The Federal Reserve said Friday it has revamped its security procedures surrounding the release of highly sensitive market-moving information.
The security overhaul comes after an unusual pattern of trading on Sept. 18, the day the Fed announced its decision not to slow down stimulus of the U.S. economy. The unusual pattern suggested that information about the decision had somehow left the Federal Reserve's headquarters building and traveled to computers in Chicago before the official release time of precisely 2 p.m. that day.
On Friday, the Fed said that the new security measures will go into place starting with the Oct. 30 Federal Open Market Committee statement. "We consulted with news organizations and we believe these additional measures will protect against premature release while still allowing news organizations an opportunity to accurately report the FOMC's actions at the release time," said the Fed's statement.
Fed officials declined to say whether this change comes specifically in response to the unusual trading. Fed officials also declined to say whether or not they knew which entity may have transmitted information early out of the so-called "lockup room" where reporters are given information about Fed decisions.
The security changes include a new document for reporters entering the lockup to sign acknowledging their obligation to hold the information in the room until an agreed upon transmission time. Reporters are also banned from bringing electronic equipment or devices into the room. Reporters have been given a new three-page description of the new lockup procedures, and an additional seven-page set of detailed definitions and requirements.
The unusual pattern of trading was first spotted by Eric Hunsader of Nanex.
In September, Hunsader said he saw exactly simultaneous trading reactions to the Fed's announcement in New York and Chicago. That would be theoretically impossible if the information was released from the Fed's headquarters in Washington. In theory, the trading reaction should have begun in New York several milliseconds before it began in Chicago, because information takes several more milliseconds to travel the longer distance — even over speed of light transmission technologies such as fiber-optic cable and microwave. By Hunsader's estimate, as much as $600 million in assets changed hands in the milliseconds before traders in Chicago should have been able to learn of the Fed's September surprise.
A key question is whether or not a news organization transmitted information out of the lockup room and into its own computer system before 2 p.m. If that was done, the data could have been moved to computer servers near Chicago before 2 p.m. and publicly released the information from there at precisely 2 p.m.— enabling subscribers of that data service to get the information milliseconds before others in Chicago relying on transmissions from the Federal Reserve headquarters building in Washington to arrive.
But it is not clear whether such transmission was specifically prohibited by the Fed's lockup rules — although it would seem to violate the purpose of having simultaneous release from a lockup in the first place.
In the wake of the incident, Federal Reserve officials refused to tell CNBC what the lock up rules were on Sept. 18 (though CNBC itself participated in the lockup) or whether the Fed determined any rules had been broken.