Magazine article Modern Trader

Markets Await Salomon Fallout

Magazine article Modern Trader

Markets Await Salomon Fallout

Article excerpt

Markets await Salomon fallout

The scandal surrounding Salomon Brothers Inc. or its illegal activities in U.S. Treasury auctions has had little effect on Treasury futures, but market participants are paying close attention to the fallout they expect will tighten regulations on those markets.

Though traders were more nervous than usual for the first few Treasury auctions after Salomon's admission of guilt in mid-August, they note that the auctions went well and buyers obviously were accommodated easily by other primary dealers.

The scandal alleges Salomon exceeded the 35% purchase limit in Treasury auctions (buying as much as 94% of the two-year T-notes at the May auction), used customer names without authorization and failed to report the violations to authorities promptly after their discovery.

In a report to a Congressional panel investigating the auction process, Salomon caught the attention of futures traders when it indicated there was a "question" regarding the existence of a pre-auction understanding with Tudor Investment Corp. of New York to repurchase five-year notes bought for Tudor in the April 25 auction.

Tudor "categorically denied" that any pre-auction understanding existed and that it had directed and authorized Salomon to purchase no more than $1.5 billion in five-year notes at the auction. Salomon submitted a $2.5 billion bid on behalf of Tudor, received allocations of $2.1 billion and repurchased $600 million on the auction day at the auction price. …

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