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A blog on financial markets and their regulation
When I argued in my blog post a few days back that monopoly providers of official data are unlikely to innovate, I still did not imagine that lack of accountability could lead to their actually degrading their data releases. But that is exactly what the US Department of Labour is proposing to do as regards the BLS (Bureau of Labor Statistics) non farm payroll data release which is perhaps the most powerful market moving data release on the planet today. The proposed draft rules and a transcript of a conference call on the subject are available at the website of the Department of Labour (hat tip for the links and for the whole story to FT Alphaville).
I remember reading a couple of papers by Ederington and Lee two decades ago on the BLS data releases and marvelling both at the ingenuity of the data release system and the speed with which markets process the information. The two papers by Louis H. Ederington and Jae Ha Lee are “How Markets Process Information: News Releases and Volatility”, The Journal of Finance, 48(4),1993, 1161-1191 and “The Short-Run Dynamics of the Price Adjustment to New Information”, The Journal of Financial and Quantitative Analysis, 30(1), 1995, 117-134. The JFQA paper describes the release system as follows:
The release is distributed to reporters with a “need for timely access” about 30 minutes prior to the scheduled release time. While the reporters may type their reports, they cannot leave the room or use the phone. Approximately one minute before the scheduled release time, the reporters are allowed to plug in their modems or pick up the phones but the lines are dead until the scheduled time.
The same paper also describes the speed with which the eurodollar futures market processes the information as follows:
Using 10-second returns and tick-by-tick data, we find that prices adjust in a series of numerous small, but rapid, price changes that begin within 10 seconds of the news release and are basically completed within 40 seconds of the release.
We must remember that this was two decades ago when modern high frequency trading was practically absent and eurodollar futures trading was still on the trading pit.
The Department of Labour now plans to degrade the data release system. In the conference call, it described the proposed changes in the system as follows:
Currently, organizations that participate in our lock-ups use their own computer and phone equipment, which is installed in our facilities. The telephone and data lines they use belong to and have been maintained by them. That, too, is changing.
… all currently participating organizations should plan to have their equipment removed.
… The department’s main lock-up facility will be … reconfigured with new computer equipment, and telephone and data lines. The Labor Department will own and maintain that equipment and those lines.
… Each work station will offer a telephone, monitor, mouse and keyboard. The server and network gear will be located in the lock-up room within a locked cage but separate from the workspace area. Users will be able to log onto their desktops at assigned work spaces. Those who want time to prepare notes or drafts can take advantage of the extra half hour to use Microsoft Word, which will be loaded on the computers.
… There will be a new rule that personal effects must be placed in lockers outside the lock-up facilities before entering the rooms. However, carrying in paper research notes and other paper materials will be allowed. Carrying in pens and pencils will not be permitted. The department will provide writing instruments as well as plain paper for notetaking inside the lock-up rooms.
… You can’t bring in discs or thumb drives or any type of electronic devices.
The Department of Labour will thus control what historical or background data is available to the reporters (they cannot bring anything in electronic form), and the Department of Labour will also control what software is available to the reporters (only Microsoft Word).
To understand how this degrades the information processing, let us go back to the market reacting to the release within 10 seconds in the age of human trading on the pit two decades ago. The only way this can happen is that a lot of analysis takes place prior to the data release and contingent trading strategies are worked out and well rehearsed in advance. The market thus waits not for the raw data, but for an interpreted news report that places the raw data in the context of all the consensus estimates, past trends and other background information and allows a pre-rehearsed trading strategy to be invoked. By reducing the quality of this analysis (by disallowing the tools required to do this), the Department of Labour is degrading the quality of its data release.
What is more, the Department of Labour has no real reasons for making these changes. Look at this exchange in the transcript:
Daniel Moss: Bloomberg News. I’m just wondering, why is the Labor Department choosing to do this now? What is the problem that you believe you are trying to fix given the master switch is already in place working effectively?
Carl Fillichio: [Department of Labour] It’s been, as I mentioned, 10 years since we took a holistic view of the lock- up, and times have certainly changed. …
Daniel Moss: What is the problem that you imagine you’re trying to fix given there is an effective master switch there already that controls access out of the room for the information?
Carl Fillichio: There’s nothing we necessarily expect. I think we’re doing prudent business management of reviewing our systems and looking at the changes in technology and the way that the news is delivered and have decided that now is the correct time to institute these changes. …
Daniel Moss: Do I interpret your response, Carl, as meaning there’s no current problem?
Carl Fillichio: What I’m trying to do is prevent a problem, Daniel.
Daniel Moss: What is the problem you think, you imagine that this will prevent?
Carl Fillichio: I think we’re going to move on. Operator, we’ll take the next question.
What we see clearly in this exchange is the total lack of accountability. I am reminded of the famous lines in Shakespeare’s Julius Caesar (Act II, Scene II, 72-76):
DECIUS BRUTUS: Most mighty Caesar, let me know some cause, Lest I be laugh'd at when I tell them so. CAESAR: The cause is in my will: I will not come That is enough to satisfy the Senate.
As far as the governmental monopolist’s preference for a private sector monopoly (Microsoft Office), that is probably the subject of another post.