The Fed and the Wall Street Put
This paper investigates proprietary trading in S&P 500 options around FOMC announcements, detailing monetary policy shocks and informational advantages.
What it examines
This study investigates how proprietary trading firms behave in the S&P 500 options market ahead of FOMC announcements. Using high-frequency 10-minute data and regression analysis, it examines if early morning trades predict unexpected monetary policy shifts and option price changes, indicating an informational advantage.
What it concludes
The study finds proprietary trading firms sell options in the morning on FOMC days, effectively predicting unexpected monetary policy shifts and subsequent price declines—especially when the Fed updates policy projections. These results reveal firms’ informational advantages and underscore risks of uneven information access, stressing the need for fairer Fed communication.
Evidence objects
High-frequency data analysis shows that proprietary trading firms in S&P 500 options become net sellers on FOMC days, especially before the Fed statement, exploiting early communications to anticipate policy shocks.
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By decomposing monetary policy shocks into predictable and orthogonal components, researchers link firm trades to VIX and Eurodollar futures changes, suggesting traders profit from expected declines in accommodative option prices.
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Employing an innovative intraday dataset and detailed regression analysis, the study underscores forward guidances influence while cautioning that aggregated investor categories may obscure distinct individual firm behaviors in trading microstructure.
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This paper uses a novel intraday dataset to reveal early morning trades by proprietary firms in the $S&P 500$ options market that predict monetary policy shocks and price movements. By decomposing shocks and distinguishing investor types, its originality and novelty offer fresh insights into derivative volatility, market microstructure, and finance.
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Raw abstract and provenance
- … We study the trading behavior of financial intermediaries around Federal Open Mar… has focused on equity and fixed-income markets, our analysis using the equity index …
Source row: 1940 · abstract type: snippet