No one has dug into the vaults of the Bank of England and pilfered a gold bar, but security breaches for a central bank in the 21st-century age of information do not come much worse than this. Hedge funds have managed to gain access to an audio feed of the governor’s press conferences, thereby securing for themselves an advantage of a few seconds over viewers of the slightly delayed TV broadcast. In modern frantic markets, seconds can matter.
The misuse of the audio feed by an unnamed third-party supplier is “wholly unacceptable”, said the Bank after the report by the Times. The governor, Mark Carney, will be squirming with embarrassment. He arrived in 2013 on a mission to modernise the Bank’s operations and information security was top of the list. Now Threadneedle Street stands accused of gross naivety.
The audio feed was designed as a back-up in case the TV system failed, but the potential for mischief should have been obvious. The Bank left a back door, if not wide open, then significantly ajar. The call for somebody’s resignation will be loud.
No hedge fund or trader, it should be said, had advance knowledge of the Bank’s actual policy decisions, which are the main event on these stage-managed occasions. Interest rate decisions, for example, are announced to the world on the stroke of midday, and the full set of accompanying documents is published simultaneously.
Journalists are allowed to read the contents in advance only if they are locked in the bowels of the Bank until midday in a secure room with no wifi or mobile phone signal. The security breach concerns only the press conferences, which start at 12.30pm.
A consolation for the Bank, one could argue, is that Carney’s press conferences tend to be spectacularly dull. He’s in the business of explaining reports that are in the public domain by the time he speaks and he tends not to stray far from his mental script. For ordinary mortals, a five-second informational advantage might be useless. Even five minutes to wade through Carney’s sub-clauses might not yield nuggets to indicate if the pound should be moving up, down or sideways.
The trouble is, there is a breed of hedge funds that does not operate like ordinary mortals do. They’re pursuing fast action and even the possibility of morsels of information count in their world. Some even run artificial intelligence computer programmes to alight on specific words or phrases and then trade instantly, and perhaps only for a brief second, on what they learn.
This type of hedge fund may also be interested in what Carney doesn’t say, as much as what he does, in response to a question. Such strategies seek only marginal gains, and success is clearly not guaranteed, but a central bank simply cannot give anybody any theoretical opportunity to get ahead of the market.
The fallout from this affair will be fascinating. The Financial Conduct Authority will have to decide if the third-party supplier (which surely won’t remain unidentified for long) has merely breached its contract with the Bank or has committed market abuse, which is a serious regulatory matter. The market abuse question also applies to the hedge funds, though the FCA will face an obvious difficulty in proving that a trade was placed because of access to the audio feed rather than something unrelated. This could be groundbreaking territory.
The judgment on the Bank of England, by contrast, is already clear. It looks amateurish.
