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The Oil Markets Are Rigged - Here's How

Tyler Durden's picture




 

We have remarked numerous times, thanks in many cases to the detailed analysis of Nanex LLC, that oil markets (among others) are manipulated or rigged. But, just as Michael Lewis was what equity market participants needed to comprehend what was occurring stocks, so WSJ reports today on 'spoofing' in the oil markets. Spoofing is rapid-fire feinting, which as Tabb group's Matt Simon notes, "raises a question now about whether someone is engaging in legitimate market activity or clear market manipulation." Here's how they do it...

 

Ironically, the last time we commented on this was the day after The SEC charged another trader (and his machines) with spoofing.

But, as The Wall Street Journal reports, it continues...

The 2010 Dodd-Frank financial-overhaul law outlawed spoofing, but the tactic is still being used to manipulate markets, traders say. “Spoofing is extremely toxic for the markets,” says Benjamin Blander, a managing member of Radix Trading LLC in Chicago. “Anything that distorts the accuracy of prices is stealing money away from the correct allocation of resources.”

 

CME, the world’s largest futures exchange, put out rule clarifications in August 2014 intended to end spoofing.

Here's how it works...

Spoofing is rapid-fire feinting. A spoofer might dupe other traders into thinking oil prices are falling, say, by offering to sell futures contracts at $45.03 a barrel when the market price is $45.05. After other sellers join in with offers at that lower price, the spoofer quickly pivots, canceling his sell order and instead buying at the $45.03 price he set with the fake bid.

 

 

The spoofer, who has now bought at two cents under the true market price, can later sell at a higher price—perhaps by spoofing again, pretending to place a buy order at $45.04 but selling instead after tricking rivals to follow. Repeated many times, spoofing can produce big profits.

Rigged by any other name...

“There are stories going way back about the guys in the Chicago trading pits trying ways to disguise their trading or show their cards in a certain light,” says Matt Simon, an analyst at the market-research firm Tabb Group. “It raises a question now about whether someone is engaging in legitimate market activity or clear market manipulation.”

The full extent of spoofing isn’t known, but traders say it is evident in how prices move every day in a range of stock, bond and futures markets.

 

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Mon, 02/23/2015 - 16:35 | 5819581 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

No mention of derivatives?

Mon, 02/23/2015 - 16:39 | 5819585 jaap
jaap's picture

No mention of HFT? Orders put in and taken out wilthin a fraction of a blink of an eye?

Everything is a hoax nowadays.

Have fun with your markets, your financial talking heads and your capitalism without capital but only paper (or digits).

 

I am out.... (apart from the physical blinking stuff.

Mon, 02/23/2015 - 16:50 | 5819633 NoDecaf
NoDecaf's picture

No mention of blow and hookers? Surely they're not wasting the loot on paying down their mortgages. So just relax everybody, it's all getting added to the GDP.

Mon, 02/23/2015 - 16:52 | 5819642 Au_Ag_CuPbCu
Au_Ag_CuPbCu's picture

SHOCKER!  What isn't rigged on Wall Street?

Mon, 02/23/2015 - 16:52 | 5819643 Four chan
Four chan's picture

its all rigged.

Mon, 02/23/2015 - 16:57 | 5819658 NidStyles
NidStyles's picture

Where's Flak telling us that the high prices were because of Peak Oil again?

Mon, 02/23/2015 - 17:26 | 5819797 Publicus
Publicus's picture

Traders should not be allowed in the commodities market, only producer and end users, buy once, sell once, that is it.

 

Problem solved.

 

Or, institue a trading tax of 5% per trade.

Mon, 02/23/2015 - 17:34 | 5819842 giggler321
giggler321's picture

Alternatively stop the cancelling of bids and sales - problem solved and someone with deep pockets will have to pay up...

Mon, 02/23/2015 - 17:34 | 5819846 RockRiver
RockRiver's picture

Traders should not be allowed in the commodities market, only producer and end users, buy once, sell once, that is it.

 

 

 

 

 

Wont work, no liquidity...

Tue, 02/24/2015 - 10:18 | 5820090 RaceToTheBottom
RaceToTheBottom's picture

When an order is put in and removed as soon as others see it and make manipulated decisions based on it, is that liquidity?

