Exclusive: Second Whistleblower Emerges - A Deep Insider's Walkthru To Silver Market Manipulation

Tyler Durden's picture

A second whistleblower speaks. As the topic of physical delivery has gained prominent attention recently, it is crucial to complete  the circle and show how this weakest link in the PM market is (ab)used by the big boys: Phibro and Warren Buffet. Pay particular attention to the analogues between the methods employed in the 90's commodity market and how the PM (and equity) market is being gamed currently. And to think that each new generation of traders believes it has discovered something new... (All emphasis below is ours)





  • As a market maker in silver options from 1989 to 2000 I was present during both the 1994 and 1997 silver events. They were seminal in my education of gamesmanship in trading and how probabilities can come up short.
  • Prior to going out on my own, I traded at a small market making firm. When a trader finished training there, he had top-tier options knowledge but was not educated in whom the players were, the fundamentals of the markets, and how probabilities were useless when information was asymmetric. That wasn’t their business, they taught option’s theory. Since I had drunk the kool-aid, I thought fundamentals and gamesmanship were useless in the face of the almighty Standard Deviation model. That was a mistake. 

Phibro Early Exercise

  • In April 1994, the Thursday before Easter, the trading day ended with a rather unusual run up of 15 cents near the close to finish at 435ish around noon. Options expired that day at 4pm but we weren’t anywhere near the closest strikes (425 and 450) so most of us left. It was a 4 day weekend in the U.S. but silver traded globally, albeit il-liquidly in Asia. Comex wouldn’t open until next Tuesday. My education in gamesmanship started that afternoon at JFK airport as I was waiting for a flight, my first vacation in 5 years.
  • My backer paged me at the airport to inform me that someone was exercising the K 450 calls. I scoffed thinking it was a retail sap that was talked into exercising some 5 lot piece by an overzealous broker. “Great I said, let them, the options are out of the money.”  And I hung up
  • 10 minutes later he had me paged again. “You don’t understand, it’s Phibro exercising.” Again I naively said, “So what, they are energy guys.” But I was curious, “How many? “ I asked. “All of them, five thousand, he replied. Now I was really curious, but still woefully ignorant that it was I who was the sap at the table. “Why would they do that?” and he explained it to me. I nearly shit myself and bent over in the cab vomiting on the ride back.
  • Cancelling my trip, I headed back to the office to assess the reality of what would happen, probabilities were no longer important.  Survival was important.  I had no money and was trading on a $25k note lent to me by my backer.
  • We covered by buying futures on my entire short open Interest equivalent of EXPIRED OUT OF THE MONEY OPTIONS in Singapore with a dealing firm.  We did this prior to even actually knowing if I was exercised, probabilities be damned. How did I know they exercised? The price covered at was $462; that is how. The 450s were already in the money by 12 cents.
  • Phibro exercised all 5k lots. I had a fraction of that but big enough to be carried out on a stretcher had the rest of my position not bailed me out/ performed on Tuesday next week.
  • The weird part was, the market stabilized that Tuesday and did not run to “infinity” as it could easily have. We found out later it was because Phibro’s exercise was a no-no and Warren Buffet ordered them to shut the trade down as it was too big of a potential scandal. Especially in light of his coming to Solly’s rescue and lending his good name to fix their most recent Treasury scandal. A couple head’s rolled there if I remember correctly.
  • My guess was that the client was a Buffet or Soros type. Someone that would only go to Phibro, as these guys were the best at preventing information leakage, and always aligned themselves with client interests, where as if IB had an order  and acted in dual capacity as a dealer, he would potentially front-run the order or stop it out poorly on an exit. Phibro didn’t take other side of their client’s orders. They ran with them, and took care of the clients first.
  • Phibro got a big order for a client to buy silver, one that had to be handled expertly, and filled over time, no information leakage would be tolerated.  These guys were a prop desk that took orders as brokers once in a while.
  • They accumulated options for their own account (K 450C) to piggyback but not front-run the client.
  • They must have bought futures for themselves as well as the client with his permission.
  • They beat the VWAP by gunning the market on light volumes 1 hour before a 4 day US holiday. [TD: compare and contrast with the daily patterns seen every single day in the endless move up in the S&P]
  • They exercised the 450 Calls that day and then lifted the offers of the 1 or 2 OTC metals dealers left open during Singapore hours, running them over during illiquid markets.

Never Again!

