How HFT firms access secure government briefings to get the jump on market-moving data

In which I pick up where Michael Lewis’s fascinating, new book Flash Boys leaves off


You start to follow the money, and you don’t know where the fuck it’s gonna take you.
-Det. Lester Freamon

In Montreal in the fall of 2007, a former journalism student of mine asked if I would serve as a reference for him. He hoped to be hired for what had in recent years become a rarity, a well-paid, entry-level journalism job. The position was at a local organization that I had never heard of and whose name is so very boring that I fear if I tell it to you, you may stop reading before my story has even begun.

So please consider before I reveal the name in question that it might have been picked not in spite of its boringness but precisely because of it. If you wanted to fly under the radar in the world’s financial and media capitals, could there be any better way to do so than as a representative of the Canadian Economic Press or CEP News for short?

Whether that utterly unsexy name was a stroke of inspired genius or sheer dumb luck, I will likely never know, but what I can tell you is that Canadian Economic Press was just one of several strange “news agencies” that I later discovered were tied to the secretive world of high frequency trading or HFT as it’s known. Along the way I also encountered many of the same things Michael Lewis did in Flash Boys : bumbling FBI agents, clueless government regulators and employees who didn’t know what the firms they worked for really did. Just like Flash Boys does, my HFT story ends with a microwave tower.

All of this happened because, as someone who is interested in the future of the troubled news industry, I was curious to find out how exactly how Canadian Economic Press planned to make money and who the people behind it were. The explanations provided by its marketing director, Paula Midena, made no sense to me. She said that CEP News had been founded to report on global economic news from a Canadian perspective, not a product for which there’s a booming market, and that the man in charge was Darren Corbett while the “original investor,” was Canadian Venture Media Corporation, neither of whom had profiles either on the internet or in various research-worthy databases.

Since Midena couldn’t or wouldn’t tell me more and no one else at Canadian Economic Press was available to talk, I posted the information I’d obtained on my blog and hoped that someone who knew about the situation would eventually find me and fill me in. The strategy worked and over the next few months I learned from anonymous commenters that Canadian Economic Press had suddenly shut down its Washington operations, that I should check out the D.C.-based Need To Know News (NTKN) agency, which had been started by Chicago traders and bore a strong resemblance to Canadian Economic Press, and that, according to a commenter using the name Tdot: “There’s tons of these news startups with bad business models. Here’s another one that’s hilarious, World Business Press (WBP Online) – Slovakian newswire, with an office in Canada, releases Canadian economic news… in English. How much demand can there be for that in Slovakia?”

Puzzled as I’d been by the advent of Canadian Economic Press, it was even more perplexing to learn that it was not alone. Beyond their acronymous names, CEP News, NTKN and WBP Online had a lot of other characteristics in common: very basic websites, mediocre news feeds, little to no information about who owned or ran the companies, and lots of young inexperienced reporters, almost none of whom seemed interested in how their employers were making money at a time when many traditional media companies were in deep financial trouble.

Once in a while, however, one of these employees would get curious, go rogue and send me an email. “At CEP, staff welfare goes to a whole new level,” wrote a journalist, whose Spidey senses were tingling. “Not only do you have free coffee, tea, juice and bottled water – there are fruitcakes, cupcakes, bread, cereal, cereal and fibre bars to go with it. Thats the breakfast sorted. Then every Friday – the ENTIRE Montreal staff (we’re looking at 25-30 people) get meals of their choice catered to the office all paid for by the company. The evening is rounded off at the Keg, a couple of streets from the Montreal HQ. Extraordinary isn’t it?”

Indeed it was and especially given the fact that CEP news had told the Canadian embassy in Washington that it had decided to close its D.C. bureau due to its investor pulling out. Determined to get to the bottom of the situation, I spent evening after evening on my laptop, glass of wine in hand, as I surfed the websites of forex trading companies registered in Cyprus and Belize, stalked the LinkedIn profiles of Montreal investment managers, and tried to decipher both Slovak company registration documents and the incomprehensible language on the websites of Chicago-based proprietary trading companies otherwise known as prop shops. On a few memorable occasions I thought I’d discovered the key to it all, but when I awoke the mornings after I quickly realized my theories made no sense. By the time CEP News folded in April of 2009, I still hadn’t figured out what was going on and was starting to doubt that I ever would.

