And Scene: CME LOWERS ES, SP, YM Margins, Despite An INCREASE In Realized Vol

Tyler Durden's picture

Speechless. Just.... speechless.



Oh, and by the way, over the past month, realized vol in the ESM1 has... risen.


So aside from what is now glaring market manipulation with the collusion of the exchanges (rip silver longs), there is no manipulation.


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Pladizow's picture

Thye closer to the end, the more blatent the corruption!

Whizbang's picture

why is everyone surprised about this? You are playing calvin ball. You are not calvin.

Michael's picture




GeneMarchbanks's picture

I had to look it up. Worthit. Well said. Calvin!!!

duckduckMOOSE's picture


The Unofficial Official Rules of Calvinball

Permanent Rule: You may not play the Calvinball the same way twice.

Primary Rule: The following rules are subject to be changed, amended, or deleted by any player(s) involved. These rules are not required, nor necessary to play Calvinball.

Manthong's picture

But then isn't the CME game in reality, "Calvinpoker"?

GoinFawr's picture

Uh, I liked the analogy too, but keep in mind that Hobbes, the sport's only other willing competitor, managed to win more often than not.

Gold Man-Sacks's picture

I am Sancho.  Are you Sancho?  No, you are not Sancho.  Neither is Scott Baio, Sancho.  I am Sancho.

Sancho Ponzi's picture

You are not Sancho. I am Sancho.

Printfaster's picture

No, not Calvin Ball since anyone can change the rules.

We are Charlie, and the CME/Fed/UST is Lucy holding the ball for placekick.

anonnn's picture

"why is everyone surprised about this?"...

...much less speechless.

Here excerpted is Dr. Michael Hudson's take on the current scene, re Iceland et al and breakup of Euro:

The truth can be soothing if it allows preparation for what must occur.


tired1's picture

Please, I need some assistance. I can't make heads or tails of this chart. I'm not a trader, I find ZH very useful for historical perspective. I try to make sense of the charts and the lingo but this is beyond my ability to understand the implications.

So, can somebody explain a bit or point me in a direction where I can figure it out myself?

Rynak's picture

The "supposed" purpose of margins, is to ensure that there is enough capital available to process the buy and sell orders. How much capital is needed, depends on how much marketprices may change (volatility). Now obviously, the more activity there is in the market (number of buy and sell orders), the more the marketprice may change.

The chart shows just that: Volume of buy and sell orders.

In this case, CME *lowered* the margins, even though the amount of buy and sell orders actually increased. Thus, CME lowered margins despite increased potential volatility.

Troll Magnet's picture

this is waaaaaaaay over my head. so what are ES, SP and YM? and how is lowering the margin, thus increasing volatility(?), manipulating the market? why did CME do this? whom does it benefit and whom does it hurt? how? i feel like that guy, ross perot's running mate back in the day. where the hell am i? why am i here?

hamurobby's picture

Aw shucks, for a minute there I thought you were from Texas.

Troll Magnet's picture

I'm rooting hard for the Mavs. :)

Rynak's picture

and how is lowering the margin, thus increasing volatility(?), manipulating the market? why did CME do this? whom does it benefit and whom does it hurt?

Tyler, you really should do an educational article about what margins are and why they supposedly exist. A lot of people are not aware of how exchanges work, because it defies what one would expect by intuition.

Anyways, here is my attempt at an ultra compact crashcourse. When you think of people buying commodities, you probably expect them to pay full price. I.e., when they buy something at 35$, you expect them to actually pay 35$ in cash. As far as i understand this (someone correct me if this is wrong), traders actually do NOT pay the full price! They only pay a certain percentage, called the "margin".

The idea, if i understood this right, is that if you buy something at 35$, and sell something at 40$, the amount of cash at the exchange doesn't really need to be 40$.... only the 5$ win you made (it's similiar in the case of losses).

Doing stuff this way however, means that the exchange also plays the role of a bank, instead of just being an exchange. This becomes most noticable, if you consider that the amount by which marketprices change, is variable. Maybe you will not make 5$, but instead 10$? So, for the exchange "bank" to not run out of money, they need to predict how much marketprices may change..... the more prices may change, the more cash people need to deposit (higher margins) - the less marketprices may change, the less cash people need to deposit at the exchange.

If there are errors in the above, please feel free to correct me.