  • I became infatuated with Phibro gamesmanship and made it a point to understand that particular type of player.
  • Libertarian Darwinist that I was I did not blame them. At the time It was a buyer-beware market for big businesses and they did nothing wrong. They took risk and they aren’t bigger than the market. I wanted to play with the big boys, and that was the price.
  • For me it was about learning how to read the signs and not be on the wrong side of one of those events again, even if I was not privy to their meetings.

Here is some of what I learned:

  • In metals (and energy and anything else with an OTC market) the IB firms have dealing desks along GS, MS, Republic, JPMorgan, Scotia Mocatta, all were essentially broker dealers in precious metals. All had clients: miners who hedged production and hedge funds who speculated OTC. They provided liquidity by taking the other side of their client’s trade and “back-to-backing” them in the futures markets or held onto them in their prop books as counterparty because of something else they saw.
  • Their client left resting orders with them in the IB’s Central Limit Order Book (CLOB) which served as good information to trade around for the IB. Sometimes they front-ran the client, other times they go for stops to force the client to puke. Sometimes they’d just make markets, depending on many things. It was poker to them.
  • Phibro was different. These were smart guys but they weren’t a dealing bank. They exploited imbalances in markets and took positions.  They had ideas. They also took orders for heavyweights who needed absolute discretion. They did not make it their business to fleece their own clients and instead aligned their interests. And they made the banks look like pikers when a client came to them with an order.
  • For the next 4 Years I paid attention to how those dealing banks and phibro played the markets. It was all about gamesmanship, Bayesian probability, and knowing your counterparty’s motivation with these guys. Information and misinformation.

Some methods:

  • How I.B firms would use a thinly traded floor to print the price that would trigger a massive stop loss in the OTC markets and bury their own clients.  Or how they would buy for their own accounts in front of resting limit orders for clients and simply use their clients to stop themselves out if the market printed thru their buy levels.  Or how they would use dual representation to show loudly they were buyers on one side of the ring, while they were selling quietly upstairs to other OTC dealers.  Trading with themselves in multiple entities, etc.
  • An IB with a Commodity Index was in heaven. Prop trading, captive client flow from IB deals and OTC dealing and Brokerage. The good ones knew how to integrate and hedge macro risks, whether to front run their own index clients or get out off their way.  “Chinese walls” did not exist in Commods.
  • Commods were mostly self regulated and that lead to predatory yet mostly legal behaviour. 
  • Some of these were necessary to protect their interests with such a small number of players. Some were possibly unethical, but most were legal. Their clients were all big boys who left resting orders with the IBs at their own risk. Clients themselves had to resort to some of the same tricks to keep the IB desks honest, like Coming in backwards, “spoofing”, leaving buy stops to get sell orders filled. The alternative for these clients was to put massive orders in the floor where liquidity was subjective, non continuous and information leakage was massive.

1997- Warren Buffet.