It was in one of my dark moments that the email I’d been waiting for for almost a year and a half arrived. It was from a trader who, though he did not wish to be named, was prepared to reveal his identity, unlike almost everyone else. He informed me that Canadian Economic Press had been funded by a Montreal-based proprietary trading firm called Vigilant Futures (which has since changed its name to Vigilant Global.) In the early days, he said, Vigilant Futures and CEP News had even shared office space. Arvind Ramanathan, one of Vigilant’s two directors, and Marco Gomez, who ran CEP’s operations in the absence of the elusive Darren Corbett, had both worked together as traders at Refco before it collapsed amid scandal in 2005. When I phoned Ramanathan, he confirmed to me that Vigilant Futures had invested in Canadian Economic Press to help out his friend Marco, but that the venture hadn’t worked out and had had to close down.

Once I learned that a trading company had been behind Canadian Economic Press, I was forced to reconsider a theory I’d initially rejected about CEP’s and the other news agencies’ whole raison d’être, namely that their main goal was to gain access to secure government briefing sessions all over the world. These “lock-ups”, as they’re known, are where government agencies regularly release key financial indicators to reporters, who in turn disseminate the data to the public at what is supposed to be exactly the same time. When the information is surprising — better than expected unemployment figures, for example, or an unexpected hike in interest rates — financial markets react. The advantage and profits go to the traders who get their first.

Given that I had reported from lock-ups, as a journalist for Reuters, one of the big three financial news companies, I was convinced there was no way anyone could systematically leak sensitive economic information to traders. On the rare occasions that I’d seen someone unintentionally break a lock-up embargo, irate officials from the central bank or finance minister’s office were on the phone within minutes. Journalists worried about losing their jobs over an accidental leak while intentional leaking could result in criminal charges. Regulators were constantly on the lookout for suspicious trading patterns ahead of a key economic data releases and ready to pounce if they saw any signs of insider trading.

What I’d failed to figure out, however, was that it wasn’t necessary to leak to have an advantage in lock-ups. I still pictured traders waiting by their screens, with fingers on buttons, and ready to pounce when Reuters (now Thomson Reuters), Bloomberg and Dow Jones all delivered their news and numbers at the appointed time. I didn’t understand that simultaneous no longer meant at the same minute or second and that so-called high frequency traders now worked in milli and microseconds. I didn’t appreciate that the new best way to do things was with so-called machine readable feeds that were algorithmically programmed to buy and sell automatically without the need for any microsecond-sapping human intervention. I didn’t realize that a trade could be carried out in less time than it took to blink an eye and that several of the news agencies in the lock-ups were using their own dedicated fibre optic lines to send data directly to their clients, whoever those clients were.

I wasn’t the only person who didn’t get this. Neither did the folks in charge of the lock-ups, most regulators, law enforcement agencies and the upstart news services’ competitors. As an anonymous source would later succinctly explain it: “(The new news agencies) were light years ahead technology wise over DJ, Reuters, Bloomberg, AP, etc. They built highly optimized networks to transfer this data through ultra low latency switches and lines that the other guys never thought of. They also were optimized to this single rifle shot of data through a network where the big legacy guys were using systems/networks optimized for throughput and continuously publishing hundreds or thousands of stories simultaneously and continuously.”

Keeping all this in mind, along with the fact that the stated purpose of government lock-ups is to inform the public and not to provide an infrastructure for high frequency traders, the obvious next question became why no one had kicked the wonky news agencies to the curb? But when I tried to discuss this issue with those responsible for the lock-ups, they proved almost as secretive and loath to talk about their business as the HFTs had been about theirs.

There had been complaints about NTKN and its relationship to specific Chicago traders, some of which are documented on the internet, since its arrival on the scene in 2005 yet it still managed to keep its much coveted seat in the U.S. Department of Labor lock-ups . And though CEP News had its access to Office of National Statistics lock-ups in England — where it was briefly allowed entry, thanks to a newly hired staffer who already had valid press credentials — revoked, it easily gained admission to lock-ups in Ottawa and Frankfurt. Econolive, yet another strange news agency which sprung up at about the same time Canadian Economic Press went under in 2009, was welcomed into lock-ups in Ottawa, Washington, and, for a short while, London. Run by an Israeli American named Yakov (Yankey) Mermelstein, who had no background in the news business and a history of active participation in web trading forums, it also used the name Empire News and had a corporate address in Jerusalem.