EDIT: The way how margin requirements affect the market is this. Imagine you're a trader. If margins decrease - thus you need to pay less to aquire a commodity - you are more probable to buy (especially if you have excess cash deposited at the exchange). Conversely, if you need to pay a higher percentage of the spotprice, you are less probable to buy, simply because the amount of cash required to buy commodities, is increased - if only because the new margin requirements are higher than the amount of cash you have deposited at the exchange. In principle, by people no longer paying full price, but instead a percentage, the exchange can arbitrarily modify the ACTUAL cost of buying a commodity (the amount of cash you need to deposit at the exchange). So, in addition to spot price, there is a secondary price, that is arbitrarily modifyable by the exchange: The amount of cash you need to deposit, to buy a commodity).

EDIT2: If this still was too complicated for you to grasp (not meant as an insult, this stuff indeed is more complicated than necessary), then imagine it like this: Traders do not pay spot price for commodities. They only pay a percentage of the spotprice. For the exchange to not run out of money, they need to estimate the percentage of spotprice people need to deposit at the bank.... err, i mean exchange..... based on how much spotprice may change. However, by there being this variable, the exchange can modify the amount of cash, people actually need to pay to aquire a commodity. Thus, the final actual price to buy a commodity, is modified by the exchange, in the form of margins: If the exchange is evil, it can arbitrarily change the percentage of the spotprice, you need to pay to aquire a commodity - and naturally, if you need to pay more, it is less probable that you can afford it.... while if the percentage is lower, you are more probable to being able to afford it.

Naive example: Imagine silver margins being at just 5%.... you could buy silver ETFs at just 5% of spotprice.... of course you'd be more probable to buy, than i.e. if the margin were 50% of spotprice.

Captain Benny's picture

If this is your first time at Fight Club, you have to fight.  That is your initiation.  If you don't know what is going on, you'll learn quick.  Nobody here needs hand holding, they all have a brain in their head.  Advanced questions are always welcome, but the new kids must be initiated through a fight.  This fight is not a physical mutilation, but instead the battle must rage within one's self to see the world around them how the've possibly never viewed it before.

Don Quixotic's picture

Oh man... you should have seen me try to figure out what GC-IOER is and how that whole repo thing works and how it relates to excess reserves... took me hours and hours, but it was worth every frustrating second.

Rynak's picture

As much as i admire the rules of the fight club, i prefer the fight being about BEATING the fight club, rather than breaking even with it (translation: I prefer the "test" being about beating common consensus or going beyond it, with sound arguments, instead of just achieving the understanding of the common consensus. Though, i agree that people should not get more education than necessary for them to grasp it via reasonable effort).

Disclaimer: I frequently (though not all the time) argue in ways that conflict with the common consensus here. Not for the sake of disagreeing, but simply because of thinking "independently". For example, i recently argued that the popular free market model of people around here, is defective, and actually guarantees socialism.

Hephasteus's picture

Everyone would that's why bury this place in trolls. Though you're not a troll and I bet you get your questions answered.

collegepunk's picture

seriously, figure it out yourself.  This is supposed to be a news site, not an educational one per se.  Similarly, why would you read the Financial Times if you don't know what a stock is.

US Uncut's picture

News site, yes, comments and questions are just that. Wading through crap here is a chore, especially this kind.

buzzard's picture

Is this the reason that I have been ignored so far? It would make some sense. I enjoy a good fight as much as the next guy. But so far no one is playing. That's OK. (You see? I'm just too damn agreeable.)

Ckashan's picture

The inverse of margin is debt.  The margin is a minimum set by (see below) in order purchase an instrument. Once you purchase on margin you now take ownership of said instrument and hope to earn equity by an increasing value of said instrument. If the price declines and the equity of your account goes below the margin requirement you either have to post new equity or a forced sale of your account holdings ensues.  Banking institutions supply the credit to the exchanges then onto you.  It is a choice to lever.  You buy or sell the instruments provided by the market or exchange.  The exchanges create this forum primarily by guaranteeing cross-party liability and offering other functional attributes like advanced technology and they make their money by providing this service.  In addition to constantly offering 'new and innovative' products.  All kinds of risks have to be managed by the exchanges through things like maintenance requirements and margin;otherwise, they risk their equity and so do the credit providing institutions.  Sounds great but it is inherently inflationary.

Anonymouse's picture

Regardless of Captain Benny's snide remarks, I appreciate what you wrote.  I know this stuff but I know there are many who do not.  You took the time to help others and good on you for that.  There is bad action in the markets.  There are crooks.  But not everything is a conspiracy.  Better education helps us tell the difference.  And it helps maintain our credibility by not claiming conspiracies where they don't exist.  Better to focus on the real ones.  (I'm not making a judgment about CME one way or the other.  It's just a good general rule).