  • I got my chance to not get run over in 1997, when Warren Buffet gave an order to Phibro to buy silver.
  • Short version. Here is what went down.
  • Buffet gives Phibro the order- fact
  • Phibro begins filling it as a broker using various OTC dealers as counterparties, and letting the I.B dealers sweat getting out of the risk. - fact
  • Phibro buys options for their own account (no exercise game this time tho)- fact
  • Phibro buys futures for their own account. – not confirmed.
  • One by one the IB dealers start to catch on that this is no ordinary order Phibro is handling. They back away and liquidity gets harder to find.- fact
  • Other bigger hedge funds in the small circle of professionals, and other smart firms start getting long.- fact
  • Silver starts getting delivered from the Comex vaults. Some of it actually removed. Some of it just “covered with a sheet” for removal. But ounces begin to be removed from the warehouse. Phibro was rumored to be taking delivery and beginning to telegraph fear in the markets to start spoofing the VWAP. Rumor was they had a warehouse in Red Hook where they stored it.  Never confirmed.
  • Point here is, the saps for the last part of this play were the producers and refiners who were complacently net short and dependent on above ground silver to satisfy delivery requests.
  • Producers had been over-hedging for years in this market, as silver was cheap and they had business cash flow issues. It was their habit to sell forward production not yet available to them. And if forced to, they would lease already above ground silver and make delivery, collateralizing it with silver yet to be mined. Their positions were habitually synthetically long the contango as they rolled their deliverable production further and further out the curve in an attempt to squeeze much needed cash (cost of carry)for their businesses. The net effect was that sometimes they had to borrow silver for prompt delivery while they rolled their production hedge back further. – my interpretation of what I learned. May not be accurate to the “T”, am not a physical guy.
  • Example: in 1995 a miner has silver due above ground in 1997. He hedges it in Z-1997 contract.  Z 1997 comes and if he doesn’t have that silver available for some other reason; he covers the short and rolls it back. How much he needs to do this is a function of his obligations, cash flows, and his greed for carry. If leases are cheap, he will seek to capture all the contango and lease it until he gets the silver available.
  • If lease rates go up, it is not unlike a miner strike. Silver is needed for delivery now, and term risk becomes the issue. Contango collapses and market goes backwardated. He will be forced to sell the contango to get that prompt silver short back if he cannot make delivery. He has to defer delivery.
  • These guys were dependent on the specs NOT taking delivery for years. Specs didn’t have balance sheets to take and store physical metal. Specs usually were the weak hands at futures expiry.
  • But then…..Entities that stored silver in bank vaults (like the Republic vault) begin to remove silver from the available pool for leasing. This made the “easy money” portion of production financing no longer easy.  Think: smart money getting the word that a squeeze was on and playing along with it.
  • Phibro (and others) start selling the contango in the futures market to prepare to take delivery of even more contracts. Or at least put pressure on the producers who had front month shorts they would have to make a decision on delivering. Phibro KNEW that the producers had to sell the spreads to get their shorts back. But they couldn’t lift their shorts altogether as part of their financing deals with their bankers. Their own positions were now breaking down in every way except flat price. The market really didn’t move much. This let them stay in denial.
  • Buffet announces he is long and intends to take delivery of silver. Contango collapses. Market spikes to 7.40.
  • Rumor is gov’t intercedes and asks Buffet to not do this, it would break the industry. (Kind of like how the exchange begged the gov’t to help it shut down the Hunt Bros.)  He says ok, and agrees to lend then their silver back to them. Essentially charging them 40% interest to delay delivery for a year

What to look for:

  • Find the overleveraged/ extended party- and you will find the weak hand at the table. (Producers in 1997)
  • Tail wags dog: if the pricing venue trades smaller volume than the OTC, then manipulate price with small volumes to execute trades with big volumes favorably.  (OTC vs Comex floor)
  • Divide and conquer- if counterparties are undercapitalized and/ or fragmented, then it will be easier to get them to move like a herd.  (happens in options ALL THE TIME at expiration)
  • Manipulate data- take delivery of metal, take risk off books, manipulate MTM data.
  • Create an exit strategy- a good catalyst like Easter weekend, an announcement by an investor etc.  or develop a market and grow your own bigger fool. ie – retail.

Comments - So many points to make here:

  • How derivative markets can create a problem thru too much liquidity that cannot easily be reconciled by bringing physical production on line fast enough.
  • How this works both ways, and that dealing banks have been playing the gold/silver carry game for easy funding of other trades for years.
  • How, even though I personally think that what the OTC does is their own business, but the increasing securitization of commodities leaves regulatory arbitrage and OTC games to affect a new generation of ETF buyers, either thru incremental banking or thru contango cancer. That Wall Street salesmen and players with access to both markets retail and professional can exploit the captive audience created with ETFs and other fund type instruments to shear and in some cases skin the sheep.
  • That much of this happens because the gov’t is too stupid to see the inherent conflict of interest in what a broker-dealer does. Regulation will not stop gaming the law.  Ethics do, and not everybody has ethics. So best you can do is prevent situations of conflict of interest, like the existence of Broker-dealer type entities. Either you trade for yourself, or you trade for others. Period.
  • Fact is, if there were retail public in this game back then, the IB firms would have somehow sold them on the idea to BUY contango, or short silver. But the financialization of commodities wasn’t there yet. And the “bigger fool” game stopped at the producers. If it happened again, with ETFs, cross regulatory semi fungible products, asymmetric access to venues and other factors in a global market, the public would be killed, short squeeze or long puke (like in UNG now) take your pick.
  • You can never know intentions, and no one is bigger than the market, but the consequences of a lack of transparency and the free reign in which banks can tell half-truths to investors is a big factor in enabling strong hands to fleece weak hands with little market risk. It’s all a con game. And when the IBs figured out how to change the rules, then they were free to use their killer techniques to exploit a million little fish instead of the 10 big fish they usually competed with.
  • Phibro was a ballsy cowboy trading firm. The banks at the employee level are as well, but corporately, they first seek to make money and secondly provide a service. When they should be providing a service that makes money.
  • Everything that was done I’ve seen done the other way, keeping prices low, shaking out weaker players. Rarely does it happen in such a dramatic way. It is usually a series of “short cons” as opposed to Phibro’s home run. It’s all Darwinism. But when civilians are involved as they are now, then it is no longer caveat emptor.
  • Instead of taking a million dollars from a hedge fund, these guys take a dollar from a million people now.