I was starting to think that instead of an indecipherable investigative report on incompetence in the administration of G-7 lock-ups, I might be better off writing a sitcom script. The pilot could focus on an email I’d just received from the FBI — which did not from an fbi.gov address but rather from Concerned Citizen at forbrocklehurst@gmail.com. “Ms. Brocklehurst,” read the email, “Any chance you’d be willing to talk by phone about your posting Monday regarding the visitors to your site? If so, could you send me a number where I could reach you this morning?”

The blog posting in question showed that officials at the U.S. Securities and Exchange Commission were searching my website for information on the news agencies and their owners. Concerned Citizen, who had a thick southern accent and identified himself as a United States special agent named Bob, asked if I’d be willing to take my post down as it could interfere with his investigation . He said someone at the SEC had erred in not using secure computers for their research and buttered me up by telling me how he and his colleagues checked out my website regularly. This was a very big story, he said, hinting that there might be a scoop or two in my future if did him this favour, which I did indeed do.

While I had initial suspicions that Agent Concerned Citizen might be a hoaxer, he wasn’t. The FBI turned out to be even worse at secure surfing than SEC employees and somehow managed to leave information stored in their C-drive files, including employees’ first names, on my web traffic monitoring program. So when Agent Concerned Citizen failed to return my emails, I did what I should have done all along and published the evidence showing the sorry state of FBI computers.

Only last year did I finally learn from a series of Wall Street Journal articles how the FBI had spent years investigating what it deemed to be suspicious activity in lock-ups. In 2011, it had installed a hidden camera in the room where the U.S. Labor Department holds its media briefing sessions, the Journal reported. And that same year, the SEC had also subpoenaed computer hard drives used by Need To Know News’s reporters.

None of this led to any criminal charges being laid although the suspicions did eventually cause the Department of Labor to commission the dramatically named Clean Sweep Red Team Report, from Sandia National Laboratories. As a result of this investigation, the DOL announced in spring of 2012 that it would overhaul procedures for its lock-ups and that all media participants would have to reapply for permission to attend. In May, it said three previously accredited news agencies would no longer be eligible to file from lock-ups because they were not considered to be “primarily journalistic enterprises” that disseminate original news to a “broad public audience.” Those given the boot were NTKN, the Bond Buyer and RTT News, which had briefly employed CEP’s old marketing director. The agencies did, however, remain eligible to participate in a variety of other government lock-ups.

At about the same time as Clean Sweep Red, Statistics Canada proposed changes that would slow things down in the lock-ups it oversaw. It announced that it would delay its releases to the public by as much as 16 seconds as part of a new data-loading process onto its website. Given that 16 seconds is a veritable lifetime in a world where milliseconds can mean millions of dollars of profits, there was immediate pushback.

Since the arrival of the strange news agencies, the big three financial data providers had caught up and were now also offering clients the direct machine readable feeds that used to be exclusive to their smaller rivals. According to Thomson Reuters, “strenuous representations” were made to both StatsCan and then Industry Minister Christian Paradis, arguing that such a change could cause chaos on financial markets. Within two days Statscan had backed down and agreed to hold consultations. Although spokeswoman Gabrielle Beaudoin said in October 2012 that a decision would be forthcoming very soon, the situation remains unresolved to this day.

Without understanding how lock-ups have evolved to become a crucial part of HFT infrastructure, it’s difficult to appreciate how complex it is to make any changes to them. When there was a fuss last year over possible leaks from a U.S. Federal Reserve lock-up, Google’s executive chairman Eric Schmidt opined that the institution of lock-ups was obsolete and that it made much more sense just to release data on the web. But take away the lock-up with all the special fibre optic lines — and, more recently, microwave networks — leading out of it and the financial industry would be back to looking at numbers on a screen and pushing old fashioned buttons.

Michael Lewis’s  Flash Boys ends in the wilds of Pennsylvania at the foot of a microwave tower, the latest frontier in the race for speed. It was not unfamiliar territory to me as I had learned about how microwave networks were 30% faster than the most sophisticated landlines last summer when it came to my attention that Vigilant Global, now owned by the Chicago trading firm DRW, had applied for permits to build wireless networks in both North America and Europe.

In England, Vigilant had stated in a position paper, that the failure to create such a network could result in job losses in London’s important financial industry. But such arguments failed to convince city councillours in Castle Point, Essex who voted against the Montreal company’s request to put two satellite dishes atop a local water tower. “I don’t understand why every two or three months we are getting applications for more equipment on this building, “ Norman Smith, a Tory councillor , told the local newspaper.“I am happy to approve applications to replace existing, tired equipment but not more. Enough is enough.”

