Decade of Bank manipulation revealed indications in gold fix study
February 28, 2014 10:51 am
The London gold fix, the benchmark followed by jewelers, miners and central banks to distinguish the worth the metal, may have been controlled for a decade by the banks setting it, researchers say.
Unusual trading patterns around 3 p.m. in London, when the so-called afternoon fix is set on a private conference call between five of the largest gold dealers, are an indications of collusive behavior and should be put under a huge probe, New York University’s Stern School of Business Professor Rosa Abrantes-Metz and Albert Metz, a managing director at Moody’s Investors Service, wrote in a draft research paper.
“The structure of the benchmark is certainly conducive to collusion and manipulation, and the empirical data are consistent with price artificiality,” they say in the report, which hasn’t yet been submitted for publication. “It is likely that co-operation between participants may be occurring.”
The paper is the first to increase the chances that the five banks managing the century-old rate – Societe Generale SA, HSBC Holding Plc, Barclays Plc, Deutsche Bank AG and Bank of Nova Scotia — may have been closely working with each other to manipulate the benchmark. It also adds to pressure on the companies to overhaul the way the rate is computed. Authorities around the world, already investigating the manipulation of benchmarks from foreign exchange to interest rates, are examining the $20 trillion gold market for indications of misconduct.
Officials at London Gold Market Fixing Ltd., the firm possessed by the banks that manipulate the rate, referred requests for comment to Societe Generale which holds the rotating chairmanship of the group. Officials at Barclays, Deutsche Bank, HSBC and Societe Generale declined to comment on the report and the future of the benchmark. Joe Konecny, a spokesman for Bank of Nova Scotia didn’t respond to requests for comment.
Union Jacks
Abrantes-Metz offers recommendation on the European Union and the International Organization of Securities Commissions on financial benchmarks. Her 2008 paper “Libor Manipulation?” helped show the implements of the London interbank offered rate, which has led monetary companies including UBS AG and Barclays Plc to be fined about $6 billion in total. She is a paid expert witness to lawyers aiding individuals and firms sue banks. Metz heads credit policy research at ratings firm Moody’s.
The rate-setting ritual dates back to 1919. Dealers in the early years met in a wood-paneled room in Rothschild’s office in the City of London and raised little Union Jacks to signify interest. Now the fix is computed two times in a day on telephone conferences at 10:30 a.m. and 3 p.m. London time. The calls commonly last 10 minutes, though they can continue more than an hour.
Unregulated Process
Companies announce how many bars of gold they want to merchandise or purchase at the current spot price, based on orders from themselves and their clients. The price is hiked or trimmed down until the merchandise and purchase values are within 50 bars, or about 620 kilograms, of each other, at which point the fix is set.
Traders relay shifts in supply and demand to customers during the call and take fresh orders to purchase or merchandise as the financial values moved, according to the website of London Gold Market Fixing, where the outcomes are published. The fixing process is unregulated and the five banks can exchange gold and its derivatives throughout the call.
Bloomberg News reported in November concerns among traders and economists that the fixing banks and their customers had an unfair benefit because data gleaned from the calls provided an insight into the future direction of financial values and banks can bet on spot and derivatives markets during the call.
All Down
Abrantes-Metz and Metz screened intraday exchanging in the spot gold market from 2001 to 2013 for sudden, unfamiliar actions that may show unlawful behavior. From 2004, they observed frequent spikes in spot gold prices during the afternoon call. The moves weren’t replicated during the morning call and hadn’t taken place before 2004, they found.
Big financial value actions during the afternoon call were also overwhelmingly in the similar route: down. On days when the authors identified huge financial value action during the fix, they were downwards at least two-thirds of the time in six different years between 2004 and 2013. In 2010, huge actions during the fix were negative 92 percent of the time, the authors found.
There’s no accessible reason as to why the arrangements started in 2004, why they were more prevalent in the afternoon fixing, and why financial value moves in a declining way, Abrantes-Metz said in a telephone interview this week.
“This is a first attempt to uncover potentially manipulative behavior and the results are concerning,” she said. “It’s down to regulators to establish why there are such striking patterns but banks have the means, motive and opportunity to manipulate the fixing. The results are consistent with the possibility of collusion.”
Bafin, FCA
Deutsche Bank, Germany’s biggest lender, said in January that it will withdraw from the panels setting the gold and silver fixings. German monetary markets regulator Bafin interviewed the Frankfurt-based bank’s employees as part of a probe into the possible manipulation of gold and silver values.
“In general, research that finds certain price patterns does not as such constitute evidence of manipulation,” said Thorsten Polleit, chief economist at Frankfurt-based precious-metals broker Degussa Goldhandel GmbH and a former Barclays economist. “However, it might encourage interest in finding out more about the sources of these price patterns.”
The five banks that oversee the fixing set up a steering committee and will assign external advisers to consider reforms before EU legislation on monetary benchmarks’ regulation and oversight comes into force, Bloomberg reported last month.
Britain’s Financial Conduct Authority is also scrutinizing how financial values are computed. The regulator published a report this week outlining its remit for regulating commodities involving gold, saying that while it’s responsible for commodities derivatives, it doesn’t control physical commodities.
“Abusive behavior can occur in the physical commodity markets which in turn can have an impact on, or be directly linked with, financial market activity and prices,” the FCA said in the report. “The regulatory regime — both in the U.K. and internationally — needs to be adapted to ensure robust and appropriate oversight.”