 

 

Mon, 02/23/2015 - 16:51 | 5819636 LawsofPhysics
LawsofPhysics's picture

Yes, I am still surprised that the powers that be will let us exchange those digits for ammo.

 

tick tock...

Mon, 02/23/2015 - 16:58 | 5819660 NidStyles
NidStyles's picture

That should tell you how scared they are to move too fast.

Mon, 02/23/2015 - 17:15 | 5819742 Surveyor4Pres
Surveyor4Pres's picture

...except for the fact that the ATF is proposing to ban M855 62 grain penetrator 5.56mm ammo for sale to civilians.

FIGHT THIS PROPOSED BAN, NOW!

Mon, 02/23/2015 - 17:24 | 5819796 Four chan
Four chan's picture

i just got a thousand rounds for each of my guns. woot!

Mon, 02/23/2015 - 17:29 | 5819811 kchrisc
kchrisc's picture

"...shall not be infringed."

If infringed Unconstitutional aggression, levying war, then:

Article3, Section 3: Treason against the United States, shall consist only in levying War against them, or in adhering to their Enemies, giving them Aid and Comfort. No Person shall be convicted of Treason unless on the Testimony of two Witnesses to the same overt Act, or on Confession in open Court.

The banksters need to repay us.

 

They can seize all the weapons they can find from my house. The ones under the garden I will "bring" to them.

Mon, 02/23/2015 - 18:14 | 5819979 Exponere Mendaces
Exponere Mendaces's picture

The CME is going to close down most of their pits by July of this year. They've been relentless in their push to go electronic, and the only thing that paused that progress was all of the older members on the trading floor that weren't about to give up their seats.

Now that most have either retired or moved "upstairs" to screens. (Not all make the transition well, see the documentary "Floored" for that struggle) The CME is now free to shit-can everyone who works on the floor and keep the bigger pits for show.

Open Outcry wasn't perfect, but it fucking worked. This HFT bullshit and CME's Globex platform is just another way to squeeze pennies from people under the banner of "progress". I'd love to know what their fall-back plan is if their electronic platforms ever have a bad day - nobody would be left who would know how to trade in an open-air pit.

They never should've stressed electronic so heavily, but given they don't give two shits about anything but volume/revenue, it isn't too surprising that they'll make every short-term decision at the expense of long term planning.

Just par for the course over at the CME.

Mon, 02/23/2015 - 16:53 | 5819646 Canadian Dirtlump
Canadian Dirtlump's picture

As a precious metals fan with a growing collection of scarred assholes, none of this shocks me ( nor do I suspect it would shock the average zerohedge gangster ) but I'm sure to the lemming masses it is an eye opener.

Mon, 02/23/2015 - 22:41 | 5820906 DragonWings
DragonWings's picture

well technically the market price becomes what buyers are paying.

If the spoofer "spoofs" and the suckers suck... what the sucker pays/receives becomes the new market price!!!

It has been done for centuries without even trading futures.

Go figure...

 

 

Mon, 02/23/2015 - 16:35 | 5819582 dimwitted economist
dimwitted economist's picture

As Fake as the stock market???

Mon, 02/23/2015 - 16:39 | 5819595 Bossman1967
Bossman1967's picture

Even taking time to read this article is sad. Dyh all markets are rigged period end of story but I guess if they wernt talking about Lehman or rigged through in Putin for laughs well there would be no news to read

No sarcasm intended

Mon, 02/23/2015 - 16:48 | 5819625 duo
duo's picture

Correction Tyler:  "The gold and silver markets are rigged - here's how".

Mon, 02/23/2015 - 17:40 | 5819868 Proofreder
Proofreder's picture

  Moar (and better) correction;

  "The Markets are Rigged - Here's How"

Mon, 02/23/2015 - 18:04 | 5819947 Aaaarghh
Aaaarghh's picture

and further to your correction is mine;

 

"the casino is rigged-heres how"

Mon, 02/23/2015 - 16:35 | 5819583 Tuck Fheman
Tuck Fheman's picture

So ... just like cryptocurrency exchanges.

