Toomre Capital Markets LLC

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NY Federal Reserve Calls for Meeting on Treasury Short Squeezes

As this Reuters article of Friday, October 20th 2006 reports, the New York Federal Reserve, at the request of Dino Kos, head of the New York Fed's open market desk and executive vice president, has called for a meeting of all of the primary dealers at 4 pm on November 6th. The heads of each desk and compliance officers were requested to attend. Market sources relate that the meeting will be held to discuss issues raised recently by James Clouse, U.S. Treasury deputy assistant secretary, and earlier this year by U.S. Treasury Undersecretary Randal Quarles. According to this Reuters article,

Both officials have expressed concern in recent months over an apparent increase in instances of firms trying to profit from controlling a particular Treasury security.

Last month Clouse told the New York-based Bond Market Association that regulators were pursuing cases in this area and that manipulative trading ultimately could drive investors out of the Treasury market. Clouse's remarks in September were similar to a speech he delivered in June this year to a European audience in London, which in turn, echoed comments made in May by Quarles.

Toomre Capital Markets wonders whether the youthful traders today populating Wall Street's Treasury trading desks remember some of the lessons of their predecessors. For instance, might they recall Paul Mozer and Salomon Brothers' attempted cornering of the U.S. Treasury market back in 1991 (as described in this International Herald Tribune article)? One certainly hopes that no dealers have been "playing games" in the smooth operation of the $600 billion per-day traded Treasury market. It will be interesting to learn the outcome of this meeting, including the possible impact on short squeezes and the alleged hoarding of securities while not lending them out to other market participants.