Two weeks ago when news broke about the first confirmed instance of gold price manipulation (because despite all the “skeptics” claims to the contrary, namely that every other asset class may be routinely manipulated but not gold, never gold, it turned out that – yes – gold too was rigged) we said that this is merely the first of many comparable (as well as vastly different) instances of gold manipulation presented to the public. Today, via the FT, we get just a hint of what is coming down the pipeline with “Trading to influence gold price fix was ‘routine.” We approve of the editorial oversight to pick the word “influence” over “manipulate” – it sound so much more… clinical.

What the FT found:

When the UK’s financial regulator slapped a £26m fine on Barclays for lax controls related to the gold fix, the UK financial regulator offered more ammunition to critics of the near-century-old benchmark. But it also gave precious metal traders in the City of London plenty to think about.

While the Financial Conduct Authority says the case appears to be a one off – the work of a single trader – some market professionals have a different view. They claim the practice of nudging a tradeable benchmark in order to protect a “digital” derivatives contract – as a Barclays employee did – was routine in the industry.

Well, then, if gold price manipulation, pardon, “influence” was routine, be it to avoid digital option trips or any other reasons, then it’s all good, right?

Apparently not, especially if a “customer” of a bank that was running a prop trade against the customer ended up costing said customer millions in lost profits.

As a result, customers of Barclays and other market-making banks may be looking to see if they too have cause for complaint, according to one hedge fund manager active in the gold market.

The only piece of actionable information from the above sentence is that Barclays actually has customers: we expect that to change. After all, with the exception of Goldman’s muppets, there hasn’t been a more clear abuse of client privileges than what relatively junior trader Daniel Plunkett did while at Barclays. However, Plunkett is just the first of many. Many, many.

“If I was at the FCA I would be looking at all banks trading digitals. This could be the tip of the iceberg – there’s a massive issue with exotic derivatives and barriers.”

That, naturally, assumes that the FCA wasnt to catch more manipulators, pardon, “influencers” of gold and other OTC derivative prices. Which is hardly the case: after all one never knows which weakest link rats out the people at the very top: the Bank of England itself, and perhaps even higher: going all the way to the BIS and those who equity interests the BIS protects.

So just what is the most manipulated product with either gold or FX as underlying?

In the City, digital options are common in the precious metals sector and, especially, in forex trading. A payout is triggered if a predetermined price – or “barrier” – is breached at expiry date. If it is not, the option holder gets nothing.

One former precious metals manager at a big investment bank says there has long been an understanding among market participants that sellers and buyers of digitals would try to protect their positions if the benchmark price and barrier were close together near expiry.

Ideally, the underlying will be relatively illiquid, with a price fixing set by a small number of individuals, individuals who can be corrupted or simply onboarded to your strategy, thus incetivizing them to keep their mouth shut and assist you in ongoing rigging attempts.

In the case of gold, this means trying to move the benchmark price, which is set during the twice daily auction “fixing” process run by four banks, including Barclays.

That is what the Barclays trader, Daniel Plunkett, did on June 28, 2012. Exactly a year earlier, the bank had sold an options contract to an unnamed customer stating that if after 12 months the gold price was above $1,558.96 a troy ounce, the client would receive $3.9m.

By placing a large sell order on the fix Mr Plunkett pushed the gold price beneath the barrier, thus avoiding the payout. After the counterparty complained, the FCA became involved. Barclays paid the client the $3.9m, and was fined. Mr Plunkett was also fined – £95,600 – and banned from working in the City.

In its ruling, the FCA criticised Barclays for its poor controls related to the gold fix and said the bank had failed to “manage conflicts of interests between itself and its customers”.

“We expect all firms to look hard at their reference rate and benchmark operations to ensure this type of behaviour isn’t being replicated,” said Tracey McDermott, the FCA’s director of enforcement and financial crime.

Still, why did gold manipulation go on for as long as it did? Because the Barclays trader was an amateur, and instead of taking the money of one of the “old boys’ club” participants, ended up robbing an outsider, someone who had the temerity fo lodge a formal complaint.

The identity of the Barclays client has not been revealed. But a senior gold trader with knowledge of the transaction says it was not another investment bank or hedge fund. “This was not professionals going head to head,” he says.

Wait a minute… this smells remarkably familiar to the LIBOR rigging – after all there it was one “sophisticated” investors against another: the impact of rigging the IR market hardly ever escaped the arena of “sophisticated” influencers, pardon, traders. It is also why Libor was manipulated for a decade before the regulators finally figured it out: because while banks may have lost money to this rigger or that, they were all in it together, and better to lose money individually than to sink everyone at the same time. Alas, that is precisely what happened with Libor.

And now it is coming to gold.

“If you have Goldman Sachs on one side and JPMorgan on the other, the gloves are off. But not everybody in the market has the same level of sophistication and vindictiveness.”

The gold trader familiar with the Barclays case expresses some sympathy for Mr Plunkett, saying in the pre-financial crisis days the trader may have been censured by his bosses if he had not defended the digital option sold by the bank.

it gets worse:

“What’s changed now is the market morality,” he says. “We can’t simply say: it’s always been done this way.”

Well that’s ironic: because it has always been done this way. Influenced. Or manipulated… or however you want to call it.

And while in the case of Libor the regulators could get away with it by stating only other professionals were impacted by years of wholesale market rigging because tracking the impact of daily gyrations in a rigged fix are virtually impossible for normal individuals to trace, and thus prove monetary impairment,  with the gold market they may find some significant resistance using this approach.

So what approach will they use? Why, just like in the case of HFT: there may have been manipulation, but it only impacts hedge funds and other “sophisticated” investors they will say. Because when it comes to rigged markets, mom and pop have surely never had it better.


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