Mon, 02/23/2015 - 19:11 | 5820210 GoldSilverBitcoinBug
GoldSilverBitcoinBug's picture

At least in crypto exchange you can't do naked short selling unlike in crimex on XAUUSD with  100:1 paper to real ratio.

One Bitcoin is one Bitcoin not more not less.

Of course there is some whales who dump or buy but it's rare now.

Try to buy/sell 10.000 BTC on a market order, it will move the price a lot.

Mon, 02/23/2015 - 16:37 | 5819586 swmnguy
swmnguy's picture

As Mr. Simon says this sounds like a very old, though risky, technique.  The larger and more anonymous the market, the easier to pull off more than once before everyone decided you were a welsher and stopped dealing with you.  With the speed and relative anonymity of current electronically-driven markets, where most of the traders are computer algorithms, this sort of thing gets a lot easier and a lot less acceptable.  There's a gray area between what's just sharp practice and what's outright fraud, and it's usually best to stay out of there.

Mon, 02/23/2015 - 16:57 | 5819655 First There Is ...
First There Is A Mountain's picture

With proxies/ECNs, it's like shooting fish in a barrel. I was a market maker for many years. You never knew who was behind ARCA, AUTO, EDGX and others like them. It's easy to conceal your identity and EVERYONE is doing it. 

Mon, 02/23/2015 - 16:38 | 5819589 kurzdump
kurzdump's picture

How can the oil 'markets' not be rigged?

Mon, 02/23/2015 - 16:40 | 5819597 nope-1004
nope-1004's picture

+100

Mon, 02/23/2015 - 16:42 | 5819605 centerline
centerline's picture

How can any markets touched by bankers and/or politicians not be rigged?

Mon, 02/23/2015 - 16:51 | 5819637 Thisisbullishright
Thisisbullishright's picture

I believe you meant BankSTERS....

Wanted to correct you real quick.  :)

 

Mon, 02/23/2015 - 17:33 | 5819832 kchrisc
kchrisc's picture

"I believe you meant BankSTERS...."

Or grifters.

The banksters need to repay us.

 

One day soon "banking" will become the most dangerous profession to be, or have been in.

Mon, 02/23/2015 - 16:44 | 5819614 astoriajoe
astoriajoe's picture

"The spoofer, who has now bought at two cents under the true market price"

If spoofers exist, then is there any "true market price" ever?

Mon, 02/23/2015 - 16:55 | 5819653 disabledvet
disabledvet's picture

Well...aside from all the click baiting that this has become...this is a good question.

"What happens when my Nanex phoney market meets one with actual money?"

 

And the answer is debt, taxes, skyrocketing crime and Russians nuking you and your Cities!

 

Hooray!

 

Who needs real money when you can just print it!

Mon, 02/23/2015 - 16:46 | 5819618 Tsar Pointless
Tsar Pointless's picture

Looky here at my "shocked" face.

Mon, 02/23/2015 - 16:47 | 5819624 buzzsaw99
buzzsaw99's picture

sounds like a bunch of algos playing grab ass to me

Tue, 02/24/2015 - 22:24 | 5825142 astoriajoe
astoriajoe's picture

I think I will adopt your grab ass term.

Mon, 02/23/2015 - 16:50 | 5819629 Rainman
Rainman's picture

yeah ....this is called " LIQUIDATEE " !

Mon, 02/23/2015 - 16:50 | 5819631 Thisisbullishright
Thisisbullishright's picture

Can said Spoofer be nail gunned???

 

Mon, 02/23/2015 - 16:52 | 5819641 gcjohns1971
gcjohns1971's picture

Part 1 and Part 2 would seem to cancel each other out.

Furthermore, this activity looks alot like buying to cover.

This is not the rigging I am worried about.

 

The rigging I am worried about is done by the market makers.  They use their clien'ts orders and cash on a fractionally-reserved basis to bet against the balance of their client's positions...  So if a bare majority of their clients dollars are betting short, they can take their client's own dollars, write themselves a loan up to the bank's reserve ratio, and then use that money to bet the other way...creating a self-fulfilling prophecy.

