A Former NYMEX Trader Explains "The Mechanics Of Silver Manipulation"

Tyler Durden's picture

Submitted Vincent Lanci, as posted originally on Marketslant

The Mechanics of Silver Manipulation

JPMorgan Chase on Wednesday won the dismissal of three private antitrust lawsuits, including from hedge fund manager Daniel Shak, accusing the largest U.S. bank of rigging a market for silver futures contracts traded on COMEX. The lawsuits accused JPMorgan of having in late 2010 and early 2011 placed artificial bids (i.e., spoofing) onto the trading floor, harassed employees at metals market COMEX to obtain prices it wanted (i.e., intimidation) and made misrepresentations to a committee that set settlement prices. (i.e., manipulating settlements).

What follows is how JPM manipulated the silver markets by selling the Silver contango during illiquid hours, then used their deep pockets to push settlements, then waited until margin calls made the large locals puke their positions. JPM in effect stretched the relationship between forward rates and futures spreads until they made no sense anymore. Not unlike a company trading at 50x earnings. It cannot last long. But it only has to last long enough until the guy with the position opposite you has to liquidate. That guy does not have access to cheap money, political influence or the most physical silver in the world in a single vault at his disposal to create a squeeze.

From Reuters:

U.S. District Judge Paul Engelmayer in Manhattan, however, said the plaintiffs, who also included traders Mark Grumet and Thomas Wacker, did not show that JPMorgan made "uneconomic" bids, or intended to rig the market at counterparties' expense. He also questioned the plaintiffs' use of Silver Indicative Forward Mid Rates ("SIFO") as a benchmark for determining proper levels for the spreads in their lawsuits.

Analysis: The demand was fabricated

The market was only partially backwardated. Spot was below the next 6 expirations. Translation: there was no massive demand for immediate delivery. There was only demand in months where the last remaining MEN who took risk trading their own money had positions. JPM's own book was likely short and had to get liquidity to cover their positions. We knew Shak from our floor days, and were trading spreads off-floor when this happened. They should not have lost this case. Comex traders do not trade physical spot. Spot was under the backwardation. Smoking gun? No, but damning circumstantial evidence in the least.

Reuters Again:

Given the (lawsuits') failure both to explain why SIFO should track silver futures spreads, and to concretely plead that it did so consistently, a mere general correlation between these two is not sufficient to make SIFO a reliable benchmark such that deviations from it support a claim of irrational pricing animated by anticompetitive aims," Engelmayer wrote.

Analysis:  a poor job was done explaining the role of SIFO in spread pricing.

SIFO represents the spread between expirations of FORWARD physical contracts in silver. The futures spread markets are derivative of the SIFO spreads. SIFO represents the cost-of-carry for physical silver and is used in determining lease/borrow rates over periods of time. These are in-turn extrapolated and the dominant factor in determining futures spreads on COMEX. Comex spreads are a direct function of SIFO. Without SIFO there are no spreads. And since SIFO was a much bigger market than the Comex spread market. The pricing mechanism was not fully transparent. It was in the hands of a few dominant cartel-like players, as it had been for 30 years.and every time JPM sold 1 year silver and bt 4 month silver it was using their deeper pockets to push the locals to liquidate. Add that they probably asked clients with silver in storage to pull it off the lease market, and you have a “tail wags dog short squeeze.”

If Shak and the other traders had ability to take delivery: warehouse, cash&carry liquidity, etc., they wouldn't have had a problem. They would have taken delivery in spot and then made delivery on the short contracts in the next months they were short. But due to inability to play in the spot market, they could not "butterfly" their positions. Another reason they could not do this: FCMs only give 50% cash value for physical silver as hedge vs. futures shorts. Think about that next time you hear EU banks guaranteed 100% face on their Greek bonds. The physical is worth only 50% collateral to the futures. Banks like JPM have no issue with that. They borrow from the Fed window at 1%. Guys like Shak would have had to use their credit cards and sell their homes to carry that position.

