What do the speed of light and stock trading have to do with each
other? Actually, quite a lot. On September 18th, the Federal Reserve
made an announcement that it would not scale back its support of the
economy, an unexpected announcement. This type of news should move the
market as a whole, and indeed it did. Looking at the chart below, taken
from
Yahoo! Finance, what time do you think the announcement was made public?
If
you guessed 2 PM, you are correct. This chart shows that the
announcement was a systematic event since the entire stock market moved,
as well as the efficiency of the market in rapidly reflecting the new
information.
However, several large trades made in Chicago are now under investigation. As you can
read in the article, the Federal Reserve went to great lengths to ensure that the information was released to the market at exactly 2PM. Even with the Fed's safeguards, over $600 million dollars worth of assets traded in Chicago, all within 3 milliseconds after 2PM.
Unfortunately, because of the physics related to the sped of light, it
would have taken 7 milliseconds for the news to reach Chicago. In this
case, it appears that someone in Chicago received the information early.