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Cheeky Bastard's picture

I predict +/- 20 500 comments on this thread.

Lothar the Rottweiler's picture

No predictions bro, but damn is it good to see your face again regularly!

Cheeky Bastard's picture

Same here bro.

How you been doing dowg ?

Miles Kendig's picture

Agreed pup.  And may I say CB it is a shame to havta welcome you to the short timers club.  There is a special kinda peace to be found here tho bro. See yaz

Lothar the Rottweiler's picture

When y'all talk like that it makes ME ill... stay strong and on here.  We need all the brainpower we can muster (or at least I need you guys and everyone else).

We're all on that timeline in the tagline after all...

Cheeky Bastard's picture

Layne, old friend, nice to hear from you. I'm still putting up a fight though.

Will it be successful or not; time will tell.

Lothar the Rottweiler's picture

Layne... old school.  I'll leave this thread alone now but between the two of you, I've gained an education of a lifetime.  Stay strong boys.  Find the chat.  Easier there.

Miles Kendig's picture

Peace pup & CB.  While folks get worked up over PM manipulation I thought you might appreciate this bit of respite.  http://www.youtube.com/watch?v=fH1VDE3bvBA  and the original you may recall from RZH. http://www.youtube.com/watch?v=tBbV1O6_FNc

JW n FL's picture
by Miles Kendig
on Tue, 04/13/2010 - 20:09

Peace pup & CB.  While folks get worked up over PM manipulation I thought you might appreciate this bit of respite.  http://www.youtube.com/watch?v=fH1VDE3bvBA  and the original you may recall from RZH. http://www.youtube.com/watch?v=tBbV1O6_FNc


Miles Kendig,

http://www.youtube.com/watch?v=c2vSB39Vho4 or... http://www.youtube.com/watch?v=Q3LE7srtDVs&feature=PlayList&p=C1B06538A32767DF&playnext_from=PL&index=137 .

Be well, JW

Janice's picture

I like to get a little Cheeky too, but all this love talk is very distracting.  Cheeky are you trying to "hedge" your bet with a few multiple postings of your own? 

Sqworl's picture

Hey CB, Miles, CD and the rest of the original gang, Its great to read you sharing the love!  Yes, ZH has shifted, but its still home and I forecast that its going to rock very soon!...just saying...X

Narcolepzzzzzz's picture

You need to revise that down by 100. Master Bates has stopped posting.

Pure Evil's picture

We also haven't heard from:

Mater Bates the peterpeter

Rick64's picture

They are making a movie together " Two Guys and a Hotdog"

Gold...Bitches's picture

Don't worry, Jory's been making up for him recently

Mercury's picture

You need a subject involving class warfare, real warfare and/or/all open author solicitation of input for those kinds (multi-hundreds) of numbers, at least at this point in ZH history. Too much inside baseball on this one.

I don't think there are any shocking revelations here but it's a good summary of the dynamics of PM (other commodity and more generally any) markets and what to be aware of. The best take-away is probably the connection to the ETF markets. ETFs are now so large and so numerous and are so widely perceived to be passive, what-you-see-is-what-you-get securities that they just have to be fertile ground for this kind of serious  gamesmanship.  That short and/or levered ETFs are mathematically difficult to profit from longer term is old news at this point.  But expertise on the rules that determine when/what exactly they hold, how creation units are made/dissolved, the buying habits of automated investments etc. etc...especially (I would imagine) in PM ETFs is almost certainly turning into skimmed cream for somebody. Just because ETFs are automated and traded by machines doesn't mean that information about them is uncompromisable.  A dollar from a million people indeed.


Ruth's picture

Cheeky, I think the 500 comments are going to depend on how many ppl want to admit they hadn't be fucked like that since grade school;)  But anyway, if you want this for your open thread, we can make that happen.  Good to see under any ANY condition!  Right boyz?!

