POMO And Market Intervention: A Primer

Tyler Durden's picture

With FRBNY Brian Sack's Permanent Open Market Operations (POMO) now firmly back on the scene, and by all appearances about to grow orders of magnitude larger than the prevailing $10 billion a week levels following implementation of QE2, we have been bombarded by requests to explain the methodology behind what the 10:15 am - 11:00 am liquidity intervention by the Fed means in terms of asset prices. We recently presented Nic Lenoir's observations on how POMO impacts rates on an intraday basis. However, the most comprehensive report on the issue comes courtesy of Bob English as the Precision Report. His analysis titled A Grand Unified Theory on Market Manipulation is a must read for everyone who dares to trade ahead of the Fed on POMO days (which, incidentally, this week will be on Tuesday and Thursday). While the report is as of August 2009, the logic behind it is as relevant and applicable today as it was when first written.

Here is Bob English' summary on the topic:

There is much speculation and anecdotal information regarding the rally that began March 6 2009, which have suggested the gains are the result of massive manipulation on the part of the Federal Reserve (FR) and the large institutions that dominate Treasury securities dealing, program trading and the derivatives markets.   Traders have reported that traditional indicators and metrics used for market analysis stopped working for periods of time or altogether, and that correlations among markets have been erratic and quick to change.  Record program trading by Goldman Sachs as reported by the NYSE, heightened focus on high frequency trading (HFT), outsized profits by the large and well-connected banks, along with unprecedented intervention by the FR in the markets only fuel the manipulation speculation.

If we had a big picture model (a Grand Unified Theory, or G.U.T.) that described the intentions, motivations and actions of the influential players, we could attempt to predict future market direction.  A limiting factor is that the rules of the game have changed quickly, and what we believe is important to the major players now may not necessarily have been important twelve or even six months ago.  Accordingly, while we will present as much supportive data as possible, our sample sizes will be small and we will rely on educated conjecture when necessary.  As such, we would expect to be, at worst, self-referentially coherent and, at best, correct in our predictions for the coming weeks and months. 

Full report, courtesy of The Precision Report (link)


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bugs_'s picture

Interesting thought that FRBNY and the FED might not be on the same page.

Sudden Debt's picture

did you ever know a government service that shined in communication?

Oracle of Kypseli's picture

Based on this article there are a thousand leaking faucets at the same time. Neither Bernanke nor anyone else can plug them successfully.

He is snooker and he knows it. He will eventually use his Glock 40 and end it all in his den with no note left, unless he does not get re-appointed.

You're snookered Benny. Or as they say in the United States of Entertainment: You are behind the 8 ball.

Oracle of Kypseli's picture

And one more thing:

Since we are talking unified theories, which is in the quantum mechanics territory, let's ask Mr. Ben if he is familiar with Heisenberg's uncertainty principle and Planck's constant


Good luck with that.

scratch_and_sniff's picture

lol "self-referentially coherent ". That one is going into my contortionist repertoire.

knukles's picture

Frankly, it amazes me that anybody even thinks that QE 1 ever even slowed down let alone QE 2 beginning.

The FED is Out of Ammo.  They have No further Unused Tool.  All they can do is More of the Same.  Either Expand the balance sheet or Degrade its quality, and both have been done in Biblically Large Zimbabwean Proportions.

Furthermore, with the Maiden Lane's and AIG rescue when viewed opposite the "permitted" (another story for another time) demise of Lehman, the FED's even trod into Fiscal Policy. 

Prof Gulliver's picture

"No further unused tool. All they can do is more of the same."
How did "more of the same" work out for Nagasaki?
I've been reading "the Fed is out of ammo" for two years.
They're not.
What part of "Don't fight the Fed" do you not understand?

knukles's picture

Didn't.  They only got nuked once.  A second time would have made no difference.


Prof Gulliver's picture

Umm, Hiroshima first, then Nagasaki. More of the same had quite an explosive result, no?

Dollar Bill Hiccup's picture

It's tough to go to the beauty contest every day, especially if you have a view that there should be some consistency to reality and that the overweight one with warts does not portray the ode to a grecian urn.

Remember, have a bucket to buy what you hate. POMO stocks up yields down is certainly antithetical to free markets as fundamental analysis, technicals etc. all are ground down into so much chaffe. But it's working. Mr. Tepper. Hello, Mr. Tepper ?

Maybe it would be easier to jump aboard the cynic / gravy / train if you were a professional politico since that is how your bread gets buttered at any rate ...

Buy what you hate. Repeat after me ...

tom a taxpayer's picture

Tyler, Bob English and The Precision Report - Thank you for the peek behind the curtain.

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