A study authored by a West Virginia University associate finance professor and three other researchers found suspicious trading ahead of seven regular U.S. economic releases, saying information leaks probably helped traders make more than $160 million in profits in two markets over six years.
Between January 2008 and March 2014, prices in Treasury futures and equity index markets drifted in the "correct" direction before the release time for 11 of 21 indicators, with seven showing a major move about 30 minutes ahead, according to the European Central Bank-published paper posted Monday on the ECB's website.
Alexander Kurov, who holds the respected Chartered Financial Analyst designation and is WVU's finance doctorate program coordinator, was a co-author of the paper, alongside Alessio Sancetta of the University of London, Georg Strasser of the ECB and Marketa Halova Wolfe of Skidmore College in Saratoga Springs, New York.
"The possibility that there is information leakage feeds into the notion that the market is rigged against the 'little guy,'" Kurov said in a WVU news release. "The point is that this matters, and hopefully there will be more action taken to ensure the security of the data before it is released."
Three of those seven indicators had release procedures that the researchers said were the least secure of the 21 indicators; some have since seen security beefed up to make leaks tougher.
The findings may add to concerns that data providers, which can include central banks and governments, are failing to adequately protect market-moving communications such as economic indicators and monetary-policy decisions. Last month, the Federal Reserve's internal watchdog urged beefing up safeguards for giving journalists some information under embargo, while the Reserve Bank of New Zealand announced an overhaul in the release of decisions after a journalist was able to leak a surprise interest-rate cut.
"We find that an implementation of strict release procedures makes pre-release drift less likely," according to the paper. The study, which has been circulating in earlier drafts for almost two years, doesn't analyze other nations' indicators.
The paper finds "strong evidence" of pre-announcement moves before the Conference Board's consumer confidence index; the National Association of Realtors' existing home sales and pending home sales reports; the Commerce Department's preliminary GDP report; the Fed's industrial production; and the Institute for Supply Management manufacturing and non-manufacturing indexes.
The U.S. nonfarm payrolls report, which markets are particularly attuned to, wasn't associated with pre-announcement movement, according to the study.
The researchers estimate that the "price drift" in the seven flagged indicators probably resulted in a total profit of about $119 million in the E-mini S&P futures during the roughly six-year period. Profit in 10-year Treasury note futures probably amounted to about $46 million.
"It's sizable," Kurov said, noting that the two-market analysis provides an incomplete picture of how much money is made on informed trading. "It was a way for us to see if the results were economically significant."
While it's difficult to pinpoint whether the early trading happens because some market participants are better at forecasting or whether it stems from leaked data, evidence suggests that it's some combination of the two, the researchers wrote.
It's "conceivable that several factors combine to cause the drift," according to the paper. "The source of informed trading merits more research in view of the public interest in the safeguarding of macroeconomic data."