Rynak's picture

Thank you, and i agree with the overall mentality you implied.

ThirdCoastSurfer's picture

Margin is the amount you can borrow. The danger is a margin call.  One day they'll tell you you can borrow $50 for every $5 in cash, the next they'll change it to $10 for every $50. So, if you borrowed the $50 you now have to double your cash to cover. If you are away on vacation that day, they'll sell whatever they need from your account to make up the difference deducting commissions and margin fees, penalties, etc.

You'll see a lot of ZH'ers deride Interactive Brokers and perhaps you've seen their ads on TV that allow you to borrow $1 million for every $100,000 you deposit in cash. 



Rynak's picture

I'm beginning to understand people who argue for total abolishment of this system, rather than specific static margins. It turns an exchange into all kinds of things, except of an exchange. Your as well as Ckshan's post pretty much make's it obvious, that the most simple and transparent method, would simply be for people to deposit cash at the exchange, and pay/receive full price.

dark pools of soros's picture

and like, banks should only loan out what they got right??  you gonna let them slide?

collegepunk's picture

by that logic you are advocating a conversion to sound money, money backed by something physical (be it gold, silver, et cetera).  Are you prepared for that?

Troll Magnet's picture

thank you for your detailed explanation. I had a small but passable understanding of what a "margin" is but you really drove it home for me. What I'm trying to understand is what ES, SP & YM are and how CME's lowering the margin affects the market (increased volatility?) and by extension the big banks and us regular folks. Maybe I need to go back to college and major in economics but then I'll start thinking like the Bernank? Shudder!

Rynak's picture

Short version: Lower margins = more people can afford to buy something who wouldn't be able to afford the full spot price.

Troll Magnet's picture

I get it now. By lowering margins for these stock index futures, they are luring more people to invest their money in the stock market and eventually prop it up? Correct? So, assuming I'm near the ballpark, this seems to me like a stealth QE? My head is spinning.

dark pools of soros's picture

so no one gonna tell him that margin is just another form of credit card??  you gotta pay interest on all that leverage you playing with... best used with insider information or naked shorting..  real quick and dirty maxxed margin

Rynak's picture

interest doesn't really matter much, if you're short.

Yes, it is just plain stupid - may as well make people pay full price, and if they want credit, use a bogstandard credit. But in terms of "comfort", i guess that is too much to ask.

Bananamerican's picture

The Fed is trying to engender a renewed "wealth effect" and gin up "confidence" in the economy by driving up equities (by any means necessary). Lower margins help this scheme.

But the Fed's bouts of Quantative Easing (printing/currency debasement) have been spooking people into commodities and gold/silver as people attempt to maintain their wealth in "real things"...THESE have been getting hit with HIGHER margin requirements thereby driving their prices DOWN. The Fed doesn't like competition.

tired1's picture

Thanks, it's going to take some work.

Dr Hackenbush's picture

Purpose of margin is to overleverage the little guy long enough for the bankers to rip off his nuts.  

Next question 

DeadFred's picture

I understand and agree with the nuts part, but my question is do margins only pertain to longs or does a lowering of margins allow you to better short an overblown manipulated excuse for a market such we see today?

dark pools of soros's picture

shorting has it's own set of rules too..  some stocks require/restrict this and that..  doesn't e-trade have that baby makin training vids or something?

John_Coltrane's picture

There is a symmetry between long and short positions as there is between calls and puts.  So, if I sell (i.e. short) 100 shares of SPY (S&P500) (I actually did that today) I receive a credit in my account of around $13400.  Only if there is a dramatic change in SPY value (volatility) in the positive direction is there any problem requiring me to supplement this credit.  Otherwise I can just wait for the next big "event" to occur (likely the ISM index miss tomorrow) and can buy it back at a lower value (say $12,500) and pocket the difference.  Or it could "explode" to the upside (LOL).

blindfaith's picture

Shorts???  You mean shorting?  Fools rush in where angles fear to tread.  Not in any markets manipulated like these are, meaning stock, commodities, even T-bills and bonds. 

You can loose your shirt in a heartbeat.  Sorta like Tiffney's letting goods go on a simple signature.

Only the TBTF banks can short without fear, since they don't have to disclose or cover losses thanks to the Executive Presidential Order claiming national security.