Various sources:

Silver was being taken delivery from the warehouse.

Rebuttal: Define "Take Delivery"

During the time Phibro cornered the silver market in 1995[1] (likely for Soros), and in 1997 for Warren Buffet they employed "taking Delivery" as a catalyst to get the market moving. How does one take delivery?

  1. You physically remove silver from the warehouse and say you took more than you did- because of the physical work involved a receiver can take ayt most 6MM oz of Silver daily. Why? Because it's just not that easy to move silver out of the vault and onto a receiver’s vehicles. So when you see "30MM oz removed" it's not physically possible. That is 375,000 lbs.
  2. You take delivery, store it nearby and bring it back when you are out of your long futures position
    • Be long 30MM oz of silver in futures.
    • Take delivery of 20 MM in physical using borrowed money
    • Store the metal in a warehouse in RedHook Brooklyn and wait for the news to spook the market.
    • Tell your pals with long positions to make their own silver unavailable for delivery. as prices will go up soon
  3. You throw a sheet over the silver still in the warehouse and say, "this is mine, it is no longer here. I'll pick it up tomorrow- - Phibro was to have employed all 3 methods in 1997 after filling Warren on his buys.- Andy Hall was a genius when he had order flow to front run
  4. Buy the last 1,000 contracts for the customer as sloppily as you can.
  5. Tell the customer you beat the VWAP, i.e. last price on the board is higher than the average price you bought for client.

There is a word for that. It is called Racketeering

Final Word:

In 1994, Phibro played this game except for the spreads. They exercised out of the money calls on a 4 day weekend. But that squeeze was short lived. Warren Buffet just rescued Solly and didn’t want any more DOJ problems.

But in 1997 Warren was the instigator.In 1997 Warren Buffet, actually stood for delivery. Yet the market did not rally until AFTER the spreads backwardated all the way to spot.

This trader also remembers that in 1997, Buffet was then asked by the Gov’t to defer his request for delivery a year. . They pleaded with him, “The integrity of the market was at stake (Hunt Brother's anyone?); and The whole Silver mining industry was in jeopardy. (TBTF).” Buffet happily complied by selling spot at approx. $7.40 and buying a 1 year future at around $4.50. He netted an ROR of 40% due to negative carry without selling. Effectively, he lent the producers their silver back to them 40% higher than his cost.

In 2011Blythe Master did a mini-Buffet.

The difference being, the market had ALREADY rallied without backwardation, and all of a sudden spreads (literally overnight during Asian and London hours) went into backwardation.

In a real market, the spread activity predicts the physical demand before the flat price does. You see the spot price start to act squirrelly to the front month future in the EFP.  Immediate demand drives deferred month pricing.There are exceptions to this. But it is rare.

I'm sure each one of my arguments for manipulation can be taken apart by some lawyer or “expert”. But that is what lawyers do.

  • Facts against them? Argue the Law.
  • Law against them? Argue the facts.
  • Both against them? Use ad hominum attacks to shoot the messenger. So for the sake of transparency, here is the messenger.

Author's Background and Caveat:

For the record- I was suspended from NYMEX 12+ years ago for manipulating a settlement without a client complaint. I learned that behavior from watching the pros do it and get away with it. I was arrogant enough to think I could. I was a street kid form Philly who had to drop out of college and learn to survive. Got lucky and had 15 Ivy league kids working for me at one time. But I lay down with dogs too long and got a bad case of fleas. A big price was paid for that. And to save an incompetent compliance officer's job I was punished harshly.

Post suspension, most firms wouldn't touch me even as they burned themselves time and time again on derivatives risk in Energy and Metals. I then witnessed the FC Stone downfall fittingly from them cooking their own books ( Jeff Soman?) years after  they threw me under the bus as their client ( Jeff Soman!).  But you have to move forward. 

