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The POMO Submitted-To-Accepted Ratio: A Tell On How To Frontrun The Frontrunning Primary Dealers

Tyler Durden's picture




 

To those who look to Fed POMO days as a guaranteed panacea to underperformance and an even more guaranteed green close, you are right (at least, so far). But that is only half the story. It turns out that combing through POMO data yields a very surprising set of outcomes, namely, that the ultimate return on any given POMO day is almost exclusively a function of the Submitted-to-Accepted ratio. As John Lohman highlights, "the generic market effect on POMO days (i.e. stocks and yields up relative to non-POMO days) should be pronounced when the submitted-to-accepted ratio is relatively low (“meets expectations”) and muted when the ratio is high (“a negative surprise”, particularly if said Dealers had already positioned themselves in pre-POMO trading, based on a set of expectations regarding the outcome)." Indeed, the empirical result is precisely that. Which is why in addition to keeping track of POMO days, a far more critical piece of information is tracking the S/A ratio disclosed every day at 11am. If low, and if market performance is below a specific bucket's average, it may be a green light for a stratospheric ramp into market close, and a signal to frontrun the market alongside the Primary Dealers.

Without further ado, here is the statistical data compiled and associated narrative by John Lohman that predicts not only market performance, but Primary Dealer frontrunning via Fed monetization generosity.

POMO Submitted to Accepted ratio

In a prior Zero Hedge post (here), it was clearly demonstrated (to all save a few unnamed asshats who believe in coincidences against all statistical probability) that equities and interest rates tend to rally on POMO days relative to non-POMO days.  Here, using the Fed’s Total Par ‘Accepted’ and ‘Submitted’ data, we can show that, not only is this effect not a coincidence, but that the magnitude of the market’s reaction to POMO on any given day is positively correlated with the outcome of that day’s operation.

The POMO ‘Submitted-to-Accepted’ ratio can be thought of as being similar to a reverse bid-to-cover ratio in Treasury auctions.  Primary Dealers submit a certain volume of paper and the Fed accepts a portion of it.  If POMO is indeed having a direct impact on the markets, there should be a relationship between the submitted-to-accepted ratio and the size of the market’s response.

More specifically, the generic market effect on POMO days (i.e. stocks and yields up relative to non-POMO days) should be pronounced when the submitted-to-accepted ratio is relatively low (“meets expectations”) and muted when the ratio is high (“a negative surprise”, particularly if said Dealers had already positioned themselves in pre-POMO trading, based on a set of expectations regarding the outcome). 

In fact, this is exactly what we find in the data.  The first chart below compares the returns on days when the ratio is below average (S/A < Avg.) with days when it is above average (S/A > Avg.).  Note that, indeed, the effects of POMO are pronounced when submitted/accepted is lower than average and subdued when it is above (vs. all POMO days).  And of course, the returns under all POMO scenarios is higher than non-POMO days.

To eliminate the potential impact of skew in the ratio, we also conducted the analysis above using the ratio’s median (S/A < Med. and S/A > Med.).  Note that the data has the same monotonic relationship.

To the extent the submitted-to-accepted ratio is a better indicator of the market’s response than is the actual size of the operation itself, there is evidence that Dealers are (surprise) front running in pre-POMO trading, but this is a topic for another day.  At a minimum, this analysis confirms the link between POMOs and market reactions, as well as illustrating that the success rate of dealer submissions is positively correlated with the magnitude of the market’s response.  Finally, it suggests the submitted-to-accepted ratio contains valuable information regarding post-POMO intraday trading on POMO days.

 

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Wed, 10/27/2010 - 15:27 | 681261 HarryWanger
HarryWanger's picture

At a minimum, this analysis confirms the link between POMOs and market reactions, as well as illustrating that the success rate of dealer submissions is positively correlated with the magnitude of the market’s response.

No shit. It's been easy money. You've done an excellent job of keeping this forum updated on POMO's. It's helped me pull in a few extra bucks.

Wed, 10/27/2010 - 15:49 | 681334 homersimpson
homersimpson's picture

Of course, you refuse to acknowledge the fact if POMO days aren't around, days like today happen. The concept of POMO works in both directions, not one..

Wed, 10/27/2010 - 15:52 | 681341 SheepDog-One
SheepDog-One's picture

I hope you lose em all in a flash crash.

