Why is this illegal?
BBC reports that the BoE suspects traders of "bond rigging": Full article.
But if I understand the article correctly the BoE was planning to buy back bonds as part of their QE. The market learns that there is a big buyer, hence the price goes up. That was the hole point of QE - price up, rates down.
They mention that in this case suspicion was raised because a specific gilt series (2017) moved out-of-sync with the others series. I.e. that point on the yield curve didn't move in tandem with the others. Suggesting that the traders knew that the BoE would buy back this specific bond. But the BoE could just refuse to buy it back, which is precisely what happened.
I don't understand why this is "bond rigging" and a "scandal" which is being compared to the LIBOR case. Through all times traders have tried to profit from central bank actions, there is nothing reprehensible, unethical or even illegal about that. That is how the market is supposed to work.
I might have missed a key element in this case. So please let me know if I'm completely wrong. I am by no means an expert on gilt auctions. And I would love if anyone could offer some details on this case?
It actually is, here is why:
Someone in the Bank of England tipped off some traders ahead of time and now the BOE will track down and crucify them, as well as screw over the traders by 1. cancelling the order and 2. investigating/prosecuting them.
Of course everyone tries to make money off of central bank movements, that's largely the point. Thing is, if someone in a central bank lets anyone know the plan before everyone else, that is a pretty serious problem.
The other thing is that this is so stupidly obvious, it makes one question the judgement of the traders. Someone in finance trying to dick the gov't on a stability program, at this point in history, via an insider, is basically suicidal.
No, nobody at the Bank of England "tipped off some traders"... That's an absurd idea, given the way the BoE reverse auctions work.
I remember this episode well. One particular bank (let's not name names here) decided to ramp the 8T 17s (that's the gilt issue in question) by playing with the screens ahead of the buyback. It was very obvious, very blatant and very very stupid. The guy assumed that the BoE would just not notice it and buy it anyways. However, like I said, it was so obvious (the bond was outperforming the immediate neighbors smth like 7bps on the day) that the BoE trading desk noticed it and complained. The BoE even released a statement at the time, which was pretty unusual.
The reason it's illegal is because, if proven, it constitutes mkt manipulation, which is an instance of mkt abuse. It's illegal in the same way as "marking the close" is illegal.
Hi Martin,
Thanks a lot! I appreciate it, very informative. Could you expand a little bit on how the reverse auctions work, please? I guess it is for the same market makers who participate in the DMOs auctions for conventional gilts. But I was wondering if it is on a on a offer-price basis, so the BoE pays the price they offer. Or wether it is on a uniform price basis, like with the index-linked gilts.
Also, I was just curious: What is the advantage from the BoE's point of view of holding a reverse auction, compared to just buying the gilts in the secondary market? Thanks
Firstly, if you want the full dets, they're here: http://www.bankofengland.co.uk/markets/Documents/marketnotice120301con…
Secondly, yes, GEMMs (the same mkt makers who deal with the DMO) were the main participants in the BoE APF reverse auctions. Officially, others are eligible to participate, but it was a rare occurrence. The reverse auctions (at least the competitive part) were multiple, rather than uniform price (i.e. like the conventional gilt auctions).
As your final question, I am not sure I understand it properly. The BoE was buying gilts in the secondary mkt. They just chose to do it through these reverse auctions, in order to maximize transparency etc etc.
This is fascinating, I'm going to go bone up on how the BoE does business, I took for granted their process.
I am curious: what bank did this?
As to the name of the bank, I really shouldn't say this in a public forum post. It would be very irresponsible of me.
Market manipulation, wash trades etc is illegal and majorly unethical in this day and age. It does not matter on the product, situation if you were tipped off or not etc...If you simply causing wash trades to mess around with the market or artificially push up the price, its 2013 you cannot do this.
It really worries me that perspective traders do not understand that wash trades are illegal and unethical.
I don't see how this is manipulation provided they weren't doing wash trades or something else to push the price. If I forecast that a participant will enter the market with inelastic demand for a security based on public information, buying it to resell to them is just price discovery. Bank prop desks do this all the time around index additions. Were these guys tipped off in any way?
All trading is about anticipating the actions of others. Manipulation usually involves placing false orders or trading with yourself to induce others to act in a way which they wouldn't do otherwise. Predicting that someone will bid something up and buying it before them isn't manipulative unless you corner the market.
Besides, the BoE or other players could easily put a spread on against other issues with lots of edge and crush these guys. It's not like this is a risk-free trade.
Edit: This could also be manipulative if the banks involved colluded to move the price together.
I'd also like some clarification? I thought this was a good move on his part?? lol Maybe they wanted to use him as an example? I'm only starting out in this sector so don't have any knowledge or experience..
I thought I should revisit this in light of this being public now, including all the names: http://www.bbc.co.uk/news/uk-26665974
You can read Matt Levine's excellent take on this here: http://www.bloombergview.com/articles/2014-03-20/banned-trader-did-boe-…
I am in general agreement with the points he so eloquently makes. Hopefully, it addresses your questions.
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