Having questioned whether Tim Geithner leaked every Fed announcement to the banks during his tenure (but did not mention it in his memoirs) and shown that traders acted on information at faster than the speed of light (and thus were indeed aware of leaked decisions ahead of time), it should be no surprise that a new research paper has found “robust evidence” that some traders have been getting early news of U.S. Federal Reserve rate announcements and then trading on it during the Fed’s media lockup. The trading anomalies that Bernile and his colleagues spotted begin about 15 minutes before the news embargo is lifted and continue at a fairly even pace and are "statistically significant and in the direction of the subsequent policy surprise."
A research paper has found “robust evidence” that some traders have been getting early news of U.S. Federal Reserve rate announcements and then trading on it during the Fed’s media lockup.
The paper detects abnormally large price movements and imbalances in buy and sell orders that are “statistically significant and in the direction of the subsequent policy surprise.” The moves occurred during the window between when Fed announcements are supplied to the news media and when they are permitted to be released to the public, the authors write.
“Back-of-the-envelope calculations indicate that the aggregate dollar profits … range between $14 [million] and $256 million across the four markets that we examine” between 1997 and 2013, the authors write.
“What is really interesting about our work is that it shows the problem is not a problem of milliseconds,” Bernile.
In other words, this was not just HFT front-running but actual 'information' leakage... from whom we wonder?
From the August 16, 2007 transcript (page 13 of 37) of the conference call preceding this announcement.
MR. LACKER. If I could just follow up on that, Mr. Chairman.
CHAIRMAN BERNANKE. Yes, go ahead.
MR. LACKER. Vice Chairman Geithner, did you say that [the banks] are unaware of what we’re considering or what we might be doing with the discount rate?
VICE CHAIRMAN GEITHNER. Yes.
MR. LACKER. Vice Chairman Geithner, I spoke with Ken Lewis, President and CEO of Bank of America, this afternoon, and he said that he appreciated what Tim Geithner was arranging by way of changes in the discount facility. So my information is different from that.
CHAIRMAN BERNANKE. Okay. Thank you. Go ahead, Vice Chairman Geithner.
VICE CHAIRMAN GEITHNER. Well, I cannot speak for Ken Lewis, but I think they have sought to see whether they could understand a little more clearly the scope of their rights and our current policy with respect to the window. The only thing I’ve done is to try to help them understand—and I’m sure that’s been true across the System—what the scope of that is because these people generally don’t use the window and they don’t really understand in some sense what it’s about.
At least we now know who the bankers' mole on the FOMC was before, as gratitude for his services, he was promoted to Treasury Secretary of the US. Because if he leaked one, he leaked them all.
It appears the FOMC announcements were the focus of the leaks...
The researchers found no evidence of trading abnormalities during media lockups ahead of the Bureau of Labor Statistics’ release of the monthly employment and inflation reports, or the Bureau of Economic Analysis’ release of the gross domestic product report.
So - are the markets rigged?
Full paper below: