Richard Leong, Reuters

Wall Street traders may be manipulating a key derivatives market and front running Fannie Mae and Freddie Mac, hurting the US-owned mortgage giants in the process, according to an FBI intelligence bulletin reviewed by Reuters.

Using what Federal Bureau of Investigation agents described as “unsophisticated tradecraft,” such as hand signals and special telephone ring tones, some traders are conspiring to rig rates on large orders submitted by Fannie Mae FMNA.OB and Freddie Mac(FMCC.OB), or front running them in the interest rate swaps market, the document says.

The FBI said in the bulletin that the information came from a former high-level employee at a U.S. bank and an employee at a Canadian Bank, plus interviews with other bank workers conducted in 2012 and 2013. The former high-level employee at the U.S. bank estimated the front running had resulted in profits of $50 million to $100 million for the bank, the FBI said.

The bulletin did not name any of the traders or banks suspected of the activity, or indicate whether it may extend beyond the two banks.

Front running occurs when someone with advance knowledge of another market participant’s plan to make a sizable transaction puts an order in first, often profiting from a market move that can occur once the big trade has gone through.

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