholly unacceptable use of the audio feed was without the Bank’s knowledge or consent, and is being investigated further”.
Since UK data leaks had been known for almost three years, it's about time the BOE finally realized that it itself was the source of the leaks. As for the company intermediating all of this, we are confident that they already have moved their money to a non-extradition jurisdiction. The unnamed market news service was selling these feeds charges between £2,500 and £5,000 a press conference for each client in addition to a subscription fee.
The revelation that the Bank of England’s systems were abused to give HFT traders an advantage over everyone else will be a huge embarrassment because one of the bank's roles is to support fair and efficient markets. BOE head Mark Carney is due to leave the Bank on January 31 and will become the United Nations special envoy for climate action and finance on a token $1 a year for the part-time role. His successor could be announced as soon as tomorrow.
While the news may explain why there was no allegations of any information leaks ahead of the latest BOE report, it also explains why there have been recurring instances of clients trading on what appears to be inside information, and it now appears the BOE itself was the culprit.
And while the BOE may finally be cracking down on insider trading, after an unknown set of clients has already made millions if not billions in illicit profits, consider that high-speed audio services are also offered for press conferences at the ECB, the Fed and the Bank of Canada. Just how much money was made by hedge funds who had found a way to hijack backup feeds at all these central banks. We doubt we will ever find out, especially if the central bankers in question plan on ending up as employees of said hedge funds after their tenure is completed. It almost makes one wonder what "quid pro quo" helped propel former Fed chair Ben Bernanke to the role of senior advisor at the world's foremost HFT operation, Ken Griffin's Citadel.