After we reported a week ago that JPMorgan was trying to corner the copper market, many noted this was not surprising, considering the bank's comparable approach in manipulating various other precious metal markets. Naturally, we extrapolated that the main reason why the CFTC continues to refuse to delay implementation of position limits is precisely due to the JP Morgan's need to control commodity pricing precisely due to such manipulative trading practices: "As for the CFTC, we now know why they are so intent on delaying the size limit discussion:
after all, any regulation will be forward looking - better let JPM
accumulate all commodities it can and distribute these via hidden
channels to affiliated subs before the ever so busy Gary Gensler corrupt
cronies decide to raise their finger on what is increasingly an ever
more blatant market manipulation scheme. At least in this case, JPM will
push the price higher unlike what it is doing courtesy of its gold and
silver manipulation. However, the PM market (especially Asian accounts)
will soon make sure Blythe Masters is looking for a job within 3 months
as we predicted a few weeks ago." The only problem with this story is that so far, is that unlike copper, JP Morgan's now legendary paper short in the silver market, long taken for granted by the "less than in mainstream" community, has been persistently ignored by the broader media due to the a lack of concrete evidence. Hopefully that will now change: courtesy of a speech delivered by none other than the CFTC commissioner Bart Chilton, who continues to expose the CFTC and the banker cartel's illegal market manipulation practices, we now have proof that "one trader held over 40 percent of the silver market." As this trader is either JP Morgan directly, or various Blythe Masters proxies, we can only hope that finally the broader outcry against JPM's ongoing attempt to suppress precious metal prices (insert Mike Krieger/Max Keiser "Crush JP Morgan" campaign here) will force the bank to finally unwind its shorts. And if not, perhaps the market speculators will do it for them: as of Friday, the SLV ETF held an absolute record 10,941 tonnes of silver, an increase of 163 tonnes for the week.
What is even more amusing is that the Bart Chilton disclosure came during a speech blasting that other manipulative scourge of the market: High Frequency Trading (it is helpful that over a year after Zero Hedge first recognized HFT as the biggest threat to market stability, subsequently confirmed by the flash crash, now the very CFTC is finally confirming we have been right all along). In an ideal world, there would be an overhaul to both position limit and HFT trading rules. Alas, we live in a world, in which the son of the heretofore biggest known ponzi, Bernie Madoff, has decided to take his own life on the two year anniversary of his father's ignominious collapse. Surely, should the regulators confirm that our own markets are nothing but a massive ponzi, the suicides will be far more pervasive, as all those who "trade the tape" realize they have been following the crowd right over the cliff.
First, here is a snapshot of (alleged) silver holdings in the SLV ETF, which many believe is a direct and indirect attempt by Asian banks to force a massive short covering capitulation by JP Morgan.
And here is the full December 8 speech by Bart Chilton. Relevant sections have been highlighted (h/t Bill Murhpy and LeMetropole).
Speech by Commissioner Bart Chilton before the High Frequency Trading World USA 2010 Conference, New York
December 8, 2010
Good morning and thanks to Terrapinn, and especially Matt Bednarsky, for the kind invitation to speak with you today.
Today, I’m going to spend a few minutes talking about speed. That
is, speed not only with regard to computers in trading but also to
regulation. Together, we’re all going boldly where no man has gone
before. I’ll also share with you a few of my thoughts about the
happenings and changes that are occurring in Washington that will impact
Wall Street and LaSalle Street and a bunch of people on streets that
not many folks have even heard about.
Streets With No Name
In fact, forget about Wall Street or LaSalle, it really doesn’t
matter the name of your street at all. Many High Frequency Trading
(HFT) and other financial trading firms don’t even have offices in New
York or Chicago, let alone London, Hong Kong or Singapore. If you have a
connection, you can trade, and trade they do. A recent report says HFT
firms account for about 50 percent of European markets. Our CFTC
economists say high frequency traders (HFTs) account for roughly a third
of all trading volume on regulated U.S. futures exchanges.
HFT companies don’t even need traditional traders on staff. The
types of professionals represented in today’s HFT firms might be more
suited for the deck of the starship Enterprise than a traditional
trading firm. These are mathematicians, programmers and physicists.
Moreover, with the advent of Star Trek-like “gee whiz” HFT technology,
we are witnessing one of the most game-changing and tumultuous shifts
we’ve ever seen in financial markets. Is it being done correctly? Are
there new rules or regulations that should be in place? If so, who,
what and how should it all be done? Those are some of the questions
Many of you may recall from your television education that the Enterprise and other starships of the 24th
century travelled at faster than light warp speeds using dilithium
crystals for power. Today’s HFT firms are travelling at the same
superfast speeds in their bold quest to seek out new life and new
civilizations. Scratch that: in their quest to scoop up market
micro-dollars in nanoseconds. That makes this an exciting time and an
exhilarating environment in which to live.
