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Move Over FX And Libor, As Manipulation And "Banging The Close" Comes To Commodities And Interest Rate Swaps

Tyler Durden's picture




 

While the public's attention has been focused recently on revelations involving currency manipulation by all the same banks best known until recently for dispensing Bollinger when they got a Libor end of day print from their criminal cartel precisely where they wanted it (for an amusing take, read Matt Taibbi's latest), the truth is that manipulation of FX and Libor is old news. Time to move on to bigger and better markets, such as physical commodities, in this case crude, as well as Interest Rate swaps. And, best of all, the us of our favorite manipulation term of all: "banging the close."

The story of crude oil manipulation, primarily involving Platts as a pricing intermediary, has appeared on these pages in the past as far back as a year ago, and usually resulted in either participant companies, regulators or entire nation states doing their best to brush it under the rug. However, it is becoming increasingly more difficult to do so as the following Bloomberg story demonstrates.

Four longtime traders in the global oil market claim in a lawsuit that the prices for buying and selling crude are fixed -- and that they can prove it. Some of the world’s biggest oil companies including BP Plc (BP/), Statoil ASA (STL), and Royal Dutch Shell Plc conspired with Morgan Stanley and energy traders including Vitol Group to manipulate the closely watched spot prices for Brent crude oil for more than a decade, they allege. The North Sea benchmark is used to price more than half the world’s crude and helps determine where costs are headed for fuels including gasoline and heating oil.

 

The case, which follows at least six other U.S. lawsuits alleging price-fixing in the Brent market, provides what appears to be the most detailed description yet of the alleged manipulations and lays out a possible road map for regulators investigating the matter.

 

The traders who brought it -- who include a former director of the New York Mercantile Exchange, or Nymex, one of the markets where contracts for future Brent deliveries are traded - - allege they paid “artificial and anticompetitive prices” for Brent futures. They also outline attempts to manipulate prices for Russian Urals crude and cite instances when the spread between Brent and Dubai grades of crude may have been rigged.

 

The oil companies and energy-trading houses, which include Trafigura Beheer BV and Phibro Trading LLC, submitted false and misleading information to Platts, an energy news and price publisher whose quotes are used by traders worldwide, according to the proposed class action filed Oct. 4 in Manhattan federal court.

The method of manipulation is a well-known one to regular readers: spoofing.

Over 85 pages, the plaintiffs describe how the market allegedly showed that the Dated Brent spot price was artificially driven up or down by the defendants, depending on what would profit them most in swap, futures or spot markets. They allege the defendants used methods including “spoofing” - - placing orders that move markets with the intention of canceling them later. Platts’ methodology “can be easily gamed by market participants that make false, inaccurate or misleading trades,” the plaintiff traders alleged. BFOE refers to the four oil grades -- Brent, Forties, Oseberg and Ekofisk -- that collectively make up the Dated Brent benchmark.

Ironically, spoofing is one of the primary mechanisms by which the HFT cabal has also benefitted, and been able to, levitate the market to ever record-er highs on ever lower volume. That, and Bernanke of course.

What do the plaintiff's allege?

Kovel represents plaintiffs Kevin McDonnell, a former Nymex director, as well as independent floor traders Anthony Insinga and Robert Michiels, and John Devivo, who held a seat on Nymex and traded for his own account. The complaint says the plaintiffs are among the largest traders of Brent crude futures contracts on Nymex and the Intercontinental Exchange. The four, who don’t specify the amount they are claiming in damages, seek to represent all investors who traded Brent futures on the two exchanges since 2002.

 

The plaintiffs allege that in February 2011, defendants manipulated the trade of Forties-blend crude, one of four grades used by Platts to determine the Dated Brent benchmark, which represents the price of physical cargoes for delivery on the spot market.

 

Shell offered to sell shipments to keep the price of Forties “artificially low,” according to the plaintiffs.

 

Morgan Stanley (MS) was the only buyer for one of four such orders, or cargoes, totaling 2.4 million barrels of oil, the traders said. The Feb. 21, 2011, transaction was prearranged to set a lower price for Dated Brent, according to the complaint.

So how was such wholesale manipulation able to continue for over a decade? Simple - same reason why nobody "knew" anything about the Libor cabal until recently - alligned financial interests of every participating party, in this case Platts, a unit of McGraw Hill Financial - the same parents as Standard & Poors rating agency - and all the other major commodity players in the space.

