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Robert Gottleibsen: Are commodities markets rigged?

Submitted by cpowell on 07:47PM ET Sunday, March 28, 2010. Section: Daily Dispatches
By Robert Gottliebsen
Business Spectator
Melbourne, Australia
Monday, March 29, 2010

http://www.businessspectator.com.au

Trading in the financial markets is an enormous source of profits for the world's largest investment banks and the traders get big chunks of each firm's controversial bonuses each year. The fortunes of Australia are closely linked to this trading activity as the Australian dollar exchange rate and metals such as gold and silver are among the most traded areas -- and the traders have a big role in establishing the prices.

Over the past few decades there have been allegations of market rigging in these areas and from time to time incidents are proved. But clear cases of market rigging have not been widespread, either because they simply don't exist or because proof is too hard to obtain.

However, a unique event has taken place in the silver market. A London metals trader, Andrew Maguire, emailed the U.S. Commodity Futures Trading Commission (CFTC), warning them that market rigging in the silver market was about to take place. He described how JPMorgan Chase allegedly sends signals to the market of its intention to take down the price of precious metals. Other traders recognise these signals and make money shorting the metals alongside JP Morgan. These manipulations allegedly take place at the time of option expiry, non-farm payroll data releases, and Comex contract rollover, as well as ad-hoc events. The CFTC was told that a market rigging event would take place in the first week of February coinciding with the release of non-farm payroll data. Maguire described what would happen and then, during the actual alleged market-rigging event, he interpreted what was happening.

I want to emphasise that I am not endorsing those allegations and it is almost certain that JPMorgan Chase will be able explain its actions and show that they had nothing to do with market manipulation.

And to underline their case, the emails were released by a group known as the Gold Anti-Trust Action Committee, which has a clear axe to grind.

What makes this warning worth commenting on is that last Thursday the Commodity Futures Trading Commission held a public meeting to examine the trading of futures and options in the precious and base metals markets. The inquiry covers a wide range of issues related to metals trading and derivatives.

If -- and I emphasise if -- there is any validity to the Maguire allegations, then it will spark a much wider inquiry going well beyond silver. Apart from suspected exchange rate manipulation, Michael Lewis in his book "The Big Short" tells the story of the person who first discovered and made a fortune from the sub-prime disaster. The book indicates that as the disaster was unfolding there were investment bank activities that looked suspiciously like market rigging.

And the whole question of investment bank bonuses is a most controversial area.

The world of derivatives trading is one that few understand, but if the events around the London silver market in February 2010 do turn out to be a case of market rigging, there could be a whole new raft of regulations. Watch this space.

The "silver affair" comes as there are jitters among London investment banks because, according to The Australian, officers from the Serious Organised Crime Agency have conducted 16 dawn raids on investment bank traders, looking at pre-takeover activities.

These raids are in no way connected to the "silver affair" but underline that investment bank trading is under unprecedented scrutiny.

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Robert Gottliebsen is associate editor of the Business Spectator.