The material has been provided by InstaForex Company – www.instaforex.com
The London gold fix, the benchmark followed by jewelers, miners and central banks to distinguish the worth the metal, may have been controlled for a decade by the banks setting it, researchers say.
Unusual trading patterns around 3 p.m. in London, when the so-called afternoon fix is set on a private conference call between five of the largest gold dealers, are an indications of collusive behavior and should be put under a huge probe, New York University’s Stern School of Business Professor Rosa Abrantes-Metz and Albert Metz, a managing director at Moody’s Investors Service, wrote in a draft research paper.
“The structure of the benchmark is certainly conducive to collusion and manipulation, and the empirical data are consistent with price artificiality,” they say in the report, which hasn’t yet been submitted for publication. “It is likely that co-operation between participants may be occurring.”
The paper is the first to increase the chances that the five banks managing the century-old rate – Societe Generale SA, HSBC Holding Plc, Barclays Plc, Deutsche Bank AG and Bank of Nova Scotia — may have been closely working with each other to manipulate the benchmark. It also adds to pressure on the companies to overhaul the way the rate is computed. Authorities around the world, already investigating the manipulation of benchmarks from foreign exchange to interest rates, are examining the $20 trillion gold market for indications of misconduct.
Officials at London Gold Market Fixing Ltd., the firm possessed by the banks that manipulate the rate, referred requests for comment to Societe Generale which holds the rotating chairmanship of the group. Officials at Barclays, Deutsche Bank, HSBC and Societe Generale declined to comment on the report and the future of the benchmark. Joe Konecny, a spokesman for Bank of Nova Scotia didn’t respond to requests for comment.
Union Jacks
Abrantes-Metz offers recommendation on the European Union and the International Organization of Securities Commissions on financial benchmarks. Her 2008 paper “Libor Manipulation?” helped show the implements of the London interbank offered rate, which has led monetary companies including UBS AG and Barclays Plc to be fined about $6 billion in total. She is a paid expert witness to lawyers aiding individuals and firms sue banks. Metz heads credit policy research at ratings firm Moody’s.
The rate-setting ritual dates back to 1919. Dealers in the early years met in a wood-paneled room in Rothschild’s office in the City of London and raised little Union Jacks to signify interest. Now the fix is computed two times in a day on telephone conferences at 10:30 a.m. and 3 p.m. London time. The calls commonly last 10 minutes, though they can continue more than an hour.
Unregulated Process
Companies announce how many bars of gold they want to merchandise or purchase at the current spot price, based on orders from themselves and their clients. The price is hiked or trimmed down until the merchandise and purchase values are within 50 bars, or about 620 kilograms, of each other, at which point the fix is set.
Traders relay shifts in supply and demand to customers during the call and take fresh orders to purchase or merchandise as the financial values moved, according to the website of London Gold Market Fixing, where the outcomes are published. The fixing process is unregulated and the five banks can exchange gold and its derivatives throughout the call.
Bloomberg News reported in November concerns among traders and economists that the fixing banks and their customers had an unfair benefit because data gleaned from the calls provided an insight into the future direction of financial values and banks can bet on spot and derivatives markets during the call.
All Down
Abrantes-Metz and Metz screened intraday exchanging in the spot gold market from 2001 to 2013 for sudden, unfamiliar actions that may show unlawful behavior. From 2004, they observed frequent spikes in spot gold prices during the afternoon call. The moves weren’t replicated during the morning call and hadn’t taken place before 2004, they found.
Big financial value actions during the afternoon call were also overwhelmingly in the similar route: down. On days when the authors identified huge financial value action during the fix, they were downwards at least two-thirds of the time in six different years between 2004 and 2013. In 2010, huge actions during the fix were negative 92 percent of the time, the authors found.
There’s no accessible reason as to why the arrangements started in 2004, why they were more prevalent in the afternoon fixing, and why financial value moves in a declining way, Abrantes-Metz said in a telephone interview this week.
“This is a first attempt to uncover potentially manipulative behavior and the results are concerning,” she said. “It’s down to regulators to establish why there are such striking patterns but banks have the means, motive and opportunity to manipulate the fixing. The results are consistent with the possibility of collusion.”
Bafin, FCA
Deutsche Bank, Germany’s biggest lender, said in January that it will withdraw from the panels setting the gold and silver fixings. German monetary markets regulator Bafin interviewed the Frankfurt-based bank’s employees as part of a probe into the possible manipulation of gold and silver values.
“In general, research that finds certain price patterns does not as such constitute evidence of manipulation,” said Thorsten Polleit, chief economist at Frankfurt-based precious-metals broker Degussa Goldhandel GmbH and a former Barclays economist. “However, it might encourage interest in finding out more about the sources of these price patterns.”
The five banks that oversee the fixing set up a steering committee and will assign external advisers to consider reforms before EU legislation on monetary benchmarks’ regulation and oversight comes into force, Bloomberg reported last month.
Britain’s Financial Conduct Authority is also scrutinizing how financial values are computed. The regulator published a report this week outlining its remit for regulating commodities involving gold, saying that while it’s responsible for commodities derivatives, it doesn’t control physical commodities.
“Abusive behavior can occur in the physical commodity markets which in turn can have an impact on, or be directly linked with, financial market activity and prices,” the FCA said in the report. “The regulatory regime — both in the U.K. and internationally — needs to be adapted to ensure robust and appropriate oversight.”
The material has been provided by InstaForex Company – www.instaforex.com
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