Institutional Trading around FOMC Meetings: Evidence of Fed Leaks

Abstract

Using detailed institutional transaction records from Ancerno, I find evidence consistent with informed trading on the days before the Federal Open Market Committee (FOMC) scheduled announcements. The institutional trading imbalances on highly exposed stocks are in the direction of the subsequent monetary policy surprises. On the three days before a 1% surprise rate increase, the institutional trading imbalance is 27.7% higher for high-MPE stocks as compared to low-MPE stocks. This result is particularly strong before easing monetary policy shocks - when the aggregate market reaction is positive -, for the most-active traders and the hedge fund management companies, and for the US institutions that are headquartered close to one of the regional reserve banks. It holds throughout the Ancerno's sample, from 1999 to 2014. Overall, these findings are consistent with a hypothesis of a systematic informal communication of Fed officials with the financial sector, provide an additional channel through which institutions make abnormal profits from their intra-quarter trades, and contribute to an information-based explanation of the pre-FOMC drift.