Wall Street Reform
There are, however, many other fascinating changes taking place in
markets and in our economy. That makes this all not only an
exhilarating, but also a challenging time.
Given the economic meltdown, which we saw in full force beginning in
2008, Congress saw the need to re-write financial laws. In July,
Congress passed and the President signed the most sweeping financial
reform bill in history: the Dodd-Frank Wall Street Reform and Consumer
Dark to Light OTC Markets
If there is one chief concept behind the new law, it is
transparency. In the futures world, the major change will be bringing
light and regulatory oversight to the over-the-counter (OTC) derivatives
market. As you know, OTC markets are where those annoying credit
default swaps traded. To give you an idea of how this increases the
regulatory universe, the currently CFTC-regulated exchanges account for
roughly $5 trillion in annualized trading. The OTC market is roughly
$600 trillion. We are going boldly where no regulator has gone before.
To say the least, we have our work cut out for us.
Speculation and Position Limits
In addition to OTC markets, there is another key provision of real
significance required by the new law. In the run-up to 2008, we saw an
enormous shift in speculative money coming into futures markets. Over a
several year period, roughly $200 billion in speculative money came
into these markets. Crude oil reached $147.27 a barrel; gasoline topped
$4 a gallon. Wheat, which trades at roughly $8 a bushel these days,
was trading at $24. It went on and on, and then it all crashed.
I’m not suggesting a direct correlation between the inflow of
speculative money or positions and the price volatility, by any means.
Many of us learned, however, that while there may not be such a
thing as too much speculative money, that same money might be too
concentrated. We saw very large concentrations of trader positions in
2008. That has continued. Since then, we saw one trader hold more than
20 percent of the crude oil market. Even earlier this year, one trader
held over 40 percent of the silver market.
While I’m not suggesting speculators drove prices in 2008 or
today, I know they had an impact then and believe they are having some
impact today. You don’t have to take it from me though. Economists at
Oxford, Princeton and Rice universities all document that speculators
have had an impact on prices.
Congress got it, and that is why the new law requires mandatory
speculative position limits—to ensure that too much concentration
Crude and Gas
News stories on front pages in recent days report the nearly 10-cent
surge in gasoline prices as a result of increased crude oil futures (by
the market close last Friday, the NYMEX price had risen nearly $7 to
$89.19 in the past two weeks). The same articles point out that crude
futures are somewhat delinked from supply and demand. With strong
supply and relatively weak demand, one energy economist said, “There is
nothing a normal person would look at and come up with what’s
happened.” Maybe we need to look again at the experts. An April 2010
MIT study said that “. . . speculation may temporarily push crude oil
prices above the level justified by physical-market fundamentals . . .
New Speculation Data
One might ask if there are as many speculative positions today as
there were in 2008. If folks thought speculative levels were high then,
data I’m discussing for the first time today reveal an even greater
Speculative money from the likes of hedge funds, index funds and
pension funds is coming into the commodity markets at a blistering
pace. There are more of these speculative positions now than at any
time. To provide a more granular data look, between June of 2008 and
October of 2010, futures equivalent contracts held by these types of
speculators increased 47 percent in energy contracts, 20 percent in
metals and 18 percent in agricultural commodities. More than $149
billion in speculative money in commodities markets represents more
futures contracts than at any previous time. (Note: While the dollar
amount of speculative money was slightly higher in 2008 at $162
billion, the actual number of futures positions held by these
speculators was less due to the high cost of commodity contracts).
Not Bad Guys
Now, there is nothing whatsoever wrong with those speculators being
in markets. Bless them. We need speculators. Without them, there is no
market, full stop. The sheer size, however, of concentrated
speculative interests has the potential of moving markets, of
influencing true price discovery. That can make life difficult for the
hedgers who use markets to manage commercial business risks, and for
consumers who rely upon them to fairly price just about everything they
purchase. Everything from a loaf of bread to a gallon of milk or gas to
a home mortgage is impacted by these markets.
So, where does that leave us?
