Leaks only benefit the select few.

Photographer: Arif Ali/AFP/Getty Images

Who Profited From ECB's Leak?

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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There's a right and a wrong way to respond to Monday night's leak of a change in the European Central Bank's bond-buying policy. The correct reaction would be for U.K. regulators to investigate who might have profited from the selective disclosure at a closed-door gathering of traders, economists and central bankers. The wrong one would be for the bank to stop giving the media texts of policy speeches in advance. Guess which path the ECB is currently choosing?

Insider Trading

Here's a brief summary of this week's events. On Monday evening, ECB board member Benoit Coeure said at a private meeting in London that the bank would probably accelerate its May and June bond-buying, which is supposed to top out at 60 billion euros ($67 billion) per month. The text of his speech wasn't made available to the world at large until Tuesday morning; the prospect of yet more central-bank liquidity flooding financial markets drove the euro down against the dollar.

On Tuesday, I compared  the moves in the euro before and after Coeure's comments were made available to the general financial community. But a trader in Singapore who wishes to remain unidentified reckons I looked in the wrong place. The real action (and profit opportunity), he says, was in the options market. Judging by the price action on this chart, he's right:

Source: Bloomberg

The chart shows something called risk-reversal: As more traders bet on a euro decline using options, the line on the chart starts to head lower (you can read a fuller definition here). To make money, you'd use options rather than speculating directly against the euro because options have what's known as leverage: You get more bang for your buck. My Singapore trader says he watched the options market start moving a bit more than an hour before Coeure's speech was released to the media. That's about when Europe opens for business; prior to that, there wouldn't have been sufficient liquidity to put on a big trade.

I'd argue it's very hard -- impossible, even -- to look at that chart and not conclude that someone made money using the information Coeure divulged the night before.

Here's an extract from what the Bank of England's rulebook has to say on the issue of what counts as "inside information" in U.K. financial markets:

(i) is of a precise nature;

(ii) is not generally available;

(iii) relates, directly or indirectly, to one or more issuers of qualifying investments or to one or more qualifying investments; and

(iv) would, if generally available, be likely to have a significant effect on the price of those qualifying investments or the price of related investments;

(d) information is precise if it:

(i) indicates circumstances that exist or may reasonably be expected to come into existence or an event that has occurred or may reasonably be expected to occur; and

(ii) is specific enough to enable a conclusion to be drawn as to the possible effect of those circumstances or that event on the price of qualifying investments or related investments;

I'd argue that Coeure's remarks qualify as exactly the kind of inside information that regulators don't want traders benefiting from -- which in turn would suggest that there should be an investigation by the U.K.'s Financial Conduct Authority into whether anyone is guilty of insider trading in the aftermath of his speech.

The ECB disagrees. It says there was a procedural error, and that Coeure's remarks should have been available for publication on Monday night, in accordance with its standard practice of distributing speeches to the media in advance, together with strict instructions not to publish anything before the blathering is scheduled to start. (Instead, the text was distributed to the media only on Tuesday morning.) But the bank's response to the debacle -- saying today that it will stop sending embargoed speeches to journalists -- is both unhelpful and bizarre. It's unhelpful because if the pre-existing system had worked the way it should, none of this would have happened. It's bizarre because it does nothing to avoid future selective disclosures.

And it's irrelevant to the case at hand. What's needed is simple -- a probe of whether any of the attendees at Monday night's bash profited unlawfully from their privileged information.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mark Gilbert at magilbert@bloomberg.net

To contact the editor on this story:
Cameron Abadi at cabadi2@bloomberg.net