Duke U. Study Suggests The Fed Consistently Leaked Non-Public Information to Select Insiders

This excerpt from a Duke University study is just in from my friend Professor Anthony Sanders at George Mason University, who writes at Confounded Interest.

In reading the paper I did not necessarily get the sense that this was a nefarious form of communication.  More like the kind of collegial exchanges of information that are so common to the revolving door nature of our modern financial regime.  There are two sets of rules, and two methods of handling things.  And insiders never speak ill of the actions of other insiders.

This is the 'money shot' from the abstract of the paper which is tracks the distribution of stock market gains over the FOMC information cycle:

"High return weeks do not line up with public information releases from the Federal Reserve or with the frequency of speeches by Fed officials.

Systematic informal communication of Federal Reserve officials with the media and the financial sector is a more plausible information transmission mechanism. We discuss the social costs and benefits of this method of communication."

And in related news, the Congress has just used its power to block an investigation of its own insider trading.  Again.

Remember this blog post from 2011?  Credibility Trap: US Congressmen and Their Staffs Regularly Engage In Insider Trading

It is hard to escape the credibility trap as a plausible explanation for the lack of serious financial reform and transparency in a system that has been shown to be plagued with a lack of sound regulatory oversight, price manipulation, and corruption in almost every major market.

I would certainly hope that there is a different explanation for what appears to be systematic insider trading since at least 1994.

Here is what Tony has to say about this Duke University paper at his blog:

Fed Consistently Leaked Non-Public Information to Selected Insiders

Researchers at Duke University and the University of California at Berkeley point to quantitative evidence that The Fed consistently leaks non-public information about its meetings, driving an investment pattern that has led to market gains.

Here is the paper: 292092121-Stock-Returns-Over-The-FOMC-Cycle

Here are stock returns over the FOMC cycles. Notice anything unusal?

And here are the 5 day returns with bootstrapped confidence bands.

A Tale of Two Markets: One for Wealthy Insiders, And Another For the Rest of Us

"We run carelessly to the precipice after we have put up a façade to prevent ourselves from seeing it.”

Blaise Pascal
 

Here is a brief excerpt from an article today by the amazing team of Pam and Russ Martens at Wall Street On Parade titled, Are U.S. Markets Liquid and Deep or Rigged and Broken? I suggest you read the entire article when you have the opportunity as this is just a snippet.

"...the SEC which oversees stock exchanges has allowed both the New York Stock Exchange and Nasdaq to create a bifurcated market. The unsophisticated investor is given trading data on which to base trading decisions on a slow data feed called the Securities Information Processor or SIP. The SIP is not only slow in getting the data to the technology-challenged investor, but it has limited data.

For the rich and powerful on Wall Street who can afford massive fees, there is another data feed offered by the exchanges called the Direct Feed. The Direct Feed data, which has far more useful information, arrives in the hands of High Frequency Traders and Wall Street’s proprietary traders ahead of the arrival of the SIP data. This allows the Direct Feed users to buy a stock on the cheap and sell the stock back to the SIP user at a higher price...

The New York Stock Exchange and Nasdaq, which also have a mandated regulatory role to ensure that their markets are fair and non-discriminatory, have allowed the two-tiered market to exist because they are collecting hundreds of millions of dollars a year selling the SIP to the dumb money and the Direct Feed to the smart money..."

For someone that is not drinking the daily dose of electronic kool aid from the mainstream media, this is a systemic, institutionalized control fraud that inevitably leads to a financial crisis.   And a close survey of the markets today might lead one to observe, 'My God.  These lunatics are going to do it again.'

That is what it is in plain words.   That is what the price discovery of the US, which controls the reserve currency of the world and sets many of its key prices, is based upon.   This is not some rogue trader, or anomalous abuse.  This is fraud that is deeply woven into the very fabric of the system, and is widely tolerated with a self-serving wink and a nod.

For example, the privately held London Metals Exchange was dismissed as a defendant in the aluminum price fixing case today because it is immune from US prosecution as 'an organ of the UK government.'  That is quite an admission, and some organ.   Droit du seigneur.  Reminds one of the motive for dismissal insinuated by the Barrick motion in the Blanchard gold manipulation suit.

