Washington has information that Wall Street traders want — fast, and if possible, first.
The federal government routinely churns out new data that can cause huge swings in individual stock prices and sometimes entire markets, including commodity trends, FDA drug approvals, and, perhaps most importantly, the monthly jobs report from the Department of Labor.
The release of that figure on the first Friday of each month can move financial markets around the world — generating millions in profits for traders who are well positioned for it.
But government officials are increasingly worried that their market-moving information could be leaking to traders too early, giving a select, aggressive few unfair access to information that is supposed to be available to everyone at the same time. And officials at several federal agencies say they’re taking new steps to ensure that no one on Wall Street gets advance access to their data.
CNBC has learned that the Department of Labor has asked Sandia National Laboratories — the organization that ensures the safety of the nation’s nuclear weapons stockpile — to scrutinize the security procedures surrounding the release of monthly jobs report data.
Separately, officials at the U.S. Energy Information Administration tell CNBC they have taken steps to block computers operating from certain Internet protocol addresses from accessing the administration’s website, arguing that some users appear to have a “malicious intent” to slow down the website’s release of data for the general public while speeding it up for themselves.
Officials describe the moves as a new round in an ongoing battle between the government, which strives to release information in a fair and orderly way, and financial market players constantly trying to gain an informational advantage over their rivals.
Access by Washington elites to market-moving information has been a hot topic this year, but attention has largely been focused on potential insider trading by members of Congress. Both the House and Senate passed legislation earlier this year attempting to prevent lawmakers from profiting on market moving information they encounter through their work on Capitol Hill.
"This cat and mouse has been around for a long time. And at each turn, the government is going to make sure they’re doing their best to ensure the right protections are in place."
Closely held Washinlgton information — from Congress or otherwise-obscure federal agencies — has potentially enormous financial value, whether it is obtained in the days, hours, or even seconds before public release.
“This cat and mouse has been around for a long time,” said Jane Callen, a spokeswoman in the Office of Economic Affairs at the Department of Commerce. It publishes data on economic indicators such as retail sales, durable goods, and gross domestic product. “And at each turn, the government is going to make sure they’re doing their best to ensure the right protections are in place.”
At the Energy Information Administration, which publishes data in the oil, coal, natural gas, and electricity markets, officials say they’re doing exactly that. “We hold our stuff tightly, especially the market moving stuff,” said Jonathan Cogan, a spokesman for the agency. “We’re very conscious of that.”
But Cogan said the agency is constantly dueling with market players who try to access its website for data while at the same time deluging the sites with so much traffic that others can’t get access to the same information.
“There’s some bad actors out there who would like to slow down things for others and speed things up for themselves," Cogan said. “We’ve blocked certain IP addresses that appear to have malicious intentions to clog up the pipes for others.”
Cogan declined to say how many IP addresses had been blocked, who was orchestrating such attacks, or which specific information those people tried to access. But he said the attacks come on an “ongoing basis” and they show the vulnerabilities of average investors trying to keep up with technically sophisticated high-speed trading firms in an era when data posted on government websites moves markets in “milliseconds.”
“Anybody using their browser and clicking refresh is already at a disadvantage,” he said.
The Department of Labor received the security analysis from Sandia National Laboratories some time last year, and its recommendations will be considered as the department reviews its process for releasing the monthly jobs data.
“We’re reviewing the recommendations, as well as the recommendations of other smart people we’re talking to within the organization,” said Carl Fillichio, a senior advisor for public affairs at the Department of Labor.
“Things are changing – the need for this data is important. The integrity of the data is important. There are new things that are floating around and we want to make sure we’re on top of it,” said Fillichio. “We’re looking at everything.”
He would not give details about what the recommendations were, whether officials were scrutinizing potential data leaks seconds or days before the rest of the market, or whether potential data leaks could come as a result of technological vulnerabilities or people deliberately leaking the information. A spokeswoman for Sandia referred questions about its analysis to the Department of Labor.
