88m3
Fast Money & Foreign Objects
By Matt Levine
If you were writing a paranoid fantasy of gold price manipulation you'd be hard pressed to come up with something more on the nose than the U.K. Financial Conduct Authority's order against Barclays. It has everything; it is the benchmark of manipulation by which all future manipulation will be measured. Well, this or Libor. Delightfully, this manipulation occurred on June 28, 2012, the day after Barclays was fined 290 million pounds for manipulating Libor. They just really wanted to perfect their manipulating technique.1
And oh did they! For starters, they manipulated the most manipulable thing imaginable: Digital options. Former Barclays precious-metals exotics trader Daniel Plunkett, who also settled with the FCA (for a £95,600 fine and an industry ban), sold a customer a digital option that would pay $3.9 million if the 3 p.m. London gold fix on June 28, 2012, was above $1,558.96, and zero if it was at or below that barrier.2 So right there the temptation is obvious: If you're around the barrier, you can save $3.9 million by pushing prices down just a little bit.3 As it happens, the gold price on June 28 was just above the barrier, so a bit of selling by Plunkett could move his client out of the money and make him a bunch of money.
In normal liquid markets, doing a bunch of selling to push the price down is an uncertain thing -- there might be buyers! -- but this was not a normal market. This was the London gold fixing process, whicheveryone thinks is always manipulated. And for good reason: It's five banks, getting on the phone, talking about what the price will be, and adjusting their trading based on that information. And the description of what went on during the June 28 call will not improve your view of the process.
Basically the way the fixing works is that the chairman of the little five-bank committee announces a price, and every bank announces its buying or selling interest, and the chairman moves the price up or down until supply and demand balance. But as he does this, the banks can keep trading and changing their interest, so they pretty much informally chat it out until everyone is satisfied. Here's a summary of how that went on the day in question:4
If you do the math,7 that works out to a price of $1,560.40 per ounce, well above the barrier that Plunkett had just avoided.
Plunkett's customer, who despite buying digital options on gold was no idiot, had some suspicions about a 3:10 p.m. fixing that was $3.50 below the 3:00 p.m. starting price, $1.90 below the price at which Plunkett covered,8 and just 46 cents below the barrier. So the customer called to complain, and Plunkett "provided an explanation that referred only to the significant selling in August COMEX Gold Futures" and somehow omitted his own selling. Then he had a change of heart: "After the weekend, on the morning of Monday 2 July 2012, Mr Plunkett sought out his line manager and informed him that he had traded during the 28 June 2012 Gold Fixing." And so eventually this was unraveled, Plunkett was fired, the customer was reimbursed, the FCA got involved, and Barclays ended up being fined £26 million today.
So, what did we learn? One, come on, this process is ridiculous. A big problem in Libor was that the cash traders who submitted Libor for banks were talking too much to the derivatives traders who wanted Libor manipulated for their own purposes. Much the same happened here -- Plunkett emailed his commodities colleagues that he was hoping for "a mini puke to 1558 for fixing," and that the "ideal" fix would be $1,558.759 -- but the problem here is almost worse. Plunkett, an exotic options trader, pretty much sat at the table for the spot gold fix: He knew the supply and demand at each level, and could put in his own orders at the fix, so he could manipulate it himself rather than having to persuade anyone to help him out.
Barclays Manipulated Gold as Soon as It Stopped Manipulating Libor - Bloomberg View
long article
no wonder they're cutting their US staff and one of their heads in the US resigned
@Domingo Halliburton
If you were writing a paranoid fantasy of gold price manipulation you'd be hard pressed to come up with something more on the nose than the U.K. Financial Conduct Authority's order against Barclays. It has everything; it is the benchmark of manipulation by which all future manipulation will be measured. Well, this or Libor. Delightfully, this manipulation occurred on June 28, 2012, the day after Barclays was fined 290 million pounds for manipulating Libor. They just really wanted to perfect their manipulating technique.1
And oh did they! For starters, they manipulated the most manipulable thing imaginable: Digital options. Former Barclays precious-metals exotics trader Daniel Plunkett, who also settled with the FCA (for a £95,600 fine and an industry ban), sold a customer a digital option that would pay $3.9 million if the 3 p.m. London gold fix on June 28, 2012, was above $1,558.96, and zero if it was at or below that barrier.2 So right there the temptation is obvious: If you're around the barrier, you can save $3.9 million by pushing prices down just a little bit.3 As it happens, the gold price on June 28 was just above the barrier, so a bit of selling by Plunkett could move his client out of the money and make him a bunch of money.
