12/5/16: Leaky Buckets of U.S. Data

Recently, ECB researchers published an interesting working paper (ECB Working Paper 1901, May 2016). Looking at the U.S. data that is released under the embargo, they found a disturbing regularity: across a range of data, there is a strong evidence of a statistical drift some 30 minutes prior to the official time of the release. In simple terms, someone is getting data ahead of the markets and is trading on it in sufficient volumes to move the market.

Let’s put this into a perspective: there is a scheduled release for private data that is material for pricing the market. The release time is t=0. Some 30 minutes before the official release, markets start pricing assets in line with information contained in the data yet to be released. This process continues for 30 minutes until the release becomes public. And it moves prices in the direction that correctly anticipates the data release. The effect is so large, by the time t=0 hits and data is made publicly available, some 50% of the total price adjustment consistent with the data is already priced into the market.

"Seven out of 21 market-moving announcements show evidence of substantial informed trading before the official release time. The pre-announcement price drift accounts on average for about half of the total price adjustment,” according to the research note.

Pricing occurs in S&P and U.S. Treasury-note futures and data sample used in the study covers January 2008 through March 2014.

Here is the data list which appears to be leaked in advance to some market participants:

1. ISM non-manufacturing
2. Pending home salses
3. ISM manufacturing
4. Existing home sales
5. Consumer confidence from the Conference Board (actually, CB has taken some actions recently to tighten their releases policy)
6. Industrial production (U.S. Fed report)
7. The second reading on GDP
8. There is also partial evidence of leaks in other data, such as retail sales, consumer price inflation, advance GDP estimates and initial jobless claims. 

Overall, plenty of the above data are being released by non-private (aka state) agencies.

The authors control for market expectation, including forecasts drift (as date of release grows nearer, forecasts should improve in their accuracy, and this can have an effect on market pricing). They found that “more up-to-date forecasts” are no “better predictors of the surprise” than older forecasts. In addition, as noted by the authors: “these results are robust to controlling for, among others, outliers, data snooping, nearby announcements and the choice of the event window length.”

The problem is big and has gotten worse since 2008. “Extending the sample period back to 2003 with minute-by-minute data reveals both a higher announcement impact and a stronger pre-announcement drift since 2008, especially in the S&P E-mini futures market. Based on a back-of-the-envelope calculation, we estimate that since 2008 in the S&P E-mini futures market alone the profits associated with trading prior to the o fficial announcement release time have amounted to about 20 million USD per year.”

Two tables summarising there results.

The paper is available here: http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1901.en.pdf?ca0947cb7c6358aed9180ca2976160bf