Market Structure and Greedy Pols

As time passed I grew to despise manipulators but did not blame them per se. The market structures are the major culprit. Which in turn means the politicians who are lobbied by the corporations to alter market structure to protect Corporate interests are the culprits. In the end it is all about greed.  Dodd-Frank was passed essentially blank. The "bankers will help fill it out. they are the experts" SMFH.

Then, I got my break. I was on other side of arguably, the biggest Commodity trade of 2007. My firm saw an arbitrage, borrowed money and took on the banks. Not only was Echobay right, but our counterparty, BMO was (ironically) cooking their own books. Their trader was David Lee and I feel bad for him as he was a victim of a greed cult and lost his ethics as I had in 2003.

Full Circle

In the end I was a material witness in BMO's 2007 Nat Gas EOO scandal where they tried to blame the counterparties to their rogue trader. BMO settled the case within days of my deposition involving manipulated settlements. I havethe transcript of a 9 hour deposition to prove it.

So bring it, if you think my observations are flawed. I'm all about learning. A million facts do not add up to a single truth, especially where corporate lawyers are involved.

This isn't the first time I've written on this and won’t be the last. During my career, I've been victim, observer, perpetrator and now despiser of market manipulators and the market structure that rewards corporate greed at the expense of free markets. The little guy can no longer compete. Watch, homogeneous counterparties will be the death of the markets. TBTF means too big to exist IMHO

Judge Engelmeyer, you got it wrong. Daniel Shak, you deserved better than you got.

- Vincent Lanci,  Vlanci@echobay.com

* * *

Mr. Lanci is owner of Echobay Partners, LLC, Private Equity and consulting firm in the commodity space. He is a derivatives trader with 25 years’ experience in Precious Metals, Energy, and Agricultural Commodities. He is quoted by Kitco, Reuters, Bloomberg, and has written on background for major blogs on  Market Manipulation. He currently has status as a MarketMaker in the CME WTI CSO product. But would not be surprised if it were pulled after this article.

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SHEEPFUKKER's picture

Funny, no mention of fake Bin Laden's body floating in the Indian Ocean or the multiple margin hikes pre-announced by the CME. 

J S Bach's picture

All the while... the government "regulatory" agencies sit on their hands and let the criminal usurers get away with all of their nefarious activities.  Surreal times we live in.

BaBaBouy's picture

SILVER Being Mined 10 OZS To 1 OZS Of GOLD ...

Cheap Prices will not last, and Plus GOLD Will Soar ...

Squid-puppets a-go-go's picture

...aaaaand Silver just passed $20 / oz

(and asia isnt open yet)

Tall Tom's picture

 

 

 

 

And what happens Tuesday when Comex INCREASES Margin Requirements and contracts will be liquidated due to the subsequent Margin Call??

 

We have played this game before. Remember?

BobEore's picture

Lot's o small talk, coffee kiosk chatter, - as usual no substantive discussion of the point made here. Why sweat the details - if it's good for my stash, I'll jus read in a flash!

Perhaps the devil be in those details - for those with something to hide! Where a guy with knowledge of the inner working finally speaks up in counterdistinction to the endless false narratives peddled by analysts and their hangers on here -

What follows is how JPM manipulated the silver markets by selling the Silver contango during illiquid hours, then used their deep pockets to push settlements, then waited until margin calls made the large locals puke their positions. JPM in effect stretched the relationship between forward rates and futures spreads until they made no sense anymore. Not unlike a company trading at 50x earnings.

readers with unimpaired synapses begin to sit up and pay attention. To the first signs of the gradual demolition of the consensus trace storyline so desperately defending by top drawer analysts and their gang of troll-callin trolls!