“By BFOE boys,” the plaintiffs said in their complaint, “this trader was likely referring to the cabal of defendants, including Shell, which controlled the MOC process.” The claimants also alleged that in September 2012, Shell, BP, Phibro, Swiss-based Vitol and Netherlands-based Trafigura rigged the market through “a combination of spoofing, wash trades and other artificial transactions” in the Platts pricing process.

 

The defendants pressured the market downward at the start of the month by colluding to carry out irregular and “uneconomic” trades, according to the lawsuit. They drove prices higher later that month, it said.

 

The four traders said Platts was “reluctant to exclude” the irregular trades because BP and Shell are “significant sources of revenue” to Platts.

Or, said simpler, don't ask, don't tell, and keep cashing those checks.

Full lawsuit can be read below:

 

* * *

And in other news, the CFTC just charged DRW Investments with price manipulation by way of "banging the close" in Interest Rate Swap Futures Markets.

Defendants allegedly manipulated the IDEX USD Three-Month Interest Rate Swap Futures Contract by “Banging the Close”

 

The U.S. Commodity Futures Trading Commission (CFTC) today filed a civil enforcement action in the U.S. District Court for the Southern District of New York against Donald R. Wilson (Wilson) and his company, DRW Investments, LLC (DRW). The CFTC’s Complaint charges Wilson and DRW with unlawfully manipulating and attempting to manipulate the price of a futures contract, namely the IDEX USD Three-Month Interest Rate Swap Futures Contract (Three-Month Contract) from at least January 2011 through August 2011. The Complaint alleges that as a result of the manipulative scheme, the defendants profited by at least $20 million, while their trading counterparties suffered losses of an equal amount.

 

According to the Complaint, in 2010 the Three-Month Contract was listed by the International Derivatives Clearinghouse (IDCH) and traded on the NASDAQ OMX Futures Exchange, and was publicized as an alternative to over-the-counter, i.e., off-exchange, products. Wilson and DRW believed that they could trade the contract for a profit based on their analysis of the contract. At the end of 2010, Wilson caused DRW to acquire a large long (fixed rate) position in the Three-Month Contract with a net notional value in excess of $350 million. The daily value of DRW’s position was dependent upon the daily settlement price of the Three-Month Contract calculated according to IDCH’s methodology. As Wilson and DRW knew, the methodology relied on electronic bids placed on the exchange during a 15-minute period, the “settlement window,” prior to the close of each trading day. In the absence of such bids, the exchange used prices from over-the-counter markets to determine its settlement prices. Wilson and DRW anticipated that the value of their position would rise over time.

 

The market prices did not reach the level that Wilson and DRW had hoped for and expected, according to the Complaint. Rather than accept that reality, Wilson and DRW allegedly executed a manipulative strategy to move the Three-Month Contract market price in their favor by “banging the close,” which entailed placing numerous bids on many trading days almost entirely within the settlement window, none of which resulted in actual transactions as DRW regularly cancelled the bids. Under the exchange’s methodology, DRW’s bids became the settlement prices, and in this way DRW unlawfully increased the value of its position, according to the Complaint.

But the take home message here is simple: no matter the pervasive manipulation everywhere else, and seemingly by everyone including such titans of ethical fortitude as Steve Cohen, gold is not, repeat not, never has been, never will be manipulated.

 

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Wed, 11/06/2013 - 14:26 | 4127712 hedgeless_horseman
hedgeless_horseman's picture

 

 

I am just grateful that The Fed and the .gov doesn't manipulate US stock markets.

Pure as the virgin snow, they are.

Invest with confidence!

Wed, 11/06/2013 - 14:28 | 4127736 NotApplicable
NotApplicable's picture

Unless there are rules specifically forbidding the actions of DRW, I'm having a hard time seeing anything other than someone using a flawed system against itself, which I'd hardly consider criminal.

 

Wed, 11/06/2013 - 14:32 | 4127761 Tyler Durden
Tyler Durden's picture

From CFTC

Banging the Close: A manipulative or disruptive trading practice whereby a trader buys or sells a large number of futures contracts during the closing period of a futures contract (that is, the period during which the futures settlement price is determined) in order to benefit an even larger position in an option, swap, or other derivative that is cash settled based on the futures settlement price on that day.

Of course, since it happens about 10 times per day in gold, when the open and mid-day are all banged too, it is easy to see why people are confused how this can be criminal.

Wed, 11/06/2013 - 14:41 | 4127788 hedgeless_horseman
hedgeless_horseman's picture

 

 

...since it happens about 10 times per day in gold...