And that is the kind version.

The not so kind version is that when a retail investor buys  an asset through a broker, the broker isn't actually executing these trades individually, instead they can mark the client down as though the trade were executed, and account for it as though executed, and then do whatever the hell they want to with your money.

And then there's naked trading.  How do you catch a market maker who is trading naked?  You can't until/unless they bankrupt themselves.  So, an oil company places puts on the price, driving it down (supply) and refineries or other users of oil place calls' (demand) ...but Mr Market can write as many of either as he wants for his own purposes.   He has 90 days to close the trade, and worst case is he settles in cash...which, if you are a customer, can be your own funds.

Mon, 02/23/2015 - 17:02 | 5819675 disabledvet
disabledvet's picture

"And still the oil and gas keeps coming."

Why is that scary?

 

Doesn't seem to be hurting equities at all...

Mon, 02/23/2015 - 16:53 | 5819645 First There Is ...
First There Is A Mountain's picture

Only one quibble with this:

 

He set the price with a fake offer, not a fake bid. Trust me, I've watched this enough times as a Market Maker. Someone throws up an outsized offer, pulls it when other offers stack up behind it only to go bid (through a proxy like ARCA or AUTO so as not to reveal their identity) and then gets hit at the lower price. The converse is putting up a big bid and getting other MMs to start taking the offer. Of course, through proxies, the huge bidder has his minions offered at the higher price making prints. 

 

 

Mon, 02/23/2015 - 17:11 | 5819719 disabledvet
disabledvet's picture

I think the correct term is "proxy/server" meaning the entire...scam for lack of a better term...is fully automated.

 

To .exe it however requires a MASSIVE amount of not only computing power by actual electricity.

You also have to secure "the flow" (for example "be the phone company itself") by making sure all data travels over your network and your network alone.

 

I did see Cisco soared on absolutley no news whatsoever a week or so ago.

of course the algo is of no use without the data.

 

Knight Trading lost...400 million in five minutes was it?

 

Think the Swiss Franc thing engineered by Credit Suisse was 80 billion.

Mon, 02/23/2015 - 16:56 | 5819654 trader1
trader1's picture

this is what we call cyber-financial-war

more humane than killing each other outright?

Mon, 02/23/2015 - 17:19 | 5819764 disabledvet
disabledvet's picture

The Russians have alreay wiped out one one million person city off the map...working on number 2 (with great cheer leading on a near daily basis from Mish Sherlock) and nlso number three.

 

Once done they start moving towards Kiev itself.

 

That's well over 4 million displaced right there.

After what happened to their ruble I imagine they can't wait to show the folks who love this stuff the difference between starving a people to death as Stare policy and what a real kinetic attack that vaporizes your entire City "forever" looks like.

Mon, 02/23/2015 - 16:59 | 5819656 cigarEngineer
cigarEngineer's picture

The difference with the past, however, is that if you see someone in the pit offering at x and someone bidding at x, and you steal that trade because you're closer and louder to the guy offering in the pit and then turn around and sell it at x+1 to the guy who was bidding at x on the other side of the pit, he'll come over and punch you in the face. We need to bring that back. I think the fine 20 years ago for assault in the pit was like $100. 

Mon, 02/23/2015 - 17:00 | 5819670 First There Is ...
First There Is A Mountain's picture

The other thing is, this is only effective IF the bid or offer is outsized enough to convince other participants [read: scammers] that there is real volume there. The real risk to the spoofer is that someone calls their bluff and takes them or hits them at the size displayed and they have to eat the order and get stuck with it. Of course there are derivatives/options for the occasional whoopsie, but otherwise only deep pockets and big money can play this game OR move fast enough not to get hit or lifted. And if you do, you have to have a relationship with the counterparty that they don't come back out to you if you decline and force the matter and MAKE you take the trade. 

Mon, 02/23/2015 - 17:05 | 5819688 withglee
withglee's picture

Spoofing and similar market manipulation practices would be neutered by simply adding a random delay to every transaction. With that, only long term transactions could hope to achieve desired and legitimate results. Sort term manipulations would exhibit random, uncontrollable behavior.