Wed, 10/27/2010 - 15:57 | 681347 Herd Redirectio...
Herd Redirection Committee's picture

Honestly, no one should be supporting this corrupt market by trading in it.  If you want to buy and hold, or go short, by all means, do so.  But to actively trade the market?  Isn't that implying that you think the market is NOT broken?  Or that you can benefit from the corruption?

We should all be dedicated to ending this corrupt system, and the best way to do that is to hold silver and gold.  Take it out of the banks, and place your bet AGAINST Wall Street.  That is how this mess will ultimately be resolved.

http://psychonews.site90.net

PsychoNews, exposing the Oligarchy one psycho at a time.

Wed, 10/27/2010 - 16:16 | 681401 razorthin
razorthin's picture

yeah, they lull you to sleep and then apply the pillow.

Wed, 10/27/2010 - 15:33 | 681265 mjbommar
mjbommar's picture

I found a similar result but the t-stat did not indicate that it was strong, especially recently.  More here, including a dataset of POMO operations.

Wed, 10/27/2010 - 15:47 | 681314 FOC 1183
FOC 1183's picture

For what it's worth, you're including the 20 or so sales POMO days while I'm using 'buy only' days.  And it seems like your option 3 (the most comparable to all pomo vs non-pomo) giving a +29.5 vs. -32.7 should have a significant T.

JL

Wed, 10/27/2010 - 15:51 | 681340 mjbommar
mjbommar's picture

t-stat was from something totally separate than the options 1-3 in that post.  I took the direction of operation (+1/-1 for P/S) and multiplied by submitted/accepted, then ran against log(open)-log(close).  Also out-of-sample issue since submitted/accepted not known until close date around 11am.

Thu, 10/28/2010 - 09:08 | 682979 mjbommar
Wed, 10/27/2010 - 15:31 | 681278 count_de_monee
count_de_monee's picture

Breaking News - Portugal Update

 

The PSD (opposition) just announced they will wait until the last day before the budget vote (next Tuesday - vote is Wednesday) before deciding their vote.

Basically this throws the ball back into the government's court and leaves open the possibility of more negotiations until then.

Breaking it down: it's a draw, and we're heading into overtime. I wonder how those CDS will react?

I have a feeling they'll end up abstaining, but that won't really do much of anything to relieve the pressure. And there's a general strike coming up next month. Should be fun.

Wed, 10/27/2010 - 16:02 | 681301 plocequ1
plocequ1's picture

Wow!! This is bad news.It looks like its time to Load up on Google. Lord Bernanke is handing out loaves and fishes. Old ancient proverb....And lo' behold the fools that turns down free money.

Wed, 10/27/2010 - 15:49 | 681333 HarryWanger
HarryWanger's picture

I have a feeling they'll end up abstaining, but that won't really do much of anything to relieve the pressure. And there's a general strike coming up next month.

Oh, great! Another strike in a PIIG that will accomplish nothing. Can hardly wait until "next month"....again.

Wed, 10/27/2010 - 15:32 | 681281 wiskeyrunner
wiskeyrunner's picture

Market going green any minute, hungry buyers jump on every dip.

Wed, 10/27/2010 - 15:34 | 681285 HelluvaEngineer
HelluvaEngineer's picture

this country is a f&cking joke

Wed, 10/27/2010 - 15:36 | 681291 RobotTrader
RobotTrader's picture

Virtually every dip being bought.

At least in sectors that could care less about what the U.S. dollar does....

Wed, 10/27/2010 - 17:07 | 681553 GoinFawr
GoinFawr's picture

Ahah! He couldn't even get 50 bux for it! Just like Mr.T on Bloomberg trying to buy your gold that MUST mean 'the top is in'! Right Robo?

Wed, 10/27/2010 - 15:38 | 681303 HarryWanger
HarryWanger's picture

Yes and with volume behind the spikes. Look at the minute charts on the indices. Every pop up is accompanied by a decent volume surge.

Wed, 10/27/2010 - 15:42 | 681313 Gubbmint Cheese
Gubbmint Cheese's picture

look at the minute view of the SPY between 2:40 and 3:37.. huge orders.

 

 

Wed, 10/27/2010 - 15:45 | 681321 HarryWanger
HarryWanger's picture

Yep. Every move higher today spiked on volume surges. 

Wed, 10/27/2010 - 15:56 | 681346 HelluvaEngineer
HelluvaEngineer's picture

That's because the recovery is robust and broad-based, Harry.

