Iron gates that protect the underground vaults where gold is stored at the Bank of England highlight how paramount security is at the central bank’s London headquarters on Threadneedle Street.
So the revelation that one of the BoE’s suppliers has been making available an audio feed of its key press conferences — allowing traders to hear market-sensitive commentary before its official broadcast — is more than an embarrassment and has also prompted the US Federal Reserve to scrutinise its own broadcast feeds.
For the BoE, the incident suggests a serious failure to police the conduct of its contractors, and raises far reaching questions about the central bank’s internal controls and systems. Investigations have been launched and below is what we know so far.
What exactly is under investigation?
The BoE holds press conferences on monetary policy four times a year, when it publishes forecasts for the economy alongside interest rate decisions by its Monetary Policy Committee. It also holds briefings on financial stability twice a year, after reports by its Financial Policy Committee.
The revelation first reported by The Times was that some traders have this year been able to listen to the BoE’s press conferences before they were broadcast to the public.
The traders had access to an audio feed — intended only as back-up in case the main video link about the events failed — that was sold to them by a news provider linked to one of the BoE’s suppliers, the central bank found during an internal probe.
Those listening would have been able to trade on any market-moving comments by BoE officials including governor Mark Carney several seconds before the rest of the market.
This is because the audio feed provided information faster than the video link.
“This wholly unacceptable use of the audio feed was without the bank’s knowledge or consent and is being investigated further,” said the BoE.
The matter has been referred to the Financial Conduct Authority, the chief UK financial regulator, for investigation. The FCA probe is likely to focus on whether market abuse rules or other regulations were breached.
Who was involved in the activity?
The BoE has declined to name the supplier involved or the related news provider that sold it on to traders.
However, traders are well aware of the potential to gain an edge over rivals by seeking out audio feeds of commentary by public officials because these can be transmitted down fibre optic cables up to 10 seconds faster than video.
Companies such as RanSquawk and Statisma compete to be the fastest in transmitting speeches and remarks out to the market.
RanSquawk denied involvement in the BoE case. Statisma said it specialised in delivering only publicly-available audio content.
Market insiders said the end users of the audio feed were likely to be manual traders rather than firms using high-speed computers.
“It’s probably more human than computer as the advantage was five to eight seconds, so there’s not much need to be better than the human,” said Stéphane Tyč, co-founder of McKay Brothers, a high-speed trading network operator.
Did anyone make money out of the breach?
Probably not because monetary policy has offered few good trading opportunities in the past year, with the BoE leaving interest rates on hold. There were no significant moves in sterling on the days of the BoE press conferences in question.
In theory, any comments by public figures such as the head of a central bank have the potential to move markets.
But one trader at a bank said he had trialled a service that offered superfast access to audio feeds from central bank meetings and decided not to subscribe as its monthly cost of up to £5,000 outweighed the potential to make money.
Was any of this illegal?
The BoE described the sale of the audio feed — which took place without its knowledge or consent — as a “misuse” of the recording.
However, the central bank would not say whether its contract with the supplier contained any provision explicitly preventing the feed being used in this way.
Lawyers said the FCA may struggle to prove that the activity contravened EU rules on market abuse, which provide for civil penalties or, if serious enough, criminal sanctions under UK law.
Sara George, a former regulator who is now a partner at law firm Sidley Austin, said: “It will be difficult for the FCA to demonstrate that trading on the basis of a live audio news feed of a public speech by the governor of the Bank of England is market abuse. Speed of transmission may give the recipient an advantage but the information is still public.”
One regulatory expert said much would depend on how the audio feed was marketed to hedge funds or high-frequency traders, and if they knew they were paying for a service that secretly gave them information a few seconds before others received it.
“[The FCA] could pursue a conduct or ‘lack of integrity’ case against the individual traders, provided they knew that the audio feed was earlier than the public announcement, and hence knew they were getting an unfair advantage.”
What does it mean for the BoE?
It certainly casts a shadow over the BoE’s controls and systems, as well as the arrangements for its press conferences.
They compare unfavourably with equivalent arrangements by the European Central Bank, which has a free high-speed audio feed of its events aimed at killing the market for companies that seek to sell subscriptions.
Danny Blanchflower, a former member of the BoE’s MPC, called for the central bank’s chief operating officer, Joanna Place, to step down.
Tony Katz, head of investigations at law firm DLA Piper, said: “The Bank of England will need to consider whether its information controls were adequate and whether they met the standards they expect of those they regulate.”
Chris Brennan, a regulatory partner at White & Case, said: “It does feel like a significant flaw in the bank’s systems and controls.”
Reporting by Caroline Binham, Delphine Strauss, Philip Stafford and Eva Szalay
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