Wednesday, July 8, 2015

Trading on Leaked Macroeconomic Data

The official release times of U.S. macroeconomic data are big deals in financial markets. A new paper finds evidence of substantial informed trading before the official release time of certain macroeconomic variables, suggesting that information is often leaked. Alexander Kurov, Alessio Sancetta, Georg H. Strasser, and Marketa Halova Wolfe examine high-frequency stock index and Treasury futures markets data around releases of U.S. macroeconomic announcements:
These announcements are quintessential updates to public information on the economy and fundamental inputs to asset pricing. More than a half of the cumulative annual equity risk premium is earned on announcement days (Savor & Wilson, 2013) and the information is almost instantaneously reflected in prices once released (Hu, Pan, & Wang, 2013). To ensure fairness, no market participant should have access to this information until the official release time. Yet, in this paper we find strong evidence of informed trading before several key macroeconomic news announcements....Prices start to move about 30 minutes before the official release time and the price move during this pre-announcement window accounts on average for about a half of the total price adjustment.
They consider the 30 macroeconomic announcements that other authors have shown tend to move markets, and find evidence of:

  • Significant pre-announcement price drift for: CB consumer confidence index, existing home sales, GDP preliminary, industrial production, ISM manufacturing index, ISM non-manufacturing index, and pending home sales.
  • Some pre-announcement drift for: advance retail sales, consumer price index, GDP advance, housing starts, and initial jobless claims.
  • No pre-announcement drift for: ADP employment, durable goods orders, new home sales, non-farm employment, producer price index, and UM consumer sentiment.
The figure below shows mean cumulative average returns in the E-mini S&P 500 Futures market from 60 minutes before the release time to 60 minutes after the release time for the series with significant evidence of pre-announcement drift.

Source: Kurov et al. 2015, Figure A1, panel c. Cumulative average returns in the E-mini S&P 500 Futures market .
Why do prices start to move before release time? It could be that some traders are superior forecasters, making better use of publicly-available information, and waiting until a few minutes before the announcement to make their trades. Alternatively, information might be leaked before the official release. Kurov et al. note that, while the first possibility cannot be ruled out entirely, the leaked information explanation appears highly likely. The authors conducted a phone and email survey of the organizations responsible for the macroeconomic data in their study to find out about data release procedures:
The release procedures fall into one of three categories. The first category involves posting the announcement on the organization’s website at the official release time, so that all market participants can access the information at the same time. The second category involves pre-releasing the information to selected journalists in “lock-up rooms” adding a risk of leakage if the lock-up is imperfectly guarded. The third category, previously not documented in academic literature, involves an unusual pre-release procedure used in three announcements: Instead of being pre-released in lock-up rooms, these announcements are electronically transmitted to journalists who are asked not to share the information with others. These three announcements are among the seven announcements with strong drift.
I wish I had a better sense of who was obtaining the leaked information and how much they were making from it.

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