What is it going to take to wake people up?  What markets are left that have not been exposed as deeply rigged at their core?

A big part of the rest of the world isn't buying it anymore. And that is taking us into some very deep, dark, and uncharted waters. 

NPR: Congress Quietly 'Overhauls' Law Against Congressional Insider Trading

"Small wonder that confidence languishes, for it thrives only on honesty, on honor, on the sacredness of obligations, on faithful protection, on unselfish performance; without them it cannot live."

Franklin D. Roosevelt, First Inaugural Address, March 4, 1933

Who says that the Congress cannot act quickly and in a bipartisan manner in order to pass laws.

As I recall the original reform was called the STOCK (Stop Trading on Congressional Knowledge Act) Act. It was in response to the public outrage over a news story that exposed the insider trading business in Congress.

At the time the MF Global story was also breaking and there was concern that the people might lose confidence in the financial markets.

Well, the elections are over, and the law was about to take effect, so...

NPR
How Congress Quietly Overhauled Its Insider-Trading Law
by Tamara Keith
April 16, 2013


The legislative process on Capitol Hill is often slow and grinding. There are committee hearings, filibuster threats and hours of floor debate. But sometimes, when Congress really wants to get something done, it can move blindingly fast.

That's what happened when Congress moved to undo large parts of a popular law known as the STOCK Act last week.

A year ago, President Obama signed the Stop Trading on Congressional Knowledge Act into law at a celebratory ceremony attended by a bipartisan cast of lawmakers.

"I want to thank all the members of Congress who came together and worked to get this done," he said.

The law wouldn't just outlaw trading on nonpublic information by members of Congress, the executive branch and their staffs. It would greatly expand financial disclosures and make all of the data searchable so insider trading and conflicts of interest would be easier to detect.

But on Monday, when the president signed a bill reversing big pieces of the law, the emailed announcement was one sentence long. There was no fanfare last week either, when the Senate and then the House passed the bill in largely empty chambers using a fast-track procedure known as unanimous consent.

In the House, Majority Leader Eric Cantor, R-Va., shepherded the bill through. It was Friday afternoon at 12:52. Many members had already left for the weekend or were on their way out. The whole process took only 30 seconds. There was no debate...

Read the entire story and listen to the audio portion here.

Here is what DemocracyNow had to say:

Obama Signs Bill Gutting Transparency Provisions in Insider Trading Law

President Obama has signed into law a measure critics say guts key transparency provisions from a law designed to combat insider trading by members of Congress. The new bill repeals a requirement in the Stop Trading on Congressional Knowledge Act that high-level federal officials disclose financial information online.

But, according to the Center for Responsive Politics, it also removes requirements for the searchable and electronic filing of information related to potential conflicts of interest by the president, vice president, Congress and other officials.

On its website OpenSecrets.org, the Center wrote: "Without the provisions, the STOCK act is made toothless. Insider trading by members of Congress and federal employees is still prohibited, but the ability of watchdog groups to verify that Congress is following its own rules is severely limited because these records could still be filed on paper — an unacceptably outdated practice that limits the public’s access."

Here is a story on the same overhaul from The Hill.

Jonathan Weil also wrote a story on Bloomberg saying that all this concern over insider trading was overdone and that Chuck Grassley does not understand what he is talking about. I found it to be interesting. 

I think this story may be relevant. Stock Surge Linked to Lobbyist

Washington is corrupt, and Obama is no reformer.

Matt Taibbi and Eliot Spitzer Discuss Eric Holder's (and Obama's) Failure: Credibility Trap

The failure of Obama's Justice Department to engage in any systemic investigations and indictments of a thoroughly rotten and corrupt financial system that has laid waste to the real economy is an almost perfect example of the credibility trap.

A credibility trap is when the regulatory, political and/or informational functions of a society have been compromised by a corrupting influence and a fraud, so that they cannot address the situation without implicating, at least incidentally, a broad swath of the power structure. The status quo has at least tolerated the corruption and the fraud, if not profited directly from it, and most likely continues to do so.  The power brokers have become susceptible to various forms of blackmail.  And so a failed policy can become almost self-sustaining long after it is seen to have failed, and even become counterproductive, because admitting failure is not an option for those in power.