When Congress passed the new reform bill this past July, it
determined mandatory speculative position limits were required. Of the
more than 40 rules that the CFTC is required to promulgate, most are
required to be completed by next July. Only a few have shorter
deadlines. Mandatory position limits are in that small group and are
required to be implemented by mid-January for energy and metals
You may have read news stories recently where some say we can’t make
that deadline, shouldn’t make that deadline, need to hold off until we
get more data or better data so that the levels can be calculated with
exact specificity. In an idyllic world, that might be fine. Congress,
however, gave the agency the earlier implementation date for a
reason—so that we put limits in place now, not some later time of our
choosing. Additionally, the law provides no such authority for
regulators to delay the imposition of these limits. There is no
regulatory escape valve.
That hasn’t, however, slowed some folks down. There are creative
suggestions for ways around the implementation requirement. Some
proffered that the agency formally approve a final rule and consider
that step as “implementation” under the law. At the same time, the rule
would not make the limits effective until sometime in the
future. They essentially propose the agency implement a rule on time
without implementing it on time—without making it effective. If that
sounds convoluted, it is. That sort of dancing on the head of a legal
pin is exactly the variety of Washington-speak that makes folks in our
country furious. I’d also bet that those in Congress who wrote the
provision would have an opinion on the matter.
When President Obama signed the new law, he said the reforms
“represent the strongest consumer financial protections in history.”
The mandatory position limits provision is one of those consumer
protections. The CFTC has an obligation to do what Congress and the
President instructed us to do . . . and on time.
So, how might the new law have an effect on high frequency trading? Does anyone remember the movie Speed? It
is about 15 years old but still popular after all that time. Sandra
Bullock plays a passenger on a bus wired with a bomb. She is told the
bomb will trigger if the bus slows down to 50 miles-per-hour. She winds
up having to drive the bus and negotiate curves, off-ramps and traffic,
all at a speed over 50 miles-per-hour. Well, as I said, HFT is taking
place at warp speed. It is not ever going to slow down to 50
miles-per-hour. Is warp speed okay? Are there any negatives? Does
that speed help markets? At the very least, as regulators, we need to
keep up with what is going on.
Computer technology in trading is great for many reasons, not just
for the “gee whiz” things mentioned earlier, but because it can increase
liquidity in markets. It adds access that we've never seen, and for
auditors, exchanges and regulators, it's great because electronic data
trails exist instead of trying to piece together pieces of papers from
trading rooms. So, there are many good things about computer trading,
but we also have to think about the myriad ramifications of technology.
One such ramification gave us a wake-up call on May 6th.
Financial markets came unwound that afternoon. You’ve heard the horror
stories. Stock in Accenture, for example, went from $40.13 to just a
penny before recovering. The Dow lost nearly 1,000 points, and then
recovered more than two thirds of it by the close of trading. If the
crash had occurred earlier that day, when European markets were still
open, the entire financial world would’ve been rocked.
The report issued October 1st by the staffs of the CFTC
and the SEC tells us what happened. It doesn't point fingers at a
single culprit like some people think. It describes markets that were
already jittery due to economic news coming out of Europe. Volatility
was double normal levels, but liquidity was light. Sellers couldn’t
find buyers. Then when one firm utilized a trading program—not HFT, but
an algorithmic robot—to sell what would usually be a pretty ordinary
set of 75,000 S&P E-Mini futures contracts valued at over $4
billion, the markets went off a cliff.
HFT arbitrageurs and others, seeing that market plummet, recognized
an opportunity to buy low at one exchange and sell corresponding
contracts at a higher price elsewhere. That is one of the reasons we saw
the cascading effect within commodity and securities markets.
The good news is that markets recovered much of the loss. It’s also
good news that regulators and exchanges are instituting procedures to
make markets more effective and less susceptible to disruption.
It may surprise some, but mini flash crashes occur all too often.
They don’t cause as much of a disruption as that of May 6, but more than
once this year in futures markets and several times in individual
stocks, runaway robotic programs have disrupted markets. By that I
mean, they cost people money. In February, for example, one company
lost a million dollars in the oil market in less than a second. That
company lost its own money but sometimes whole markets are affected and
many innocent people are hurt.
Things can happen so fast that, all too often, regulators are like
the fire department that comes in and cleans up the charred remains. In
practice, we need to be more like the police department trying to keep
these disasters from happening in the first place.
As you know, these HFT programs and computers are not static. They
are intuitive. They can track market moves and make adjustments
accordingly. They are extremely sensitive. They play off one another
and react at nanosecond speeds. For regulators to keep up, we have to
somewhat get in the mind of the mainframe. We have to be nimble and
quick because even if we get a better handle on how to regulate this
breakneck speed trading, the methods, the machines and the markets will
continue to change.
