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The Mystery Of $600 Million Traded In The Blink Of An Eye

Here's a mystery involving physics, technology and the markets that meant the difference between nothing and millions of dollars.

Last Wednesday, the Federal Reserve announced it would not be tapering its bond buying program at 2 p.m. ET. The news takes seven milliseconds — about the speed of light — to reach Chicago. But before the seven milliseconds was up, a few huge orders based on the Fed's decision were placed on Chicago exchanges. CNBC broke the story:

"According to trading data reviewed by CNBC, they began buying in Chicago-traded assets just before others in that city could possibly have been aware of the Fed's decision. By one estimate, as much as $600 million in assets changed hands in the milliseconds before most other traders in Chicago could learn of the Fed's September surprise — a sharp contrast to the very low volume of trading ahead of the Fed's decision."

How did this happen? Right now, we don't know. But in high-speed trading, where computer algorithms fed by data make trades based on pre-programmed strategies, the difference between trading at seven milliseconds after the news and two milliseconds after the news can be worth millions.

The Federal Reserve is concerned, and it's in the process of questioning news organizations, since reporters get the Fed release early. But, they get the information in a secure room and aren't allowed to communicate with the outside world until 2 p.m. on the dot. When CNBC asked whether any organizations possibly broke the Fed's rules, the Fed spokesman didn't respond on the record.

The whole episode raises the question of how we're using our money and talent, writes Washington Post columnist Neil Irwin:

"There is a role in [capital] markets for traders whose work is more speculative ... But when taken to its logical extremes, such as computers exploiting five millisecond advantages in the transfer of market-moving information, it's much less clear that society gains anything ... In the high-frequency trading business, billions of dollars are spent on high-speed lines, programming talent, and advanced computers by funds looking to capitalize on the smallest and most fleeting of mispricings. Those are computing resources and insanely intelligent people who could instead be put to work making the Internet run faster for everyone, or figuring out how to distribute electricity more efficiently, or really anything other than trying to figure out how to trade gold futures on the latest Fed announcement faster than the speed of light."

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