Another example is the blatant fraud, and principles not of productivity but of prey, that prevail on the financial asset exchanges and the monetary system, the stealing of customer funds, and the manipulation of commodity markets such as silver. And it expresses itself in the frivolous coarseness of spectacle, and careless brutality of decline.

"Happy Hunger Games. And may the odds be ever in your favor."

Normally a two party system or a balance of powers would correct such a situation, but if the fraud is pervasive and enduring enough, those remedies can lose their effectiveness since the fraud binds even seemingly diverse elements in its grasp. And therein lies the trap.

There is a general loss of honor, a disparagement of moral principles, the common welfare, and a sense of 'service.' People in power are creatures of the system, 'getting their ticket punched' in Washington, as resume builder on their way to an even more lucrative position back in the corrupt system where they can leverage their connections and knowledge of the system to further undermine the rule of law. Their guiding principles are self-referential greed and power.

After one of the most outrageous periods of widespread fraud in a major developed country, prosecutions for fraud are at twenty year lows.  Who expected this outcome from an election in which the theme was change and reform?

Here is a recent article, Why Can't Obama Bring Wall St to Justice, asking the broader question inferred by this video interview. Why?  And the answer is not to be found in making excuses and allowing him to hide behind the incompetency or disengagement defense so popular in American management circles.

And if you think that voting for the other guy in this case, the emotinally engaging but fatally flawed red v. blue paradigm, is going to provide a cure you are sadly mistaken. The other guy in this case is the poster child for most of the problems that face a nation under siege by a financial elite engaged in an economic, ideological, and political coup d'etat.

As Glenn Greenwald recently put it:

"You can often, and I would say more often than not, in leading opinion-making elite circles, find an expressed renouncement or repudiation of that principle [of the rule of law]...All of these acts entail very aggressive and explicit arguments that the most powerful political and financial elites in our society should not be, and are not, subject to the rule of law because it is too disruptive, it is too divisive, it is more important that we should look forward, that we find ways to avoid repeating the problem...the rule of law is not that important of a value any longer...

The law is no respecter of persons, but the law is also a respecter of reality, meaning if it is too disruptive or divisive that it is actually in our common good, not the elite criminals, but in our common good, to exempt the most powerful from the consequences of their criminal acts, and that has become the template used in each of these instances."

And thanks to the apathy of the people and the gullibility of the badly used, self-proclaimed 'patriots' they are winning.

“The disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least to neglect, persons of poor and mean condition is the great and most universal cause of the corruption of our moral sentiments.”

Adam Smith

Such unsustainable social arrangements are backed by force and fraud. And as the fraud loses its power over time, force must increase, until there is an end in genuine reform, or a terrible self-destruction.

Fraud on the Street in the Purchase of 3COM

The fraud is becoming more blatant on all fronts.

Mary Shapiro and the SEC should immediately subpoena the records of options purchases in 3COM and Hewlett-Packard for this week, and look for unusually large purchases. But chances are that they will do nothing, because there is a soft partnership between the government and Wall Street.

Make no mistake. Front running and monetary bubbles are not victimless crimes, anymore than robbing a grocery store at gunpoint is a victimless crime. They take from the many to give to the few.

There are some smokey allusions to 'calendar spreads' being put forward, but this is disinformation, and does not speak to the surge in stock buying and the pattern of insider trading. It was fraud, pure and simple.

And this is just the tip of the iceberg. The basis of the SP rally on high frequency trading and a liquidity bubble is a fraud, and will be exposed as such when the bottom falls out of the market. And the people know who the primary actors are in this.

The Obama Administration is a disgrace.

Bloomberg
3Com Option Trades May Have Been More Than ‘Luck’ Before Buyout
By Jeff Kearns

Nov. 12 (Bloomberg) -- Analysts say good timing alone doesn’t account for trading in bullish 3Com Corp. options yesterday.

