Was There Informed Trading in LIBOR Referenced Interest Rate Futures?

Abstract

During 2008 a series of allegations emerged is respect of systematic attempts to manipulate the London Interbank Oered Rate (LIBOR). In this paper we implement a version of the probability of informed trading measure rst introduced in Easley et al. (1996), for the Eurodollar futures market over the 1996 to 2013 period. The Eurodollar future is one of the most actively traded US Dollar LIBOR benchmarked derivatives in the world with total traded volume in excess of half a quadrillion US dollars in 2011 (Source: CFTC) and is possibly the world’s largest nancial market. The objective of this paper is an ex-post review of the eectiveness of the PIN in determining changes in the information structure of the market around documented episodes of recorded manipulation of the benchmark rate, from the various publicly available regulatory reports. In keeping with previous studies on interest rate derivatives, we nd that the average PIN is far higher than for the equity market at or around 2/3 to 3/4. When implementing a rolling measure of the PIN to detect time variation we nd a clear pattern of increases and decreases in informed trading relative to the recorded activity in the current regulatory reports. Furthermore, we also nd a strong maturity eect that appears to arise from the strong time variation in trading in these contracts over their life-cycle, from inception to maturity. We construct a series of experiments to determine the signicance of the trading time for dierent epochs from 1996 to 2014 using all inside quotes and trades in these contracts. Our results indicate that the PIN could have been used as an early warning of unusual activity in the LIBOR reference rate and anecdotally we demonstrate that on specic dates identied