When we began here - to dig right underneath the expansive chambers of the ruling caste of BALROGS and ORC-LIKE know-it-alls who dominated the airwaves of GOLDBURG for five long years


 "that market is recognizably driven by "gold as a forex currency. Why no one has picked up and run with that ball is a mystery,"

few paid attention to the first stirring of a truth jihad comin outta nowhere -

"There is another influence in current market-making equivalent in potential impact to the Barrick phenomena - but it operates via FX pairs. It too will be studiously ignored by the BRE-X style of "gold analyst," in favor of the spiked koolaid of "WGC-generated" disinfo and hype.

 and who would have thought, that only short months later, the perps of a failed storyline would be tumbling into the dark pits of disinfo hell - to meet their end as the most reviled of betrayers of goldnsilver holders trust = even at the very moment of what seemed to be their perfect vindication ?

Price suppression in gold and silver has been dictated by the policies of those in control of China's financial fortunes for the past 5 years - in conjunction with their agents of influence in western markets. When they decide its time to change direction, so to will the POS/POG. Until then, beware the revisionist dogma of consensus trance "gold experts" peddling the stories which the puppetmasters use to cover up their schemings.

 Read n weep consensus trance trafficers. It's time.

https://www.youtube.com/watch?v=80k4qakPrqA/BookerT&the MG's Live at the Strand



gmrpeabody's picture

They are well paid to sit...

Those are very sweet jobs, you only get to keep them if you don't make waves.

Meanwhile.., round up the usual suspects (ma and pa).

HungryPorkChop's picture

These "regulatory" agencies which you loosely mentioned are not overseen by the same DOJ Loretta Lynch that secretly met with Bill Clinton last week where all cameras and cell phones were banned?  This wouldn't be the same DOJ would it that oversees the banks and Wall Street??  These are not the droids you are looking for..

Tall Tom's picture

Heads up.

 

The Plunge Protection Team members are

 

The US Secretary of the Treasury, Jack Lew.

The Head of the Federal Reserve Bank, Janet Yellen

The head of the Securities and Exchange Commission

The head of the Commodities Futures Trading Commision.

 

They are in total control over the Exchange Stabilization Fund.

 

They will not prosecute themselves and any agency that attempts prosecution will magically have their budget slashed so that they cannot.

 

And you really think that a President Turnip will be a solution???

 

LMAO

 

 

skinwalker's picture

I hear a lot of people talk about counterfeit silver eagles and similar coins, but how much truth is in it? Is there a metal with the same density as Ag but lower cost?

True Blue's picture

And wasn't there something about Chinese tungsten 'gold' bars too?

Raffie's picture

that was the gold bars we gave to Germany.

 

Squid-puppets a-go-go's picture

what, all 5 tonnes? (of the 300 hey asked for)

in4mayshun's picture

Easiest way to avoid counterfeits is to keep a real coin handy all the time. Silver has a unique ring to it when tossed on a counter. It also melts ice crazy fast because of its heat dispersion characteristics. In my experience, passing fake 1oz coins is very difficult to do. Usually a brief inspection will uncover a fake. Bars are another story, much harder to detect. There is a way to weigh silver in a container of water to determine its proper density but you'll have to google the details.

Latitude25's picture

Here's what you need to test all bullion coins yourself easily and cheaply.

https://play.google.com/store/apps/details?id=se.brolinembedded.bulliont...

DavyRoySixPack's picture

A coin book will give you weights and sizes of coins. You can measure your coins with calipers and weigh them with a scale.

 

To answer your question about fake metal of equal density - the answer is no. If you look at an atomic chart you can see the number of protons and nuetrons in the atom of any element. So density of any object can never be faked. Just know your sizes and your weights.

Dantzler's picture

Density is a function of (protons + neutrons in the nucleus, aka atomic mass), atomic radius, & how those atoms are packed together (e.g. type of crystalline lattice.) Each lattice type (there are many) has a different atoms per volume (face centered cubic vs. body centered cubic, etc.) For example, tungsten (W, body centered cubic, R = 193 pm) is atomic mass 74 and gold 79 (Au, face centered cubic, R = 174 pm) , yet their densities are 19.25 and 19.3 g/cm^3, which is why gold plated tungsten needs good tools to spot. Molybdenum & Silver are 42 & 47 amu & 10.28 & 10.49 g/cm^3.