In normal liquid markets, doing a bunch of selling to push the price down is an uncertain thing -- there might be buyers! -- but this was not a normal market. This was the London gold fixing process, whicheveryone thinks is always manipulated. And for good reason: It's five banks, getting on the phone, talking about what the price will be, and adjusting their trading based on that information. And the description of what went on during the June 28 call will not improve your view of the process.
Basically the way the fixing works is that the chairman of the little five-bank committee announces a price, and every bank announces its buying or selling interest, and the chairman moves the price up or down until supply and demand balance. But as he does this, the banks can keep trading and changing their interest, so they pretty much informally chat it out until everyone is satisfied. Here's a summary of how that went on the day in question:4
- The fix opened at 3:00 p.m. with a price of $1,562.
- That quickly dropped to $1,556, then $1,555, due to Comex gold futures selling unrelated to Barclays.
- Then it rose to $1,558.50, just below Plunkett's $1,558.96 barrier.
- So at 3:06 Plunkett, who knew this, put in a big sell order, making Barclays a seller of 130 bars of gold at $1,558.50 -- and making it less likely that the price would rise.
- After everyone had declared their interest at $1,558.50, sell orders exceeded buys by 190 bars, meaning that the call would continue until there was a balance (or no more than 50 bars of imbalance).
- So at 3:07 Plunkett, who knew this too, withdrew his sell order, reducing the imbalance to 60 bars -- making it more likely that the call would end quickly and give him the fix he wanted.
- This almost worked, but then Comex futures ticked up and more buying interest came in, leading to an imbalance in favor of buying (and likely higher prices).
- So at 3:09 Plunkett, who again knew this, put back a 150 bar sell order.
- This worked, supply and demand balanced at $1,558.50, and the price was fixed there at 3:10 p.m.
If you do the math,7 that works out to a price of $1,560.40 per ounce, well above the barrier that Plunkett had just avoided.
Plunkett's customer, who despite buying digital options on gold was no idiot, had some suspicions about a 3:10 p.m. fixing that was $3.50 below the 3:00 p.m. starting price, $1.90 below the price at which Plunkett covered,8 and just 46 cents below the barrier. So the customer called to complain, and Plunkett "provided an explanation that referred only to the significant selling in August COMEX Gold Futures" and somehow omitted his own selling. Then he had a change of heart: "After the weekend, on the morning of Monday 2 July 2012, Mr Plunkett sought out his line manager and informed him that he had traded during the 28 June 2012 Gold Fixing." And so eventually this was unraveled, Plunkett was fired, the customer was reimbursed, the FCA got involved, and Barclays ended up being fined £26 million today.
So, what did we learn? One, come on, this process is ridiculous. A big problem in Libor was that the cash traders who submitted Libor for banks were talking too much to the derivatives traders who wanted Libor manipulated for their own purposes. Much the same happened here -- Plunkett emailed his commodities colleagues that he was hoping for "a mini puke to 1558 for fixing," and that the "ideal" fix would be $1,558.759 -- but the problem here is almost worse. Plunkett, an exotic options trader, pretty much sat at the table for the spot gold fix: He knew the supply and demand at each level, and could put in his own orders at the fix, so he could manipulate it himself rather than having to persuade anyone to help him out.
Barclays Manipulated Gold as Soon as It Stopped Manipulating Libor - Bloomberg View
long article
no wonder they're cutting their US staff and one of their heads in the US resigned
@Domingo Halliburton