Observations On Inside Information Leakage By The Federal Reserve
An interesting letter posted today by a reader on Jesse's Cafe Americain caught our attention. As the reader proposes, on many occasions during the UST period of Q.E. between March and November, the Fed may have well been front-run by one or more "players" casting serious doubt on not only the integrity and propriety of the Q.E. process, but on just how much potential "leakage" may be occurring from the 33 Liberty office on a daily basis. If this occurs in Treasuries, one can be confident that it is also prevalent in equities, MBS and all other asset classes. Is it high time for the SEC to take a long, hard look at the primary source of market manipulation- the Federal Reserve Board Of New York? If not, can Mary Schapiro please approach the public with a referendum vote on whether or not she should be entitled to continue collecting hundreds of thousands of dollars in taxpayer money for continuing to do nothing.
I used to work for a BB on a prop desk until the financial crisis took
hold and they fired the less senior guys on the desk. I now trade US
Treasuries, for a small prop firm in xxxxx, to scalp basis trades in
mostly on the run securities. Occasionally, I will also take position
in the repo markets for off the runs if I see something "mispriced."
Your recent article piqued my interest because we too have noticed
"shenanigans," of sort, in the QE program of USTs.
noticed, especially in smaller issues like the 7 Year Cash is that
before a Fed buy back would be announced the price would pop
significantly as buyers would run through all the offers on two major
electronic exchanges (BGC Espeed and ICAP BrokerTec). This occurred
more than several times as the 7 Year Cash would be overvalued both by
its BNOC by 20-30 ticks and its relative value to similar off the runs.
This buyer(s) would lift every offer they could, driving the price
substantially above its "value" for sometimes a week at a time. After
this buying would occur, the Fed would then announce the purchase of
that security sometimes a handle above its approximate value. This
"luck" did not just occur in the on the run 7 Year sector, it also
occurred in the 30 Year Cash, 3 Year Cash, and more than several off
the runs. Again, it was especially prevalent in the less liquid
treasury products. Often the "appetite" for these securities would
begin approximately 2 weeks to 1 week before the official Fed
announcement. The buying was well organized and done in such a way as
to completely knock it off kilter from its relationship with like cash
Treasurys and the CME Ten Year Contract. If you examine the charts of
some of the selected buy backs before the official announcement, you
will see a similar occurrence.
While I have not broken this down
into a paper to prove it (and I see nothing positive coming out of
contacting the ESS-EEE-SEE about this issue), I can assure you that it
was occurring on a consistent basis across the entire curve.
certain issuance would be bid up through the market (substantially
above value, as derived by several metrics) only to be later gobbled up
by the Fed at the unreasonable price. These player(s) had substantial
pockets as we, the small guys (but with a decent capital base), would
take the other side of what seemed to be an obvious fade. While this
did not occur in every single issuance of the QE program, it occurred
often enough to be obvious to any learned observer.
While I am
not sure if this can be attributed to purposeful Fed policy or someone
at the Fed talking to his pals, I am certain it transpired."
As Jesse points out, and as we have claimed on so many occasions, "Corruption is inevitable when the government is engaged in manipulating
the markets with public monies. That portion of the Fed's activities
needs to be scrutinized by the GAO on a continual basis. And the
activities of the Exchange Stabilization Fund and the Treasury in
market intervention should be subject to review by the legislative
branch on behalf of the people."