At the first meeting of CFTC’s Technology Advisory Committee (TAC) in
July, some firms provided evidence that elements of the Flash Crash may
have been caused by so many orders going into the order book so fast
that the market couldn't respond. One member of the committee called it
“algorithmic terrorism.” I call it algo price piracy, where one
algorithm “invades” another. It doesn’t appear that happened May 6, but
I’m sure it can. Some of our committee members who are knowledgeable
about this think it does. It may be innocent or it may not be, but it
points out how regulators need the speed to keep up with an ever-faster
set of markets.
Given our experience with the Flash Crash and mini flash crashes, it
is appropriate to consider if there should be limits on high frequency
trading. For example, we were talking about position limits earlier.
Say we allow 10 percent of open interest in a market. Should high
frequency traders be allowed to trade 10 percent, repeatedly, in a very
short time period? We certainly should not allow some situations to
exist. What about five HFTs, each trading 10 percent of the market in
ten minutes, in concert, and it moves a market? Is that okay?
Purpose of Markets
That issue, however, raises the broader question about this type of
trading in general. Don’t get me wrong, HFT trading is part of our
trading today but should it remain the same? Is this type of trading
outside of—or is it even inimical to—the fundamental purposes of capital
formation and risk management in these markets? Many commercial firms
trying to hedge their risks complain about the inability to get into the
markets as they have in the past due to sheer number and speed of
HFTs. I understand there are arguments on both sides, but if we lose
the commercials, we won’t have the types of markets we need to ensure
price discovery and appropriate risk management.
Unstoppable and Accountability
Another way to address some of these potential circumstances is to
impose legal responsibility on high frequency and algo robot trading
that roils markets. I saw Denzel Washington in the movie Unstoppable
over the weekend. He was great, as usual. As this runaway train
travelled at high speeds across Pennsylvania, I thought about
accountability. The train company was constantly calculating the costs
of what action to take. Do they try to derail the train in a remote
area where an accident will cost them less money? Should they try to
stop it by putting people on the train and risk lives? It struck me
that the reason the company thought about those things was that there
are laws that will hold them accountable. Shouldn’t we do the same for
algo robots and HFTs? Those who instigate runaway high frequency or
algo robot trades should be held accountable when they hurt other market
participants or injure consumers.
One way to address the matter is to include such a provision in our
new anti-disruptive trading practices authority. We should prohibit
certain conduct that is specific to algo robots and high frequency
trading. Taking into account what happened on May 6, this certainly
seems like a reasonable proposition.
Seal of Approval
I believe, and think there are others at the Commission who would
agree, there should be some standard definition of what high frequency
trading is and maybe even a kind of “Good Housekeeping Seal of
Approval.” Should that be done? If so, who should do it? I’d
certainly like to ensure as part of our core principles that exchanges
have certain due diligence and HFT is vetted from the start. I’d also
like to ensure that all exchanges have the ability to monitor individual
programs trading and aggregate and slice, dice and chop up data to get a
better handle on what is and could go on in market.
I know a little of this might sound scary to some of you.
Nevertheless, take a deep breath. First, I’m always candid and we don’t
get to good or bad ideas without talking about them. In fact, I hope
you will help us as we consider what to do so that we don’t make
mistakes. Without your participation, we could do a lot of damage. I
get that. Second, remember that good people shouldn’t fear appropriate
rules or regulations. The bad actors should fear rules and regulations.
Third, we have a big thing in common: we all want markets that are
efficient, effective and free of fraud, abuse and manipulation.
We may not have this in common, but I know there are many NASCAR fans
in this country. Even if you are not, it is cool to see those cars go
really fast. Folks love to watch somebody take the checkered flag. And
admit it, sometimes we like to see a crash. However, we don’t want
anybody to get hurt. We certainly don’t want innocent bystanders in the
grandstand to get hurt.
The same is true in markets. Folks want high frequency trading
because of its advantages. What nobody wants is for anybody to get hurt
because of unintended consequences, including traders themselves.
Therefore, whether you’re driving around a NASCAR track, on a starship,
in a train, or on a bus, it’s the regulators’ job to prevent accidents
If you remember the original “Speed,” somebody asks Sandra Bullock if
she thinks she can drive the bus and she says, “Oh yeah, it’s just like
driving a big Pinto.” I’m not sure if our job is as easy as driving a
Pinto, and that’s the first car I learned to drive, but I am sure
working together, we can get the job done. We just have to be careful
and watch our speed.
Thank you. Happy Holidays. Live long