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