Information leaks help US traders turn a fat profit

Research into trading in US stock and bond markets suggests that some traders might be making a significant profit from information leaks.The study indicates that accessing private information about macroeconomic fundamentals probably helped traders make more than $160 million in profits in two markets over six years.

Royal Holloway Economics professor Alessio Sancetta is one of the authors of the research published by the European Central Bank in Working Paper 1901 (May 2016).

The research team finds that marcoeconomic news announcements with less strict release procedures are more prone to pre-announcement informed trading.

Professor Sancetta and his colleagues Alexander Kurov of West Virginia University, Georg Strasser of the ECB and Marketa Halova Wolfe of Skidmore College, New York examined stock index and Treasury futures markets around releases of US macroeconomic announcements. The team observed 'substantial informed trading' before the official release time of seven out of 21 market-moving announcements. The evidence suggests that the pre-announcement drift likely comes from a combination of information leakage and superior forecasting based on proprietary data collection and reprocessing of public information.

The late start of pre-release price drift - which becomes significant only about 30 minutes before the official release time - reveals an interesting characteristic of prevalent trading strategies. Assuming that informed traders possess their informational advantage already more than 30 minutes ahead of the release, the question arises why they wait with trading on their knowledge until shortly before the release time. A possible explanation is that trading close to the release time minimizes the exposure to other risks that are unrelated to macroeconomic announcements.

The findings have been reported widely in financial circles, including by Bloomberg, CNN and the Financial Times. Professor Sancetta says: 'One journalist asked me if the fact that information leaked before the news announcements and was used profitably made me angry. It may make some people angry. However, I think it is more productive to think about why this problem might exist. It could partly be down to agencies not following strict procedures to mitigate pre-release announcements leakage. A tightening of release procedures for all market-moving announcements, including those originating in the private sector, is likely to lead to greater fairness in financial markets. '