Was There Informed Trading in LIBOR Referenced Interest Rate Futures?

During 2008 a series of allegations emerged is respect of systematic attempts to manipulate the London Interbank Offered Rate (LIBOR). In this paper we implement a version of the probability of informed trading measure first introduced in Easley et al. (1996), for the Eurodollar futures market over the 1996 to 2013 period. The objective of this paper is an ex-post review of the effectiveness of the PIN in determining changes in the information structure of the market around documented episodes of recorded manipulation of the benchmark rate, from the various publicly available regulatory reports. In keeping with previous studies on interest rate derivatives, we find that the average PIN is far higher than for the equity market at or around 2/3 to 3/4. When implementing a rolling measure of the PIN to detect time variation, we find a clear pattern of increases and decreases in informed trading relative to the recorded activity in the current regulatory reports. Furthermore, we also find a strong maturity effect that appears to arise from the strong time variation in trading in these contracts over their life-cycle, from inception to maturity. We construct a series of experiments to determine the significance of the trading time for different epochs from 1996 to 2014 using all inside quotes and trades. Our results indicate that the PIN could have been used as an early warning of unusual activity in the LIBOR reference rate and anecdotally we demonstrate that on specific dates identified by the CFTC and FSA the recursively estimated PIN reaches a peak over 1,000 basis points higher for certain near-delivery contracts than for others further away in the forward curve