"Defendants used electronic chatrooms, instant messaging, and other electronic and telephonic methods to exchange confidential customer information, coordinate trading strategies."
"Traders at some of these primary dealers talked with counterparts at other banks via online chatrooms and swapped gossip."
Those quotes are from a 61-page complaint filed in the Southern District of New York wherein Boston’s public sector pension fund accuses all US primary dealers (the cabal of usual suspect dealer banks that transact directly with Treasury and "have a special obligation to ensure the efficient function" of what was formerly the deepest, most liquid market on the planet) of colluding to manipulate the $12.5 trillion US Treasury market.
The alleged scheme (tipped here last month) was remarkably simple and involved precisely the same sort of conspiratorial, chatroom shenanigans employed by the very same banks who, at various times, have colluded to rig FX, gold, various -BORs, ISDAfix, and pretty much everything else.
In short, the banks simply conspired to keep the spread between the when issued price and the price at auction as wide as possible, thus inflating their profits at the expense of everyone else where "everyone else" includes institutional investors and hedge funds all the way down to retirees and Main Street in general. From the complaint:
Defendants employed a two-pronged scheme to manipulate the Treasury securities market. First, Defendants used electronic chatrooms, instant messaging, and other electronic and telephonic methods to exchange confidential customer information, coordinate trading strategies, and increase the bid-ask spread in the when-issued market to inflate prices of Treasury securities they sold to the Class. Second, Defendants used the same means to rig the Treasury auction bidding process to deflate prices at which they bought Treasury securities to cover their pre-auction sales. Recent reports confirm that traders at some of these primary dealers "talked with counterparts at other banks via online chatrooms" and "swapped gossip about clients' Treasury orders.
By engaging in this unlawful conduct, Defendants maximized the spread not only for transactions in the when-issued market, but also between their buy (auction) price and sell (when-issued) price.
And of course the collusion didn’t just affect the cash market but every market linked to Treasurys.
This conduct lined the pockets of Defendants while raising prices to investors trading Treasury securities in the when-issued market, investors trading Treasury security-based futures and options, and investors transacting in instruments benchmarked to the prices of Treasury securities determined at auction, including certain bonds and other asset- backed securities and interest rate swaps.
Given the tight correlation between the Treasury securities prices in the spot market and futures markets, Defendants' manipulation of the auction prices for Treasury securities also directly and proximately caused injury to individuals and entities that traded in Treasury futures and options on U.S. exchanges, including the Chicago Mercantile Exchange.
Amusingly, it appears as though the banks got caught when, in the wake of the LIBOR scandal, they began to rein in the collusion, after which the difference between the manipulated market and the real market was impossible to ignore.
Plaintiff's experts further found that bid-ask yield spreads of Treasury securities in the when-issued market were higher in the period leading up to the revelation of the LIBOR scandal than they were after the scandal broke. Plaintiffs' experts found the change in these spreads to be statistically significant.
These observations support the proposition that spreads before the LIBOR scandal revelation were artificially high and, following the public announcement of the scandal, returned to competitive levels, as several of the same Defendants involved in the LIBOR scandal engaged in substantially similar misconduct in the Treasury market. This price artificiality could only have been caused by Defendants' collusive behavior in both the when-issued market and at the Treasury Department auctions.
And in case all of the above isn’t clear enough, here’s a step-by-step guide to rigging the Treasury market:
Similar to what DOJ discovered in connection with its criminal investigation into the FX market, Defendants' employees also used electronic chatrooms and other media to share confidential order flow information and collude on the prices of Treasury security transactions in the when-issued market. Defendants used these same electronic means to collude with respect to their bidding strategies at Treasury Department auctions so that they could maximize their gains in auctioned Treasury securities.
First, Defendants' traders agreed to artificially inflate the prices of Treasury securities in the when-issued market through coordination of bid-ask spreads. Defendants communicated with each other during the when-issued market to ensure that prices of when- issued Treasury securities would stay at supracompetitive levels.
However, because Defendants are primary dealers—and thus were required to bid at Treasury Department auctions—Defendants, individually and collectively, generally maintained short positions in the when-issued market. Defendants needed to be able to cover these positions profitably. Thus, they needed to fix the prices at which they bought Treasury securities from the Treasury Department.
And that's exactly what Defendants did. Defendants coordinated their bidding strategies at the Treasury Department auctions to artificially suppress the prices they would pay for their bids. This had the effect of benefiting the short positions they maintained in the when- issued market by allowing Defendants to cover their positions with low-cost Treasury securities purchased at auction.
By artificially increasing the spread between prices of Treasury securities in the when-issued market and at auction, Defendants were able reap supracompetitive profits— essentially shorting (selling) Treasury securities artificially high in the when-issued market and then buying them at artificially low prices in the Treasury Department auction to cover their short positions.
There you go. Buy low, sell high. Guaranteed. Every single time. Thank you, illegal collusion.
For those unfamiliar with the story behind the recent "guilty pleas" the DoJ extracted as part of Attorney General Loretta Lynch's push to show how very serious the post-Holder Justice Department is about prosecuting Wall Street malfeasance, allow us to explain exactly how this will pan out. There will be fines, which will appear large to the public but which amount to a rounding error for the banks. Depending upon what concessions the SEC and various other regulators are willing to make regarding waivers for the accused, there may be a few tongue-in-cheek admissions of guilt which will be met with fanfare and congratulatory handshakes at the DoJ. And that will be that. Obviously no actual people will be punished.
And as for the Treasury market, well, it was cornered long ago by the Fed and HFT, which means it is now infintely more dangerous than it ever was when it was beholden to mortal manipulators and carbon-based conspirators.
On the bright side, we'll likely get a look at a transcript detailing just what was said inside the Treasury rigging chatrooms, where we assume newbies were told to "sleep with one eye open" and where the mantra was likely some derivation of the Cartel creed "if you aint cheating, you aint trying."
Full complaint below.