Postscript: I am working to add links to this story, but wanted to get it out asap.

House committee hearing on new lock-up rules sure was interesting

I listened to the whole thing and a number of things struck me:

  1. Boy, has Carl Fillichio changed his tune since his April 16th conference call with reporters, when he stonewalled and refused to answer reasonable questions. (The transcript to that call is here, but to fully appreciate the extent of his obnoxiousness, listen to the audio.)
  2. Keith Hall, former BLS Commissioner and now a Senior Research Fellow at the Mercatus Center of George Mason University, is one straight shooter. He told the hearings that the Department of  Labor changes were “an effort to get traders out of the lock-ups.” What he didn’t explain, however, is why steps weren’t taken earlier to boot traders out of the lock-ups given that they’ve been there for years, and why the DOL won’t acknowledge this situation. (The only thing I can think of is that someone with influence wants the traders there. Hall said USDA likes traders in the lock-ups.)
  3. Some of the Dems on the committee seemed like they would be happy to just get rid of lock-ups, which they appear to think are designed for Wall Street fat cats. Hall, on the other hand, says he still sees value in lock-ups, but that given all the technological changes, they don’t have to take place under the same rules as in the past.
  4. Committee chairman Issa seemed to get nervous when Democrat Tierney  suggested that Bloomberg and Reuters are out to serve their clients and not the public.

Here’s some relevant background that bears repeating:

  1. It was Carl Fillichio who granted RTTNews access to the lock-ups last year, according to a DOL spokesperson. He did this when it was widely known that trading firms were starting front news agencies to gain admission to lock-ups. RTTNews had all the warning signs including key personnel tied to the Montreal-based prop trading firm, Vigilant Global (formerly Vigilant Futures), which had earlier funded CEP News. RTTNews — along with Bond Buyer and Need to Know News (NTKN) — were not accredited to participate in the revamped lock-ups, but that doesn’t answer the question of why Fillichio let RTTNews in in the first place.
  2. John Harada, the former head of NTKN, has boasted to financial industry insiders that his former news agency, a front for JED Capital, was guaranteed access to lock-ups thanks to his ties to Democratic Illinois senators. This information was given to me by sources who were astounded to hear Harada make such a claim.
  3. Fake news agencies fronting for hedge funds/prop traders continue to access lock-ups around the world.

 

Hedge funds (traders) with DOL lock-up connections

These are the ones that I know about, but there are more:

  • JED Capital of Chicago used to be tied to Need to Know News (NTKN)
  • Vigilant Global (formerly Vigilant Futures) of Montreal started the news agency CEP News which accessed several lock-ups around. CEP News was subsequently folded, but its marketing director went to work for RTTNews

 

 

RTT News, NTKN and Bond Buyer booted out of Department of Labor lock-ups

Here are the news organizations that have been officially credentialed for Department of Labor lock-ups, effective July 6, 2012:

  1. Agence France-Presse
  2. Associated Press
  3. Bloomberg News
  4. Bloomberg Television
  5. CNBC
  6. CNN
  7. Dow Jones Newswires
  8. Fox Business Network
  9. Jiji Press
  10. Kyodo News
  11. Market News International
  12. MarketWatch
  13. The Nikkei
  14. Thomson Reuters
  15. Tribune Company

This is the old Department of Labor lockup list:

  1. Associated Press
  2. Bond Buyer
  3. Bloomberg
  4. Bloomberg TV
  5. CNBC
  6. CNN
  7. Dow Jones
  8. Fox Business
  9. Jiji Press Agency
  10. Kyodo News
  11. Market News
  12. MarketWatch News
  13. Need to Know News
  14. Nikkei News
  15. Reuters
  16. RTT News (replaced Potomac Radio last summer)
  17. Thomson Financial

So who got booted?

  1. Bond Buyer
  2. Bloomberg TV (but presumably it’s rolled into Bloomberg)
  3. Need to Know News
  4. RTT News
It’s no surprise that the strange news agencies, Need to Know News (tied to JED Capital) and RTT News, were kicked out. What’s truly surprising is that  NTKN survived this long and that the DOL granted RTT News access less than a year ago.
I’m not quite sure why the Bond Buyer got kicked out as I’ve never really looked into it.

And who got added?

  1. Agence France Presse
  2. Tribune Company

Makes sense to me.

Who’s behind the big changes to the Department of Labor lock-up rules?

This post is delayed. Please check back later.

Update 10:30 April 17: The promised audio of Monday’s call, which was supposed to be posted to the DOL website yesterday, is still not available. The DOL linked it earlier, but the recording turned out to be muzak and now it’s disappeared.

Honestly, if they can’t upload an MP3 file, it doesn’t bode well for a smooth technical release of BLS data when the time comes.

Update 11:00 April 17: Ok, I’m posting even though the audio isn’t up yet. I’ll fix the link once it goes up.

Update 11:45 April 17: Link is fixed.

—————————————

As promised, I phoned into the U.S. Department of Labor’s briefing on the new lock-up rules. The DOL’s Senior Advisor for Communications and Public Affairs Carl Fillichio said at the very beginning of the call that it was not a press briefing and for planning purposes only, but the audio is now publicly available on the internet for anyone to listen to so I am going to go ahead and treat it as a public  briefing since, under the circumstances, that’s the only strategy that makes sense. There’s absolutely no logical reason why I shouldn’t be able to report on the call.

After listening to the briefing what struck me most was that these are huge changes for a bureaucracy. All the news organizations that currently attend the lock-up must remove their equipment and private communications lines on June 14th and 15th. Going forward, they will use government-owned and maintained  equipment and data and telephone lines. This poses a huge technical issue for many of the news organizations.

Some of the reporters for the big financial news agencies expressed concerns that the new systems and rules would lead to “uneven and unfair release of data.” One reporter asked if the DOL no longer cares about the orderly dissemination of data or just that nothing ever leaks.

As far as I could tell, there was contradictory information given on how the technical release of the data will happen. In answer to his question, one reporter was told that journalists in the lock-up will be able to transmit HTML files using a Win/ FTP client, but then an official for the Bureau of Labor Statistics said all information would be released in Word documents that will be transferred at precisely 8:30 a.m. after which news agencies will have to “get it efficiently” into their own systems.

I’ll admit that I don’t have enough technical knowledge to evaluate whether the first situation could work effectively.  (Maybe some of my helpful anonymous sources will be good enough to chime in in the comments or send me an email at ann.brocklehurst@gmail.com.) But the second option outlined by the BLS official sounds like crazy talk to me. If everyone’s left having to deal with Word documents at 8:30 a.m. on July 6, when the new lock-up rules go into effect, it’s going to be complete freaking chaos, especially if the numbers are big news, which they well might be — both for traders and politicians.

I have to say, I wasn’t impressed with some of the officials’ lack of knowledge, but that could be because the people who did the talking during the call aren’t the ones who have the actual technical know-how.

What did strike me when it was all over is that someone very high up must have asked for these changes because this is not the type of thing bureaucrats do by choice. And that means some very powerful people must be unhappy with what’s been going on in lock-ups for the past few years and have decided it needs to be fixed NOW.

It’s difficult to believe that they would be this upset if it were just a few pipsqueak players like Need to Know News (NTKN)RTTNewsPotomac Radio News and the now-defunct CEP News involved. If that were the case, surely the solution would have been to just kick the problem organizations out.

When asked about the reasons for the changes by various different reporters, Fillichio repeatedly declined to comment. All he said was that “the world has changed” in the 10 years since lock-up procedures were last thoroughly reviewed and that it was a “prudent business decision” to implement new procedures. “There’s no current problem,” he said. “I’m trying to prevent a problem.”

So, what problem is it that he’s trying to prevent and who’s pulling the strings? Who demanded this be fixed now after a known and documented problem hass been allowed to persist for years? And why are the names of the two different news organizations who have broken lock-up rules in the past two years being kept secret?

As always, you can reach me at ann.brocklehurst@gmail.com. No theory is too wild to entertain.

Background info: In about 2006, Need to Know News (NTKN) was admitted to DOL lock-ups despite well-known rumours that it was not strictly a news agency and that it was tied to JED Capital, a Chicago proprietary trading firm.

CEP News arrived on the scene in 2007. Backed by the Montreal prop trader/hedge fund Vigilant Futures (now Vigilant Global), it concealed some of its sources of funding. It was temporarily admitted to lock-ups in Washington and London by hiring reporters who already had valid press credentials.

RTTNews, which was recently accredited by the DOL to attend lock-ups after Potomac Radio News closed up shop and its reporter Michael Duncan left town for the midwest.