By Denny Gulino

WASHINGTON (MNI) – Whether economic data leaks early from the Labor
Department is an important question, especially to those reporters
responsible for publishing the key jobs and inflation reports.

If you were a reader of some Internet reports Wednesday you might
get the impression it actually happens.

“BLS Comes Clean That Market-Moving Data Is Consistently Leaked,”
read the Wednesday morning posting on zerohedge.com, the popular
Web site aimed at market participants, that specializes in apocalyptic
outlooks and conspiracy plots, mixed in with savvy interpretations of
the latest data and economic developments worldwide.

“The system still suffered from security flaws, according to the
report conducted by Sandia National Laboratories on behalf of the Labor
Department,” zerohedge.com said. “So, it seems that BLS has consistently
been leaked ‘early’ as the report outlined ‘ways that technology could
be used to bypass security and prematurely leak the data … including
hidden transmitters in computer equipment and compromised phone or data
lines.'”

But careful readers might seize on the words “could be” and ask
whether, in fact, there is any proof being offered that economic data
like the monthly jobs and inflation reports have actually been leaked
early or have otherwise reached the markets prematurely.

None was cited in the Sandia report, and as MNI reported Tuesday,
the question whether there has ever been a malicious breach of security
was not answered directly by either the Labor Department or its Office
of Inspector General, whose response was “no comment.” Likewise there
was no comment on whether any investigations are underway.

Poring through two Sandia documents the Labor Department released
Tuesday, “CleanSweep Red Team Report” and “CleanSweep Technical
Details,” posted on www.dol.gov/media, however, shows there are no
statements that any leaks have been discovered.

In fact, both Sandia’s executive summary and its “technical
details” report contain footnotes that say it is more likely that a leak
could happen somewhere other than from within the data “lock-ups.”

(The lockups are sessions in which reporters get at least half an
hour advance look at sensitive data reports to prepare headlines, tables
and stories to be released at the approved time, usually 8:30 a.m. ET.)

One footnote in the Sandia report stated, “The IT environments
where the data are produced are more likely avenues for data loss than
is the Press Lockup facility.”

Another stated, “The IDART team recommends examination of BLS IT
systems used to produce the target economic data, and review of
personnel security controls to address potential compromise of insiders.
While not within the scope of CleanSweep, these are the most likely
vectors for data leakage.”

Pressed by the Labor Department to clarify those footnotes after
inquiries from reporters, Sandia issued a further statement that did not
back down from its reference to BLS security.

“Protecting data from unauthorized disclosure is a continuous
process. Sandia’s assessment is one element of that process and was
specifically designed to identify risks associated with the DOL lockup
room,” Sandia’s subsequent statement said.

But it added that “It is a routine step in Sandia’s security
assessments to look beyond the defined scope and identify other parts of
the system that can place the data at risk. It is in this context that
we suggested for BLS to evaluate its IT network.”

Though it raises the possibility of the Bureau of Labor Statistics
as a “vector for data leakage,” again there appears to be nothing on the
public record that such a breach has ever happened. Labor has said the
BLS is regularly examined for security flaws.

The Sandia reports did make clear the origin of the Labor’s
concern: the reason the IDart team was engaged to examine possible
security flaws was “the possible presence of algorithmic traders and/or
their agents in the press lockup facility.”

These “agents” have always been in plain sight, news media firms
that sell services that provide algorithmic high frequency trading
operations with the breaking economic statistics as fast as
technologically possible. Some of those vendors are familiar names, like
Dow Jones, Reuters and Bloomberg. Some others were less familiar, such
as the Bond Buyer and its business partner Nasdaq OMX, and Need to Know
News — owned by MNI.

The less familiar firms were evicted from the data lockups
beginning July 5 with the Department saying they did not meet its new
criteria for entry. One of the criteria they failed to meet was that
they not have what Labor sees as the need for advance access to the
reports. Both firms’ output from the lockups output was primarily to
algorithmic trading operations.

A host of other security upgrades at Labor take effect in
September, all intended to protect against premature leakage of economic
data. Since existing security arrangements already sever all data
circuit, telephone or wireless contact with the outside world until
publication of the data, usually at 8:30 ET, the news media have been
left wondering what the upgrades will accomplish.

Labor has considerably softened their requirements of the news
media under pressure from the House Government Operations Committee
Chair Darrell Issa, who held a hearing on the changes June 6.

The key question, however, remains. Can algorithmic trading
operations, fiercely focused on instant computerized trading faster than
a human can react, somehow get Labor Department data before everyone
else? And should these operations’ huge investment in computer and
software technology to any extent disqualify them and their vendors from
getting government data as soon as it is available?

Even with the security upgrades, algorithmic trading operations
will not be deprived of instant data, given those several suppliers
still in the data lock-ups.

One thing may be changing for algo customers, however. The days may
be numbered for the peculiar algo trading mischief now in evidence
before many major economic reports, dubbed by a Tabb Group analyst as
“banging the beehive.”

As previously reported, trading activity often spikes just
milliseconds prior to the scheduled release of major economic data as
some computerized trading firms spur volatility by pretending to have
received a data leak. The spike may trigger automated trading routines
or otherwise provide opportunities for quick profit.

But the SEC Wednesday morning went another step toward creating a
“consolidated audit trail” that would let the agency trace algorithmic
trading transactions with certainty for the first time, despite the
blizzard of such millisecond and now microsecond transactions that can
reach 100,000 a second.

If implemented as envisioned, the system would destroy the
remaining anonymity so prized by many algo trading operations as well as
valued by those who try to elude their trading competitors’ algo
“sniffing” through the use of so-called dark pools.

Though not real time, the new tagging and databasing regime will
reveal the buyer and seller in every equities trading transaction by
8:00 a.m the following day, information that on occasion could be shared
with the CFTC.

“Today’s securities markets are highly automated, with trading
activity widely dispersed across many trading centers,” the SEC said.
“Due to rapid technological advances, trades are now transacted in a
matter of milliseconds if not faster.”

The SEC continued, “Such dispersed, automated trading activity
makes it more challenging for self regulatory organizations and the SEC
to conduct cross-market supervision of trading activities and oversight
of the securities markets and market participants,” the SEC said.

The trading disclosures will be kept confidential by the SEC, FINRA
and other SROs, so highly-guarded proprietary trading strategies would
still be kept out of sight of competing trading operations yet be
available for enforcement purposes.

FINRA and other SROs have 270 days after a 60-day comment period to
agree on how the audit system will be constructed and submit the plan to
the SEC for implementation.

** MNI Washington Bureau: 202-371-2121 **

[TOPICS: M$U$$$,MAUDS$]