A Former NYMEX Trader Explains "The Mechanics Of Silver Manipulation"
By Tyler Durden
Submitted Vincent Lanci, as posted originally on Marketslant
The Mechanics of Silver Manipulation
JPMorgan Chase on Wednesday won the dismissal of three private antitrust lawsuits, including from hedge fund manager Daniel Shak, accusing the largest U.S. bank of rigging a market for silver futures contracts traded on COMEX. The lawsuits accused JPMorgan of having in late 2010 and early 2011 placed artificial bids (i.e., spoofing) onto the trading floor, harassed employees at metals market COMEX to obtain prices it wanted (i.e., intimidation) and made misrepresentations to a committee that set settlement prices. (i.e., manipulating settlements).
What follows is how JPM manipulated the silver markets by selling the Silver contango during illiquid hours, then used their deep pockets to push settlements, then waited until margin calls made the large locals puke their positions. JPM in effect stretched the relationship between forward rates and futures spreads until they made no sense anymore. Not unlike a company trading at 50x earnings. It cannot last long. But it only has to last long enough until the guy with the position opposite you has to liquidate. That guy does not have access to cheap money, political influence or the most physical silver in the world in a single vault at his disposal to create a squeeze.
From Reuters:
U.S. District Judge Paul Engelmayer in Manhattan, however, said the plaintiffs, who also included traders Mark Grumet and Thomas Wacker, did not show that JPMorgan made “uneconomic” bids, or intended to rig the market at counterparties’ expense. He also questioned the plaintiffs’ use of Silver Indicative Forward Mid Rates (“SIFO”) as a benchmark for determining proper levels for the spreads in their lawsuits.
Analysis: The demand was fabricated
The market was only partially backwardated. Spot was below the next 6 expirations. Translation: there was no massive demand for immediate delivery. There was only demand in months where the last remaining MEN who took risk trading their own money had positions. JPM’s own book was likely short and had to get liquidity to cover their positions. We knew Shak from our floor days, and were trading spreads off-floor when this happened. They should not have lost this case. Comex traders do not trade physical spot. Spot was under the backwardation. Smoking gun? No, but damning circumstantial evidence in the least.
Reuters Again:
Given the (lawsuits’) failure both to explain why SIFO should track silver futures spreads, and to concretely plead that it did so consistently, a mere general correlation between these two is not sufficient to make SIFO a reliable benchmark such that deviations from it support a claim of irrational pricing animated by anticompetitive aims,” Engelmayer wrote.
Analysis: a poor job was done explaining the role of SIFO in spread pricing.
SIFO represents the spread between expirations of FORWARD physical contracts in silver. The futures spread markets are derivative of the SIFO spreads. SIFO represents the cost-of-carry for physical silver and is used in determining lease/borrow rates over periods of time. These are in-turn extrapolated and the dominant factor in determining futures spreads on COMEX. Comex …read more
Source: A Former NYMEX Trader Explains "The Mechanics Of Silver Manipulation"