Speed of sound through the medium is an excellent test. Ring, mass, dimensions, and ice cube melting are not without merit. Comparing to a known good specimen is key for the latter types of tests.

This thread inspired me to look at the melting test. PMs have impressive heat & electrical conductance,

sinbad2's picture

The mass of silver is 10.49 grams per cubic centimeter. A Troy ounce = 31.1 grams.

So an Oz of silver should have a volume of 2.96473 CC's or 29.65 mls.

Drop the silver in a measuring container with water in it, and the water should rise by nearly 30 mls.

Or a drop of nitric acid should create an off white substance. but remember you can silver plate over base metals.

Dantzler's picture

No!

One troy ounce is 31.1 g

@ 10.49 g/cm^2, it occupies a volume of 31.1/10.49 or 2.96 cm^2.

1 mL = 1 cm^2, so the volume displaced will be about 3 mL, not 30 mL. 3 mL is not trivial to measure.

The best way to do this is make a loop out of wire that you can suspend your object (coin, nugget, whatever) from. Make a mark on the wire above your object. Put a beaker of distilled water on a good balance. Dip the wire into the water to the mark and note the mass of water displaced (you are using a GOOD balance, right?)  Attach your object and repeat, this time subtracting the mass of water displaced by the wire. The remaining mass of water displaced is the volume of your object assuming you did not allow any bubbles to remain on your submersed object.

 

gregga777's picture

Don't forget that because the TBTF (too big to fail) gangsters also own the courts and judges means that they can't lose!

SillySalesmanQuestion's picture

Thanks to the author for a good read. A lot of good info for a "lay" person, such as myself. Maybe not for the more sophisticated pro's here.

BeanusCountus's picture

Agree. One smart guy. Wish he would comment on whether all of the manipulation is short term, and if it washes out to allow price to equal demand over the long run.

Dragon HAwk's picture

Put all your bids in the Box Gentlemen, we will open them in the Morning.

Fester's picture

already open.

 

Silver up .27

gmrpeabody's picture

JPM manipulating..? Now I've heard everything.

 

SumTing Wong's picture

I still have the t-shirts!

BeanusCountus's picture

Wish he could comment on what's going on right now in silver. Seems to be in some type of squeeze.

earleflorida's picture

Ref:                  http://www.bibliotecapleyades.net/sociopolitica/sociopol_globalbanking04.htm

note: article 21 (scroll down) buying and selling gold, precious metals [pm]

Ps. of extreme interest: the BIS is the central bank for all the global central banks [one gigantic clearing house]. it has permanent members for eternity [and i mean forever] with other non- permanent members allowed through secret elections.

the original permanent members you'll find as you read this article [transcript- which is a very short read] are of special interest? which aren't central banks but three private banks in america that recieved over compensation regarding ownership. just scan..

#1/3   1st Nat'l Bank of Chicago (1998 merged with Bank One as a subsidiary)

#2/3   1st Nat'l Bank of New York ( think Chase Bank as in the link provided:        http://www.raken.com/american_wealth/bankers_gilded_age/Bankers_index4.asp                 *part 1 and part 2 [index5.asp]

#3/3   J.P. Morgan and Co. (merged with Chase Manhatten Bank in 2000, now called J.P. MorganChase and Co.)

Ps2: if you realize the sudden changes in principle interest ownership, which btw, had absolutely no barinig on the outcome. and there's not a fucking thing anybody in the world can do about it.

jmo

Important: if any cb wants physical the BIS will loan it out at a moments notice...[?]

jmo 

just the tip's picture

moar articles by lanci.

Pareto's picture

+1` I agree.  Great piece.

swanpoint's picture

Don't tell Trader Dan, he'll hike the subscription price to his web site to keep you out.

thinkmoretalkless's picture

You don't buy an island working as an honest banker, (excuse the
Oxymoron)

FX223's picture

Thanks asshole...but really thanks cuz I got to stack at really cheap rates...but you're assholes still.

