A working paper recently published on the European Central Bank's website suggests that investors have made millions of dollars by trading according to macroeconomic announcements prior to their release. The paper provides evidence indicating that stock prices shift in the expected direction in response to large-scale United States economic news, but that they do so prior to the release of such news, providing cause to strengthen release procedures to ensure that some investors are not unfairly advantaged by the premature release of non-public economic information.
The study assessed 30 macroeconomic announcements, 21 of which affected markets, and found that stock prices shifted in the direction consistent with the announcement prior to 11 of the 21 announcements. The profits from trading in advance of these announcements has amounted to more than $20 million per year since 2008, based on trading in the S&P E-mini futures market alone. Leaks of these announcements account for one explanation that the researchers suggest may account for this market activity. Regulations permit prerelease of macroeconomic data to reporters, so that they can understand the information to accurately report on it upon the official public release. However, the strict guidelines for lockup rooms in which this information is provided may not be adequately met, as some rooms lack sufficient monitoring to prevent reporters from bringing in phones or other devices with internet connectivity.
The study does not suggest that the market drift prior to announcements is solely attributable to information leaks, necessitating further research on that question according to the researchers. Traders may correctly anticipate an announcement by analyzing public data such as using aggregate price data to make assumptions about upcoming changes in the consumer price index, and use their analysis to trade in advance of the releases. On a more basic level, adept traders may simply accurately infer the implications of one macroeconomic announcement on a future announcement, and use this information to their advantage. In spite of these explanations that may account for some of the market drift in advance of announcements, this study strongly suggests that prerelease privacy guidelines for both private and public announcements need to be enhanced or more thoroughly enforced to protect market fairness.
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