Lothar the Rottweiler's picture

Lothar lurves his friend Ruthie. :-)

Back to the shadows...

simonsays's picture

I predict this will not change anything - Fact. 

THE DORK OF CORK's picture

I predict silver will either rise or fall tomorrow on this news.

To be honest this trader speak is way over my head.

mouser98's picture

trader speak is over my head too, but i have learned lots since i started following ZH and learned lots from this post, even with my unfamiliarity with the jargon.  excellent post as usual TD..  oh yeah... Silver bitches!!!

Hansel's picture

I wish he would have spent the time to write out his thoughts.  Writing only in abbreviated bullet points is not an effective way to communicate.

A Nanny Moose's picture

its good for the "ADD" afflicted, helps stick to the bare facts, and minimizes editorial conjecture.

hbjork1's picture


He covered a lot of issues without putting the reader to sleep.  Yes he covers a lot of ground without much explaination but things that the reader doesn't understand can be figured out using Wikipedia or other sources and thinking. 

IMO, it is a keeper, a standard.  

simonsays's picture

We live in a sound byte world, unfortunately. 

Barmaher's picture

I need an executive summary - Fact

WaterWings's picture

Good thing I just bought another 100 oz.


merehuman's picture

Water Wings, thank you. I assume you have it in hand and its not paper! I want everybody to have some.

WaterWings's picture

I gave three coins to two of my senior citizen friends that are taking care of a grand-daughter. One for each bugout bag. Those ladies were all very starry eyed. I told them each one could be a last tank of gas, a night of warm shelter and food, or just something to remember me by.

I'd buy more but I'm not bigtime. Need to stock up on more 7.62 anyway.

Gold...Bitches's picture

yeah?  listen to this interview with Jim Rikards and you may go right back and buy another 100, or more...



J.Caesar's picture

gold and silver seem to operate in the greater or lesser hysteria part of the world

junkyard dog's picture

He makes it sound so easy. Only the strong survive.

I feel like biting the piss out of someone right now.


Goods's picture

Unless we get physical evidence all these whistle blowings will dissapear in the winds.

RockyRacoon's picture

So, you are saying that the CFTC should do its job?

I agree.

It's crooked -- fact.  That doesn't really affect my buying a few ounces here and there to add to the pile.   Actually, the shenanigans keeping prices down are helpful.  Not that that is any consolation to others.

nmewn's picture

"Actually, the shenanigans keeping prices down are helpful."


That is the simple beauty of "ethical" participation.



john_connor's picture

Take physical delivery and do your part to expose the fraud.

It would also force the Fed's hand on "liquidity" as a run on Gold and Silver would spook dollar debt holders.

Shameful's picture

That is my thought.  But it seems clear Uncle Sugar is willing to change the rules to make sure that one strong hand can't force the issue, IE Hunt Brothers or Buffet.  What will Uncle Sugar do if a lot of smaller hands try to force the issue?  Silver is not a big market, and more and more people are buying partially out of fear, and a lot of the little guys are going and taking delivery.

hack3434's picture

Death by a thousand cuts...Wonderful!

john_connor's picture

Exactly.  People have been asking what to do to fight the Fed, and this is one way.


Gold...Bitches's picture

I have no idea of the legality of it, but i was just thinking today about the initiative process in WA state and making the state govt not have any dealings with any bank that received TARP/bailout money.  Obviously the federal govt isn't going to stop the criminal banksters - its up to the people at this point to solve it.

Jim in MN's picture


Hw about the legality of requiring state chartered banks to possess reserves in the form of gold and/or silver up to some percentage of their deposits?  Call it a 'belt and suspenders' since the Feds can't regulate worth a crap.


I think under a referendum it would be quite legal, and smart; good for a state's competitiveness.

Mr Lennon Hendrix's picture


Shameful's picture

To hell with that!  We need people picking their own money, down with legal tender laws!

WaterWings's picture

In conclusion, Madam Speaker, allowing for competing currencies will allow market participants to choose a currency that suits their needs, rather than the needs of the government. The prospect of American citizens turning away from the dollar towards alternate currencies will provide the necessary impetus to the US government to regain control of the dollar and halt its downward spiral. Restoring soundness to the dollar will remove the government's ability and incentive to inflate the currency, and keep us from launching unconstitutional wars that burden our economy to excess. With a sound currency, everyone is better off, not just those who control the monetary system. I urge my colleagues to consider the redevelopment of a system of competing currencies.