ParticularlyStupidHumanoid's picture

Well shit. I didn't understand anything in this article.

DC Beastie Boy's picture

The banks are loading up. The reason the gold and silver price hasn't reset significantly higher is because China is getting as many countries on board to support a gold backed yuan. They can't run the risk of a skyrocketing gold currency when they're the only player or they kill their export economy. So, they wait and gather participant countries i.e., Russia, India, Iran to name a few.

$5000 gold and $200 silver is coming just look at the fucking charts.

live2fly1's picture

Can't come soon enough.....we're all tired of watching cobwebs grow on our stacks!

BobEore's picture

Soooo... as suspected - the gang's all here -

but silence reigns when the subject of silver gets brought into view - from an angle unconducive to consensus trances. Great article - kudos to ZH for bringing it aboard

. Unpacking it is a pleasure, because even though Vince forwards several wrong conclusions - at least he's thinkin~ bout stuff - how very rare!

First, we need to realize that Vince has played the game - but only as an outsider to the real action. Which takes place across a wider swath of territory than guys like he can imagine. His observations about the 90's silver stories puts that into poignant view - so much has changed since the Hunt/Buffet/Philco days as to leave the market almost unrecognizable to older players.

The removal of JPM's silver stash to London from NYC should have been a wake up call to anyone with a professional interest in the matter. That GOFO and SIFO were the creatures of that bullion market plays up large in any account of manipulations! Nowadays we are witness to the new bright boys who - just like the HSBC/UBS/JPM traders caught out in the 2014 forex scandal - make their loot from fx pairs.

But on a scale of trading that dwarfs those innocent scammers! This is major sovereign money at large via JPM's round the clock coverage[read setting]of lease rates and derivatives such that the whole idea of 'illiquid hours' is antiquated. Just as antiquated as the notion that they "borrow from the Fed at 1%" is to explain how they can cover. The scale of leverage is unbelievable - the stuff Vince is describing with the Shak suit is small time compared to what they are workin now - with all that physical in the bag to boot!

Physical bagged by trading forex pairs and leading the market so that the day which starts in Shanghai and ends in Chicago is one uninterrupted flow of money making money made over into real shiny in a London vault. Now that's GLOBALISM/GOLDALISM!

The judge was not incorrect in applying the judgement that SIFO could not be used as a determinant. It hardly scratches the surface of the opaque world o gold/silver! The new world of metals trading which is forming in the CITY OF LONDON imperial outpost of China LLC is a whole different creature than the world Vince looks out from.

Lucky Vince though! Saves the day with an unusual note of grace in the world o goldburg -

"So bring it, if you think my observations are flawed. I'm all about learning. A million facts do not add up to a single truth, especially where corporate lawyers are involved."

No Vince - you're not completely wrong - nor right. None of us can be in this shadowy world of silver deceit. We're all outsiders lookin in with pieces of a jigsaw puzzle. I like your style - you just need to upgrade the knowledge base!

Back over to the "gold bitchez" crew now!

Son of Captain Nemo's picture

This story should have been and should still be at the top of ZH post(s) for the next week!

As others have stated on this news here yesterday we truly are re-living in surreal times for the last two decades when you can witness fraud at this level!!!

nathan1234's picture

The Witch Bitch Blythe Masters of JPM needs to be put behind bars for at least 50 years

JohnR's picture

Where was this guy when silver was $13?...  articles like this always appear after 30% runs and before correctons ...and the so-called "friends" of gold and silver are as complicit in manipulation..my guess is that he is "prudently hedged" ....there has been zero interest from the people they take money from...so create it..and then sell them your  $13 silver....while being their mentor/friend/ally

Just observe, see an article on $10,000 gold, and $25 silver...check back in 48 hours and a correction will be underway....and I saw a $65,000 gold, $360 silver  article on 6/29

Over and over and over....at low price levels....nothing

BTFD

 

maxamus's picture

Trading is simple, just follow ZH and when they start to ramp up on something just do the opposite.