Not to mention The Big Sale on physical gold almost every single month before OpEx.

Wed, 11/06/2013 - 14:47 | 4127819 Groundhog Day
Groundhog Day's picture

I'm waiting for the headline that tells me which market isn't rigged.  Then i would shocked,,,shocked

Wed, 11/06/2013 - 15:28 | 4127979 BaBaBouy
BaBaBouy's picture

Repeat After Me My LITTLE ZOMBIES...

GOLD Is NOT Manipulated.. GOLD Is NOT Manipulated..

GOLD Is NOT Manipulated.......

Wed, 11/06/2013 - 15:07 | 4127906 Bay of Pigs
Bay of Pigs's picture

Where the fuck is Bart Chilton?

Oh yeah, he resigned...

Wed, 11/06/2013 - 19:18 | 4128732 Downtoolong
Downtoolong's picture

He's collecting on a debt and banging Blythe.

Wed, 11/06/2013 - 16:08 | 4128113 Freddie
Freddie's picture

Thanks Tylers.  No one else talks about this criminal bullshit in the media at all and I don't watch *****ng TV which is a total joke.   Anyone who watches CNBC, Bllomberg or FBN or anything on TV is a tard.

BTW - is that guy in the picture playing Whack a Mole?   I understand the Banging The Close is like algos and HFT programs playing Whack The Bid.

Wed, 11/06/2013 - 16:11 | 4128138 Al Gorerhythm
Al Gorerhythm's picture

It's not manipulation if you don't know you've been had. It's just a bad day at the tables, right?

Wed, 11/06/2013 - 19:21 | 4128742 emersonreturn
emersonreturn's picture

thank you tylers

Wed, 11/06/2013 - 21:13 | 4129215 MrButtoMcFarty
MrButtoMcFarty's picture

Bangin' the Hos: A manipulative or disruptive management practice whereby all the peons are bent over in a long row over the mahogany exec suite desks allowing the Wall Street banksters to slam fuck each on a rotational basis during the basis of any existing contract (that is, the period during which the size of your asshole is determined) in order to benefit the large status quo positions of the bankster leeches in an option, swap, or other derivative that is settled based on the fistfuck quota on that given day.

 

 

Wed, 11/06/2013 - 14:32 | 4127762 SamAdams
SamAdams's picture

You whack one mole, another pops up.  Wouldn't it be easier to just unplug the machine?

Wed, 11/06/2013 - 14:45 | 4127813 Groundhog Day
Groundhog Day's picture

Somehow i sense JPM, MS and el squid are gearing up for another slap on the wrist to the tune of say "1 BILLION dollars"

Dr Evil

Wed, 11/06/2013 - 14:24 | 4127713 tenpanhandle
tenpanhandle's picture

This just can't be.  I'm shocked.  Where's Jeff Christian when you need him.

Wed, 11/06/2013 - 14:50 | 4127836 akak
akak's picture

Does anybody actually need him?

 

(Except as comic relief, of course.)

Wed, 11/06/2013 - 14:25 | 4127720 Sufiy
Sufiy's picture


All markets are rigged...

GATA Bill Murphy: 15 Years Of Facts Add Up To Same Thing: Gold Manipulation! 


 "Somebody is getting very desperate with physical Gold flowing to China and COMEX and LBMA vaults running on fumes. System knows how to dilute the real message, but we are talking here not just about one of the whistleblowers or his credibility - we are talking about Gold and Silver Market Manipulations."


"We will ask our rhetorical question again: after LIBOR fraud, FOREX manipulations, Energy market rigging, Mortgage scam and Pension looting - Is The Gold Manipulation To Be Admitted Next?"

  We have very timely the latest entry on the GATA website on this subject to share. http://sufiy.blogspot.co.uk/2013/11/gata-bill-murphy-15-years-of-facts-add.html#

Wed, 11/06/2013 - 14:31 | 4127753 logicalman
logicalman's picture

Refer to: Everything is Manipulated

Wed, 11/06/2013 - 14:47 | 4127820 101 years and c...
101 years and counting's picture

scary to think what they'll do to crash the markets next time.  in 01, the flew 2 planes into NYC and bombed the pentagon.  in 08, Ben LET Lehman fail so he could test his "must prevent deflation" theory.  now, we have a bubble in every asset you can think of.....when they all deflate at the same time, something wicked will be blamed.  hopefully they dont kill 3K innocent civilians this time....