But Fillichio said no one specific incident of information leaking in advance prompted the Department of Labor to turn to the security experts at Sandia National Laboratories for help. “Our concern is that it never happen, not that it has happened,” he said.
Nonetheless, market experts contacted by CNBC say they have seen suspicious activity in markets in advance of government news releases.
Investor Jon Najarian, a CNBC contributor and co-founder of online broker Trademonster.com, spotted unusual activity in the options market ahead of the release of the Department of Labor’s January employment report on Friday, February 3rd. Najarian said there was a “fair amount” of call buying and put selling in the S&P 500 index before the close of the market Thursday evening, both of which indicated a bullish bet that the government’s jobs report would be a positive one. Najarian sent an email to a reporter about the unusually heavy bullish bets about a half hour before the Department of Labor released its data on February 3rd. As it turns out, that month’s number handily beat analysts’ expectations and caused major indexes to jump when trading opened that morning.
“I thought the buying in S&P 500 was a tip-off that someone knew the numbers before the release,” Najarian said.
Any investor who had advance information stood to make a hefty return on investment. “My guess is that there was about a ten-fold profit to investment on this one,” Najarian said. “Thus, a $50,000 bet made them around $500,000.”
Government officials aren’t immune to the temptation of that kind of money.
On Monday, for example, the Department of Justice announced that a former Food and Drug Administration chemist named Cheng Yi Liang was sentenced to 60 months in prison for engaging in insider trading based on his knowledge of the pharmaceutical sector. Liang admitted that he had traded in the securities of pharmaceutical companies, which, the government said, netted him $3.7 million in illicit proceeds.
And while insiders like Liang clearly have an early access to information, some in the government despair that federal agencies are hopelessly outmatched even by outsiders on Wall Street who are deploying new high speed information technology systems. “We don’t have the technology to keep up with it,” said Bart Chilton, a commissioner at the Commodity Futures Trading Commission. “We don’t have the speed, and we don’t have the supercomputers. Government is just quintessentially slow. We’ll never be able to stay ahead of them.”
Generally speaking, there are three groups of people in Washington who have advance access to market moving data – the federal workers themselves who produce and disseminate the numbers, White House officials who receive the information in advance through the Council of Economic Advisors, and financial reporters who are given advance access to some of the information through what is known as a “lock up.”
Each agency has its own procedures for ensuring its workers don’t deliberately or accidentally leak market moving data. According to a rule called Statistical Policy Directive No. 3, which dates back to 1985 and is published in the Federal Register, agencies are required to develop systems to protect the information, clear times and dates for distributing it, and even to “physically secure” copies of all materials prepared for public release between the time they are printed and when they are released.
That directive also requires agencies to release information in advance to the White House, stating that agencies “will provide prerelease information to the President, through the Chairman of the Council of Economic Advisers, as soon as it is available.” Veteran White House economic officials tell CNBC that they received the monthly jobs report number as early as Thursday afternoon, before the information is released to the public on the first Friday of each month at 8:30 a.m. ET.
Federal rules state, “All employees of the Executive Branch who receive prerelease distribution of information and data estimates … are responsible for assuring that there is no release prior to the official release time. Except for members of the staff of the agency issuing the principal economic indicator who have been designated by the agency head to provide technical explanations of the data, employees of the Executive Branch shall not comment publicly on the data until at least one hour after the official release time.”
Similarly, many federal agencies hold lock ups for journalists during which they disseminate economic data to the journalists who cover the beat, answer questions, and allow reporters time to write stories. On the first Friday of every month at the Department of Labor, print and television journalists are sequestered in separate rooms before release of the monthly employment report. TV reporters are held in a basement room in a half hour lock up during which their email devices and mobile phones are confiscated by a government official.
The format for the Department of Labor jobs report lock ups has not changed in over a decade, people familiar with the process say. And that means when the February employment numbers are released Friday, it may mark the beginning of the end of a system that has not changed nearly as much as the world around it.