from Zero Hedge
Back in the summer of 2012, a historic if largely under-reported change took place at the New York Fed, when Brian Sack, the former head of the Fed’s Markets group, also known as the Plunge Protection Team’s trading arm, was replaced by former UCLA economist, Simon Potter.
Potter’s arrival was most notable for not only taking over the Fed’s QE baton from Sack, currently a director at quant trading giant DE Shaw, but because his arrival also marked the start of a multi-year crash in the VIX future, which collapsed the month Potter took over and has hit ever steeper lows ever since (with the exception of the occasional VIX explosion).
Several years later, it was Zero Hedge that also first reported on the practical implications of Potter’s apparent market intervention, when just a few months later, during the October 22-24, 2012 FOMC meeting, now Fed Chair Jerome Powell made the following striking remarks (which was disclosed last year as part of the Fed’s declassification of its FOMC transcripts):
[W]hen it is time for us to sell, or even to stop buying, the response could be quite strong; there is every reason to expect a strong response. So there are a couple of ways to look at it. It is about $1.2 trillion in sales; you take 60 months, you get about $20 billion a month. That is a very doable thing, it sounds like, in a market where the norm by the middle of next year is $80 billion a month. Another way to look at it, though, is that it’s not so much the sale, the duration; it’s also unloading our short volatility position.
Fed’s VIX trading aside, this was the most fascinating part of Powell’s speech, one which contained some truly unprecedented – for a future Fed chairman – admissions:
I think we are actually at a point of encouraging risk-taking, and that should give us pause. Investors really do understand now that we will be there to prevent serious losses. It is not that it is easy for them to make money but that they have every incentive to take more risk, and they are doing so. Meanwhile, we look like we are blowing a fixed-income duration bubble right across the credit spectrum that will result in big losses when rates come up down the road. You can almost say that that is our strategy.
We bring all this up because moments ago, the New York Fed announced that Simon Potter, the chief operating officer of the Markets Group, and the man who single-handedly implemented the Fed’s short volatility position, will be retiring and not only that, but he will be taking with him the second most important person at the NY Fed’s “Plunge Protection Team”, the head of the Financial Services Group. From the press release:
The Federal Reserve Bank of New York today announced that Simon Potter, executive vice president and head of the Markets Group, and Richard Dzina, executive vice president and head of the Financial Services Group, will be stepping down from their respective roles effective June 1, 2019.
John C. Williams, president and chief executive officer of the New York Fed, named Ray Testa, chief operating officer of the Markets Group, as interim head of the Markets Group, and Chris Armstrong, senior vice president of cash operations, as interim head of the Financial Services Group, starting immediately. The role of product director for the Wholesale Product Office will revert to Michael Strine, the Bank’s first vice president and chief operating officer, until a new head of the Financial Services Group is in place.
It is worth noting that a replacement for Potter has yet to be picked and “The New York Fed will conduct a broad and thorough search for their successors.” Expect Potter’s successor to be intimately familiar with selling VIX, buying ETFs, ramping HFTs stops, triggering upward momentum cascades, and certainly knowing all there is to know about record stock buybacks.
Some more details on the historic transition, from the press release:
Mr. Potter joined the New York Fed in June 1998 as an economist after a career in academia. Mr. Potter served as director of economic research and co-head of the Research and Statistics Group at the New York Fed, prior to becoming head of the Markets Group in June 2012. In this role, he oversaw the implementation of domestic open market and foreign exchange trading operations on behalf of the Federal Open Market Committee (FOMC), the execution of fiscal agent support for the U.S. Treasury, the provision of account services to foreign and international monetary authorities, and the administration and production of reference interest rates for the U.S. money markets. Mr. Potter has played a prominent role in the Federal Reserve’s financial stability efforts, including by contributing to the design of the 2009 U.S. bank stress tests, as a member of the international Macroeconomic Assessment Group that supported the Basel Committee’s work to strengthen bank capital standards and, most recently, as Chair of the Global Foreign Exchange Committee.
“I want to thank Simon for his leadership over the years,” said Mr. Williams. “His contributions have been of great value to the Bank, the FOMC and the System. Most recently, his deep experience in and understanding of markets were critical in helping the Committee think through and execute a path toward monetary policy normalization, and he has been a leading and influential voice globally on reference rate reform.”
In parting, the current head of the NY Fed wrote that “Both Simon and Richard have contributed greatly throughout their careers and they each leave a substantial and substantive legacy. Not least of which is the depth and breadth of talent they’ve nurtured at the Bank and on their teams, which is why I have every confidence in the teams’ abilities to continue to execute on our mission. I wish them both all the best in their future endeavors.”
And speaking of their future endeavors, one wonders which hedge fund Simon Potter will arrive at next: with DE Shaw employing his predecessor, something tells us that either Citadel or Renaissance may soon have a new Plunge Protecting trader in its ranks.
What is far more interesting is who will be hired to replace Potter, as their prior trading style will tell us all there is to know about how to frontrun the world’s most important trading desk, not to mention the Plunge Protection Team, for the next several years.