Wed, 10/27/2010 - 16:05 | 681363 Iam Rich
Iam Rich's picture

No...it's because you need to front run the Fed POMO at the end of the prior day now and sell at noon tomorrow.  If you wake up tomorrow with a plan to buy the POMO, you're too late.

Wed, 10/27/2010 - 16:29 | 681432 Id fight Gandhi
Id fight Gandhi's picture

Oddly, it is falling apart as more people trade this, Pomo will lose its affect.

Wed, 10/27/2010 - 17:10 | 681564 GoinFawr
GoinFawr's picture

No, it is not 'odd', it's 'predictable'. Or were you being sarcastic?

Wed, 10/27/2010 - 15:45 | 681320 Gubbmint Cheese
Gubbmint Cheese's picture

PS - Wanger I think your note meant to read, "every pop up is preceeded by a volume surge"

Wed, 10/27/2010 - 15:46 | 681324 HarryWanger
HarryWanger's picture

Yes, you are correct. Thank you.

Wed, 10/27/2010 - 15:48 | 681332 count_de_monee
count_de_monee's picture

Breaking PT news (again)

The PSD, as well as many others, say that the situation is a lot worse than the government has been letting on. It looks like the hole in the deficit and in the debt is wider than admitted.

Not good.

Wed, 10/27/2010 - 16:05 | 681361 Spalding_Smailes
Spalding_Smailes's picture

The books are cook'd? Nooooooooooooooooooooooooo really?

 

The dow is up on jaw boning of uncle ben & pomo over the last 6 weeks.

The market is not up on growth, unemployment, fundamentals.

The banks are down over the last 3-4 weeks. The dollar is down on Q.E. 2 being 2 trillion. Anything less and the dollars climbs, risk off.

Over last 6-7 days Apple down, Cat down, U.S Steel down big (If we really had recovery U.S. Steel would be at 70$), all the R.E.I.T.'s all down over the last few days.

This is trillions in market cap moving down after a false run up on hot air, smoke & mirrors .....

Wed, 10/27/2010 - 15:56 | 681345 wiskeyrunner
wiskeyrunner's picture

No such thing as a down day in the stock market, hungry buyers gobble up the turkey.

Wed, 10/27/2010 - 15:59 | 681350 Harndog
Harndog's picture

Thank you...

Ok, What is the average Submitted-to-Accepted ratio

Wed, 10/27/2010 - 16:02 | 681352 Waterfallsparkles
Waterfallsparkles's picture

Trade is short the close on Pomo days.  Buy the lows on non pomo days.  Sell on the top on the pomo days and short again.  Rinse and repeat.

Seems like they want to keep the trend in tack.

Wed, 10/27/2010 - 16:06 | 681366 DollarDive
DollarDive's picture

What's amazing is that all the rhetoric about QE2 has moved the US dollar higher.  The FED is getting ready to "print" money out of thin air, and because expectations have become tempered a bit, the US dollar has rallied.   Wow.

Wed, 10/27/2010 - 16:06 | 681367 the not so migh...
the not so mighty maximiza's picture

Amazing

Wed, 10/27/2010 - 16:15 | 681391 Gimp
Gimp's picture

Anyone got the POMO schedule till EOY? I have the schedule up to 11/8/10

I am assuming the Fed is going to keep this going for as long as possible.

Wed, 10/27/2010 - 16:22 | 681420 Cognitive Dissonance
Cognitive Dissonance's picture

They haven't released anything beyond 11/08/2010...................unless your name is Bill Gross.

Wed, 10/27/2010 - 16:19 | 681413 Flatchestynerdette
Flatchestynerdette's picture

so now we're trading one day earlier on POMO if we're frontrun the frontrunning primary dealers. wow. Wormhole effect? Timewarp? We've got McFly's sports compodium a day earlier....yet what the hell happened today? Gold down almost $16 on QE2 not setting sail from the berth and no corresponding downdraft in the dow. Someone spike the s&p futures or we just float up to near flatline?

Wed, 10/27/2010 - 23:01 | 682295 StychoKiller
StychoKiller's picture

I've looked through dozens of Cracker-Jack boxes, where's the secret decoder ring so that I too can make the big bux??

Wed, 10/27/2010 - 16:24 | 681426 Gimp
Gimp's picture

CD - Bill is putting the schedule together now for the NY FED!

LOL

Wed, 10/27/2010 - 16:30 | 681440 DollarDive
Wed, 10/27/2010 - 16:39 | 681474 SimpleSimon
SimpleSimon's picture

History books will record that homo sapiens evolved into pomo sapiens.

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