Silver auction seen harder to rig as fresh scrutiny emerges
Dubai-UAE (Dec 18) The question of whether traders from some of the biggest banks conspired to rig the silver market is drawing renewed attention to how benchmark prices are set.
At the centre of a lawsuit filed last week is the old system of setting a daily silver price, which involved a few traders reaching an agreement by phone. It was replaced by an electronic system in 2014. While it may not be impossible to rig the new process, better monitoring and a different auction mechanism make it more difficult, according to traders at Marex Spectron Group and refiner Elemetal.
“The new fixing is certainly more scrutinised for anything out of the ordinary,” said David Govett, head of precious metals trading at Marex Spectron in London and who first took part in fixings three decades ago. Still, “if various people want to attempt to collude to move a market one way or the other, it is pretty hard to come up with a completely foolproof way to stop it,” he said.
At stake is a system that miners, banks and jewellers use around the world to value metal and price long-term supply contracts. About $2.9bn of silver was traded each day in London’s spot market in the first 10 months of this year, London Bullion Market Association data show.
The new auction is run by CME Group and Thomson Reuters Corp. It’s designed to make price discovery transparent and orders are monitored to “guarantee the integrity of the benchmark,” a CME spokeswoman said.
It adheres to levels of governance and oversight consistent with International Organisation of Securities Commissions principles, Thomson Reuters said.
The new system is more transparent, with more participants than the old auction, said Ruth Crowell, chief executive of the LBMA, which represents the London gold and silver market.
In the documents filed in Manhattan federal court, silver investors told a judge that chat transcripts offer convincing evidence to warrant new claims against banks that prices were rigged under the old system.
The new silver auction now uses an algorithm to determine a starting price and participants submit orders before 30-second rounds until buying and selling is matched and a price set.
The rate settled at $16.14 an ounce on Thursday. Fixings for gold, platinum and palladium have also been replaced by electronic versions in the last two years.
The credibility of the new silver system, which sets what’s known as the LBMA Silver price, was challenged earlier this year when the price settled beyond levels traded in the market. CME and Thomson Reuters responded by making some changes, including using a blind auction instead of bid and offer volumes that were disclosed in each round.
Bloomberg competes with Thomson Reuters in selling financial and legal information and trading systems, and posted a rival bid to host the silver auction in 2014.
“In the early stages of the new price-setting mechanism, many players were hesitant of participating due to fears of being wrongly accused of engaging in collusive behavior,” said Simon Grenfell, global co-head of commodities at Natixis in London. The system has improved, “with the growing participation of players reflecting a renewed confidence in the market,” he said. Spokesmen for Morgan Stanley, HSBC Holdings, TD Securities and China Construction Bank Corp, which are four of the seven firms directly participating in the new auction, declined to comment. The other three – JPMorgan Chase & Co, Bank of Nova Scotia and UBS Group – didn’t immediately comment. The banks also process orders on behalf of others.
There are more direct participants now than in 2014, when the fix was stopped after Deutsche Bank said it would pull out, potentially leaving just two banks.
The LBMA Silver price has “too many moving parts” to make attempts to rig prices worthwhile, said Ross Norman, chief executive officer of retail bullion dealer Sharps Pixley in London and who has more than 30 years of experience in the industry.
Regulators face a tough challenge because it may be impossible to completely stamp out manipulation without hurting market liquidity, said Brad Yates, trading head for Dallas-based Elemetal.
“The new fixing mechanism does seem to make it more difficult to manipulate,” said Yates, who has taken part in the process for seven years. “That said, if several large players were to theoretically collude and all decide on some mutually beneficial outcome, they can certainly use their outsized influence improperly.”
Source: GulfTimes
