Since my article on the LBMA Silver Price on Friday, more market participants have come out criticising the process:
- Afshin Nabavi, MKS: “People are going to lose all faith in the fix if this keeps going.” (link)
- Brad Yates, Elemetal: “When Thursday’s number came in, people initially thought CME would void it, it was so far out of line with the market. When they endorsed it and it became the official print, the benchmark immediately lost credibility. We had two clients shift business away from pricing on the fix to live pricing.” (link)
- Simon Grenfell, Natixis: “The new silver price setting mechanism appears broken. It is clearly an issue that the regulator should be looking at.” (link)
- Grzegorz Laskowski, KGHM: “The large discrepancy between the spot price and the fix is very alarming to us especially that it happened twice in a row. I think the LBMA needs to make every effort to explain why it happened and needs to help to develop a system that would help to avoid these kind of situations in the future.” (link)
- Unnamed bullion banker: “People are too scared to change their orders in the middle of the process so it got stuck. In the old days, banks would step in and take positions in order to balance the process. No-one dares do that anymore, as then they have to answer to compliance etc.” (link)
- Unnamed precious metals dealer: “The system is broken. In the old days, if it was out of line, someone would have bought the fix and then sold the futures. It’s a joke — that’s all I know.” (link)
The most damming comment comes from Ross Norman as he is respected enough to be included in LBMA’s oral history project ‘Voices of the London Bullion Market’, who noted that “ten times in the last six months the silver price has been ‘fixed’ outside the trading range of the spot price for that day which is nonsensical. … A benchmark or reference price it is not. … the so called LBMA silver price does not come close to reflecting reality – and it is clearly vulnerable to manipulation – it is therefore effectively invalid.”
It seems the LBMA is certainly feeling the heat, with Ronan Manly noting this recent change to the LBMA’s website:
LBMA pins responsibility for LBMA Silver Price on Thomson Reuters and amends its web site. Compare 28th Jan to today pic.twitter.com/02N9pobpvd
— Ronan Manly (@ronanmanly) February 1, 2016
Ross asks why the LBMA Silver Price oversight committee (on which the LBMA sits) has “not come forward and explain what is going wrong and what they are going to do about – it is after all their job”. However I think there isn’t much they will be able to do about it because, as Ross himself notes, the real problem “is that banks are increasingly unwilling or unable to place corresponding orders where they perceive a mis-pricing because of fears of being accused of abusing a situation and facing the wrath of the regulator or their compliance departments.”
To fix the Fix, bullion bank traders (whether they are direct participants or not of the fix process) have to be able to “buy the fix and sell the futures” when the fix gets swamped by sell orders (or vice versa). The problem is that banks have a wide range of clients who hold positions with them across spot, forwards, futures, options, ETFs and so on. It is therefore highly like that one of those clients would be the loser of any such activity (and others winners) and complain (as did the client Barclays’ trader Daniel Plunkett traded against) about it. Alternatively, the regulator may decide to investigate markets from time to time.
The problem is that when a regulator comes looking at trades after the fact they could construe manipulative intent when no such thought was going through the trader’s mind – who was just arbitraging a market imbalance – and the trader finds themselves fined £95,600 and banned from trading, as Plunkett was.
If you think that traders would not be worried about such an unfair claim against them happening, or that client complaints or random regulatory investigations it would be unlikely, you haven’t been reading enough Matt Levine, who, coincidentally on the day of the silver stuff up included the two following stories in his daily article:
- Nav Sarao, who is facing a 380-year jail sentence, “may not have had a material, or even any, impact on the bout of equity market volatility in May 2010 that later became known as the flash crash, according to a draft research report by University of California, Santa Cruz and Stanford University professors” (link)
- Tom Hayes, who is serving 11 year jail for LIBOR rigging, saying that he was “thrilled that the brokers can tonight return to their families and their lives” while also “bewildered that he is now in a situation where he has been convicted of conspiring with nobody” (link)
Now I’m not saying these guys are scapegoats, but as a trader these stories would not make you feel comfortable that you would be given the benefit of the doubt. So would you help keep the fix in line with other markets if it risked you going to jail? No you would not, so the traders sat/sit on their hands. No matter what the LBMA, CME or Reuters say, I can’t see traders keeping the fix in line with other markets unless they got a letter from the FCA and SEC saying they will not go to jail, and the chances of that happening are zero.
The only hope for the fix is if non-banks step up to act as market makers/arbitraguers, otherwise “it can only get worse” as Ross says. Bullion Vault’s article hints that some such trading did happen
“As soon as [the benchmark] was done, [futures market] was hit with arbitrage selling and traded down to 14.07 with 5,000 lots trading. Then bounced back to trade $14.30+.”
however given how far the fix was able to drop, and how the futures market dropped much less, such arbitraging was not enough (but highly profitable to whoever executed it). Possibly more non-bank traders will step into the market to take advantage of the fact that the banks are impotent.
The problem for the LBMA Silver Price as a business is that unless traders do step in, more and more clients will stop placing their orders on it, as some of Elemental’s clients have. As the two-way liquidity drains away the chance of imbalances and out of line fixings increases, which causes more to pull out and so on in a death spiral.
unable to place corresponding orders where they perceive a mis-pricing because of fears of being accused of abusing a situation and facing the wrath of the regulator or their compliance departments. … Since Mitsui the only non-bank amongst the price setters departed – (and therefore the least regulation-bound), we have only banks remaining in the benchmark setting process so it can only get worse.
If the alleged email from the CME to its clients below (as reported by Platts and called “nonsensical” by a banking source) is indicative of how this issue is being dealt with, then the future of the fix is fraught.
“The platform worked as it should, in fact perfectly. It’s as good as the orders the participants enter. If you are a client of a ‘participant’ I guess you should direct this question at them. If you want individual flexibility, become a participant.”