Wed, 11/06/2013 - 14:35 | 4127776 zanez
zanez's picture

Presumably rather than "banging the close" the folks at the SEC prefer to "bang the trannies" .

Wed, 11/06/2013 - 14:37 | 4127783 RealityCheque
RealityCheque's picture

Wait...hold the fucking phone!

GOLD IS MANIPULATED??!!

AND FATHER CHRISTMAS ISNT REAL???!!!!

I'm going to need a drink....

Wed, 11/06/2013 - 14:38 | 4127789 vegas
vegas's picture

And this is somehow a surprise? This is prevalent in all markets that are traded electronically today.

 

http://vegasxau.blogspot.com

Wed, 11/06/2013 - 16:41 | 4128242 Rainman
Rainman's picture

Indeed. FSA was " alarmed " by the prevalence of spoofing on the London exchanges over 4 years ago. Result : a few wristslaps and the beat goes on.

 

 

Wed, 11/06/2013 - 14:57 | 4127874 Wicked Old People
Wicked Old People's picture

The Wizard of OZ is real and he isn't Santa and he isn't Jesus. The idea of occupying Wall Street doesn't go far enough. How about eliminate Wall Street? Right now everybody with a day job is holding hands with this old codger. The trend is your friend!

Wed, 11/06/2013 - 14:59 | 4127875 Dr. Engali
Dr. Engali's picture

I fully expect this to lead to a vigorous and honest investigation into the markets by regulators..... Bwhahahahaha. This is going no place fast.

Wed, 11/06/2013 - 16:07 | 4128121 Al Gorerhythm
Al Gorerhythm's picture

"While the public's attention has been focused recently on revelations involving currency manipulation by all the same banks" . Bwahahahahaha!!!

Wed, 11/06/2013 - 15:23 | 4127962 RaceToTheBottom
RaceToTheBottom's picture

When you have justified to yourself that a 85Billion manipulation each month is a good one, it becomes hard to tell the difference between a good manipulation and a bad one....

Wed, 11/06/2013 - 15:29 | 4127987 bagehot99
bagehot99's picture

Jamie Dimon is one of the smartest bankers we've got. Barack Obama said so.

 

 

Wed, 11/06/2013 - 15:54 | 4128067 Relentless
Relentless's picture

Jamie Dimon is one of the smartest bankers we've got. Barack Obama is paid to say so.

 

FIFY

Wed, 11/06/2013 - 15:32 | 4127995 Dr. Kenneth Noi...
Dr. Kenneth Noisewater's picture

Paging Ann Barnhardt..

Wed, 11/06/2013 - 15:35 | 4127996 Waterfallsparkles
Waterfallsparkles's picture

Bang the close and pump the overnight futures, is the easiest way to get the Market up whithout the cost of Buying stocks.

Wed, 11/06/2013 - 18:50 | 4128601 newworldorder
newworldorder's picture

The US government (Executive and Congressional branches,) have at their disposal the Justice Department, and various other alphabet soup agencies. If they wanted to sop this and other frauds and return markets to honest trading they would do so. Additionally, there are sufficient jail cells and "other camps" to house all the fraudsters on Wall Street.

The fact of the matter is both the executive branch and congress are no more than paid enablers for the criminal untouchables of the finance class, aided by Bennie and his jets.

All that both branches have to do, is to hold open their hands and protection and hush money is promptly paid to them. To the crimimal class - Its just the cost of doing business.

Most Americans are clueless and willingly remain so, still believing that they enjoy representative government, watching and protecting their interests.

 

Wed, 11/06/2013 - 19:20 | 4128738 Downtoolong
Downtoolong's picture

It’s the biggest con in the history of cons and it’s been going for much longer than a decade in every major market. I saw it evolve in the oil markets back in the 1980’s.

First you coax everyone into the idea of pricing every transaction relative to benchmark financial indices like futures, OTC exchanges, or market price surveys (Platt’s). The arguments for it seemed to be based on logical and sound benefits, i.e., price risk reduction, easy hedging, centralized risk management, greater trade liquidity, fungibility, etc.

Once the hook is set, everyone is reeled on board and the process becomes the standard of the industry. Then you move to phase-two, which is figuring out how to control and manipulate the relatively few benchmark indices to give you price advantage on your trades.

Ultimately the scam is about centralization of price control, making it a bankster’s dream. And just as appealing, it’s so simple even a journeyman bankster trader can figure out how to do it.

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