You're not a trader when you hold your postion for microseconds. You are a manipulator and the marketplace doesn't need nor want you around.

Mon, 02/23/2015 - 17:10 | 5819710 XRAYD
XRAYD's picture

Gosh, now the Fed and the SEC are going to find out about this, and what all the "liquidity" is doing to markets!

Empowering crooks to create wealth!

But we have an atty general who is scared of Wall street who is now leaving his job, and another one in cahoots with the banks who will replace him!

And SHE like slaps on the wrist settlements, insead of handcuffs! 

Mon, 02/23/2015 - 17:17 | 5819751 rsnoble
rsnoble's picture

Stock symbols don't mean shit.  Everyone of them is a gambling game,  All a stock symbol is for is a place for you to pull up a chair and throw money on a table(aka wallstreets table) and attempt to steal someone elses money that's also playing the same game.  Just pick one.  All the same shit.

Mon, 02/23/2015 - 17:18 | 5819756 chart_gazer
chart_gazer's picture

The International Energy agency's report from feb 10 shows global demand for 4Q14 at 93.53 M/BD with supply at 94.24 M/BD. Demand for 1Q15 92.55 M/BD, no supply numbers for 1Q15. Supply/demand numbers have been around this range plus/minus 2 M/BD since 2012. Foward demand is slightly up. https://www.iea.org/oilmarketreport/omrpublic/

If oil prices were market driven how could the price be down 60% from its recent high while demand is forcasted slightly up? Even if there is a global slow down, past history shows demand will not go down greater than 10%.

Oil markets are rigged just like every other market. Probably the fed using their secret book to pound futures lower.  Another unannounced stealth QE to get americans shopping.

Mon, 02/23/2015 - 17:18 | 5819758 rsnoble
rsnoble's picture

Make the markets toxic?? LMAO! The US markets are so toxic they make drinking a glass of roundup nutritious.

Mon, 02/23/2015 - 17:26 | 5819800 Hohum
Hohum's picture

What is the "true price"?  Econ 101 might say that marginal cost must not exceed marginal revenue.  Of course, that's just a textbook response.

Mon, 02/23/2015 - 17:30 | 5819821 lester1
lester1's picture

The Fed's QE programs is what riggs the stock market. 

 

But hey, we will never know for sure because the Fed works for Obama and is unaudited and unregulated.

Mon, 02/23/2015 - 17:34 | 5819844 neuronius
neuronius's picture

I had a buddy who worked for Merrill Lynch at the time, very successful trader, who would tell me about how he would generate interest in a trade.  Spoofing is how he did it.  Because he controlled such large positions, he was able to get a lot of people interested.  It was standard operating procedure for him, he just called it "being active." 

Mon, 02/23/2015 - 18:13 | 5819972 NoWayJose
NoWayJose's picture

The problem here, is that the spoofer does NOT own shares to sell at $45.03 but magically creates them out of thin air.  yet the regulators do not see this.  Likewise, there is no '3 day window' for closing on this - the spoofer doesn't have to have cash or margin credit on his billions in purchases and sales (but the little guys do).

 

Mon, 02/23/2015 - 18:17 | 5819988 WTFUD
WTFUD's picture

I thought sPoofing was another name for shirt-lifting.

Mon, 02/23/2015 - 19:04 | 5820178 Crocodile
Crocodile's picture

Toxicity; it is all the rage!! 

Till it is not.

Tue, 02/24/2015 - 05:01 | 5821594 comfortably numb
comfortably numb's picture

Here's how they do it...

The way it is described, I don't see any wrong doing in this activity.  The guy putting in a large order runs the same risk of that order being taken instantly, as anybody else. As to the small-account algos piggy-backing on large orders ...  why should they have a guarantee those large ones are not withdrawn?   It is their decision to put chips in, nobody forced them.  If they constrantly lose money with this type of trading, they just chose a bad approach and need to rethink it

Tue, 02/24/2015 - 10:03 | 5822100 exartizo
exartizo's picture

Really?

Why anyone would be surprised at this is completely beyond me.

After all, LARGE money is at stake.

That's all you need to know really.

Do NOT follow this link or you will be banned from the site!