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Reports US

US stock market daily report (January 14, 2014, Tuesday)

January 15, 2014, Wednesday, 05:54 GMT | 00:54 EST | 10:24 IST | 12:54 SGT
Contributed by Millennium Traders

Wall Street Traders could be front running Federal Home Loan Mortgage Corporation (FMCC-OTC BB) 'Freddie Mac' and Federal National Mortgage Association (FNMA-OTC BB) 'Fannie Mae'. The Traders or banks suspected remain unnamed and are being investigated by the U.S. Federal Bureau of Investigation who may have profited ahead of Freddie and Fannie interest-rate swap orders, per a description of the practice in an intelligence bulletin distributed to security officers at financial services companies. 

Drawing on interviews and statements, including a former high-level U.S. bank employee and another at a Canadian bank, the FBI reports that traders may have conspired to rig rates or front-run the two firms in the interest-rate swaps market. Some traders are reportedly using "unsophisticated tradecraft" such as hand signals and special ring tones as they conspired to rig rates on large orders submitted by Fannie and Freddie. The signals used to identify certain customers, was verified by multiple sources with direct knowledge of the Traders actions. 

Voice brokers and senior traders at the U.S. and Canadian banks encouraged traders to listen in on calls with investors to pick up on information on large orders and front-run them or manipulate the market. An estimated $100 million in profits was realized by the front-running action by the bank under investigation. The FBI bulletin says, "GSEs frequently submit large interest-rate swap trades, making them easy targets for front running and lucrative targets for market manipulation."

Front running - an illegal activity - occurs when a trader takes advantage of advance knowledge about a large order to be placed by someone else that can move the market. The trader then uses this knowledge to place his order ahead of the large order to benefit from potential market movement after the larger order is placed. 

History shows traders found guilty of front running generally have assets frozen and have fraud charges filed against them. Employees of investment advisory firms who have information about insider trading or other financial fraud schemes should become fully informed of their rights under the Dodd-Frank whistleblower program before they notify the U.S. Securities and Exchange Commission. Insider informants who want to protect their anonymity must act through their legal counsel as they cannot notify the SEC directly.