Volume in contracts to buy shares of the Marlborough, Massachusetts-based company surged to the highest level since September 2007 before Hewlett-Packard Co. said it would buy the maker of computer-networking equipment for $2.7 billion.

“I don’t believe in that much luck,” said Steve Claussen, chief investment strategist at OptionsHouse LLC, the Chicago- based online brokerage unit of options trading firm PEAK6 Investments LP, and a former market maker at the Chicago Board Options Exchange. “If you’re on the other side of someone buying calls and a takeover is announced, it’s like someone held you up at gunpoint. It’s like you’ve been robbed and you feel violated.”

Call options that convey the right to acquire stock for a given price by a certain date usually offer higher returns to traders speculating on takeovers. The U.S. Securities and Exchange Commission polices the options market to ensure investors aren’t engaging in insider trading.

More than 8,000 3Com calls changed hands yesterday, 17 times the four-week average. The most active were contracts conveying the right to purchase 3Com for $5 through Nov. 20, followed by December $5 calls. The shares rose 5.2 percent, the most since Sept. 28, to $5.68 in Nasdaq Stock Market composite trading prior to the announcement.

Almost 4,000 of the November $5 calls and 3,300 December $5 calls traded, with almost all of the transactions occurring at noon. That compares with a total of six puts giving the right to sell 3Com shares. Hewlett-Packard, the world’s largest personal- computer maker, agreed to pay $7.90 a share in cash for 3Com, a 39 percent premium to yesterday’s closing price.

More than 22 million shares of 3Com changed hands in the stock market yesterday, compared with this year’s daily average of 4.85 million and the most since March 2008. Trading was heaviest in the hour after 11 a.m. in New York, data compiled by Bloomberg show.

“Somebody knew something was coming,” said Stefen Choy, founder of Livevol Inc., a San Francisco-based provider of options market data and analytics. “It looks like very unusual call buying. I see this very frequently when there’s a takeover...”

Goldman Sachs Group Inc. advised 3Com on the transaction, while Morgan Stanley helped Hewlett-Packard, according to data compiled by Bloomberg. Both banks are based in New York. 3Com has its headquarters in Marlborough, Massachusetts, and Hewlett- Packard is based in Palo Alto, California...

More Hedge Funds Face Indictments As Federal Wiretaps Uncover Insider Trading Rings

It is about time the Feds started tracking some of the more eyebrow raising examples of insider trading. Whenever there is new, you see a spike in the volume and the options ahead of the announcement these days.

This is most likely the tip of the iceberg, and the hedge funds are not the only culprits.

Its a step in the right direction. Let's hope it is not diversion to placate people because of the lack of serious market reform from Washington.

Bloomberg
U.S. Plans to Charge 10 More After Rajaratnam Arrest
By Joshua Gallu and David Scheer

Oct. 19 (Bloomberg) -- Federal investigators plan to charge at least 10 securities professionals with insider trading, some linked to the criminal case against billionaire hedge-fund manager Raj Rajaratnam that shook Wall Street last week, people familiar with the matter said.

The pending crackdown, more than two years in the making and among the biggest undercover operations into insider trading, may yield charges against hedge-fund managers and their associates as early as this week, the people said, declining to be identified because the cases aren’t public. Authorities had planned to arrest Rajaratnam this week as part of a broader sweep, expediting it after learning he had bought a plane ticket to travel to London on Oct. 16, one person said.

The case against Rajaratnam, built on recorded conversations within a web of alleged conspirators, offers a glimpse of how U.S. investigators are using more aggressive tactics to identify illegal trades hidden within a blizzard of hedge-fund investments. Additional probes stem from a secret Securities and Exchange Commission data-mining project set up to pinpoint clusters of people who make similar well-timed stock investments. Some probes, like the one against Rajaratnam, rely on wiretaps.

“If you’re going to shoot the king, you better shoot to kill,” said Bradley Bennett, a law partner at Baker Botts LLP in Washington who formerly focused on insider-trading cases as an SEC investigator. “If they’re going to take on a billionaire, they need to have the strongest possible cases. The defendant’s own words are the strongest possible evidence....”