A study by a finance professor at West Virginia University suggests that key U.S. economic information may have been leaked ahead of its release to the public, helping informed traders pocket more than $160 million over the course of six years.

International media outlets have been hopping this week with the paper by Dr. Alexander Kurov, associate professor of finance, finance Ph.D. program coordinator and a holder of the Chartered Financial Analyst designation at the WVU College of Business and Economics. Research by Kurov and a group of co-authors shows that there is significant market reaction in the 30 minutes preceding the release of several critical U.S. economic reports, suggesting one of two scenarios: that traders are making really smart market predictions before the important data is released, or that traders are getting information that has been leaked.

Outlets buzzing with the paper, published this week on the European Central Bank website, include Bloomberg, the Wall Street Journal, CNBC, Financial Times, CNN Money and MarketWatch. And while there are two viable possibilities as to how the curious market performance occurred, those media outlets are focusing on the possibility that key U.S. economic information may have been leaked ahead of its release. The subjects of the data releases studied include, but are not limited to, reports on GDP, manufacturing, consumer confidence and housing.

The paper, which is currently under journal review, shows that two separate futures markets drifted in the “correct” direction before the scheduled release time for seven of 21 market-moving indicators. Those indicators showed significant price movement approximately 30 minutes prior to the release of the economic data, demonstrating evidence of “substantial informed trading.” The 21 indicators were examined between January 2008 and March 2014, and the results suggest that benefactors of the activity may have made up to $20 million a year during that time on S&P 500 futures alone.

Co-authors of the paper include Alessio Sancetta, at the University of London, Georg Strasser, at the European Central Bank in Frankfurt, Germany, and Marketa Halova Wolfe, at Skidmore College, Saratoga Springs, New York.

“We show that prices and actual buy-sell order flows in stock and bond futures markets start moving in the ‘right’ direction before several important macroeconomic announcements,” said Kurov. “This means that some traders know what the announcement is going to be before it hits the newswires. They trade on it and make good profits. If these traders get their information through data leaks, this amounts to illegal insider trading. However, it is also possible that these traders use other, legally obtained information to make superior forecasts of the announcements.

“I want to be perfectly clear that there are two possible explanations for this kind of market activity. We find that announcements with less strict release procedures are more prone to pre-announcement informed trading, but it does not conclusively prove that this activity is solely attributed to leakage. There is a constant effort to try to improve the safeguarding of data before the release, and that effort is to be commended. The possibility that there is information leakage feeds into the notion that the market is rigged against the ‘little guy.’ The point is that this matters, and hopefully there will be more action taken to ensure the security of the data before it is released,” Kurov said.

The study may add to concerns that providers of this economic data, which can include central banks and governments, do not adequately protect market-moving communications such as economic indicators and monetary-policy decisions. Last month, the Federal Reserve’s inspector general — its internal watchdog — urged strengthening safeguards for giving journalists market-sensitive economic data and policy statements under embargo. The Reserve Bank of New Zealand also announced in April an overhaul in the release of decisions after a journalist allegedly leaked a surprise interest-rate cut.

Kurov will present the paper at the 2016 SFS Finance Cavalcade conference in Toronto on May 16. He and his co-authors will also present the paper at several other upcoming conferences in Stockholm, Sweden, Basel, Switzerland, and New York.

For further information on the WVU College of Business and Economics, follow B&E on Twitter at @wvucobe or visit www.be.wvu.edu.


CONTACT: Patrick Gregg, College of Business and Economics
304.293.5131, Patrick.Gregg@mail.wvu.edu


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