CFTC's Chilton Admits Silver Market Subject To "Fraudulent" Influences, Says Man

[JohnQPublic]

CFTC's Chilton Admits Silver Market Subject To "Fraudulent" Influences, Says Manipulation Should Be Prosecuted (http://www.zerohedge.com/article/cftcs-chilton-admits-silver-market-subject-fraudulent-influences-says-manipulation-should-be)

Submitted by Tyler Durden on 10/26/2010 06:43 -0700

If this is not some nasty and quite early April Fool's joke, this is very, very bad news for JPMorgan:

BN CFTC CHILTON MAKES STATEMENT ON SILVER MARKET
BN * SILVER PRICES SUBJECT TO "FRAUDULENT" INFLUENCES, CHILTON SAY
BN *"REPEATED ATTEMPTS" MADE TO INFLUENCE SILVER MARKET, CHILTON
BN *SILVER MANIPULATION SHOULD BE PROSECUTED, CHILTON SAYS

Now... where are all of those tin foil hats...

The below has just appeared on Reuters. It seems the CFTC has its cross sights on quote stuffers. It is about damn time.


The U.S. futures regulator laid out plans on Tuesday for how it could use new and beefed-up legal tools to foil traders who seek to manipulate prices or defraud investors.

The Commodity Futures Trading Commission said it also wants to ask for comments on whether to crack down on certain practices used by high-frequency traders -- such as "quote-stuffing" -- but it stopped short of immediately proposing new rules specifically aimed at algorithmic trading.

In its latest set of proposed regulations following a sprawling Wall Street reform law, the CFTC sought to clear up some confusion about its traditional test for price manipulation, an effort to improve on its dismal record of having won only one such case in its 36-year history.

The rule, which will apply to all markets overseen by the CFTC, including swaps, also creates a "broad, catch-all anti-fraud provision" that does not require the CFTC to prove a trader fully intended to cause fraud, CFTC officials said.

The agency's only successful manipulation prosecution was against a broker charged with manipulating settlement prices for electricity futures in 1998.

More recently, manipulation charges against four propane traders with BP (BP.L)(BP.N) were dismissed by a judge, who called the law "confusing and incomplete." BP agreed to pay a record $303 million to settle related charges.

CFTC officials who briefed reporters on the new package of proposed regulations declined to say whether the rules would have helped them make their case against the propane traders.

The agency's five commissioners, including Chairman Gary Gensler, will vote at a public hearing on Tuesday on whether to advance the proposal for public comment for 60 days.

After staff consider whether to make changes based on comments, the commissioners will need to vote again to finalize the plan by next July.

The new rule seeks to marry existing anti-fraud and anti-manipulation authorities together with a new section that "fills in all the gaps", an official told reporters.

Existing regulations address "plain vanilla" person-to-person fraud, and price manipulation, such as market "corners" or "squeezes", he said.

But the new provision could capture manipulative trading activity that "could potentially fall out of one of those two buckets", he said.

Before, price manipulation cases required the agency to prove traders had the intent and ability to manipulate prices, tried to do so, and caused an "artificial price".

That four-part standard will continue to exist, but the CFTC included guidance that "artificial price" means a price affected by illegitimate market forces, the official said.

BANS ON SPOOFING, BANGING THE CLOSE


The Dodd-Frank law also requires the CFTC specifically to ban three disruptive trading practices as of July 16, 2011 -- a ban that does not require new regulations to take effect.

Included are "spoofing", whereby traders make bids or offers but cancel them before execution, and "banging the close" -- acquiring a substantial position leading up to the close of trade, then offsetting the position in the final moments to manipulate the closing price.

The agency has no obligation on whether to go further, but wants to gather more comments during the next two months about whether it should close a potential loophole in the spoofing ban, or prohibit any other practices deemed disruptive.

That will include "quote stuffing" -- flooding the market with large numbers of rapid-fire orders and then canceling them almost immediately -- a practice that some have argued contributed to the May 6 stock market "flash crash."

The agency will also ask whether it needs to write rules requiring traders to test and monitor their algorithms.

For months, CFTC commissioners have said the agency needs to use its new powers to counter disruptive trades made by high-frequency algorithms.

Bart Chilton, a Democratic commissioner, and Scott O'Malia, a Republican, have said regulators should hold traders responsible for "rogue algos" that hurt markets.

[JohnQPublic]

Silver manipulated, U.S. regulator says (http://www.financialpost.com/Silver+manipulated+regulator+says/3730509/story.html)


Tim Shufelt, Financial Post · Tuesday, Oct. 26, 2010

The allegation that the silver market has long been subject to price manipulation, a notion largely dismissed as a baseless conspiracy theory, has won some powerful support.


Amid a federal investigation into the claims, a senior U.S. futures regulator raised the alarm about fraud in the silver market and is calling for prosecutions of the traders involved.


“I believe that there have been repeated attempts to influence prices in the silver markets,” said Bart Chilton, one of five commissioners on the Commodity Futures Trading Commission. “There have been fraudulent efforts to persuade and deviously control that price.”


Mr. Chilton declined to name any suspected perpetrators and deferred to the authority of the CFTC’s probe into the allegations, which began more than two years ago.


But he said he felt a duty to the public to raise the alarm. His comments came the same day, the CFTC announced sweeping regulatory reforms to help it police the US$615-trillion derivatives market.


The proposed regulations target traders who seek to manipulate prices or defraud investors through nefarious practices like “quote stuffing,” “spoofing” and “banging the close.”


With a dismal record at punishing unscrupulous traders, the beefed up laws should empower the watchdog to carry out successful prosecutions, much to the delight of detractors of the silver market.


They say that a small number of institutional investors hold a large concentration of short positions in silver on the Comex exchange in New York.


And through that aggregation of market power, those commercial traders are able to exert their will on spot silver prices and keep them artificially low, according to a narrative that has found many adherents in online forums.


For the most part, that vocal minority has been brushed off as a “bunch of conspiracy nutjobs with tinfoil hats,” said Ted Butler, a silver analyst who, for decades, has screamed foul about perceived misconduct in silver trading.


“It’s like I’ve been banging my head against a wall for a long time and all of a sudden you stop and it feels good,” he said.


And while nothing has yet been proven, or even formally alleged, Mr. Chilton’s declaration lends a certain credibility to claims of manipulation that will be more difficult to summarily dismiss, Mr. Butler said.

But some analysts expressed surprise that the commissioner would taint the silver market without divulging details and before the CFTC completed its investigation.


“It’s not helpful to lodge these kinds of accusations without really forcefully coming through with specifics,” said Andrew Busch, an analyst at BMO Capital Markets.


“If that’s going on in silver, is it going on in any other commodities?”


It has gone on in the silver market at least once before. In 1980, the Hunt brothers, a pair of Texas oilmen, tried to corner the silver market, driving the price from about $2 an ounce to as high as $50.


“Ever since, there has been suspicions of manipulation in the silver market because the Hunt brothers demonstrated that it was possible,” said Aaron Fennell, a senior market strategist at Lind-Waldock. But there has never been any concrete evidence that history has repeated itself, he said.



Financial Post, with files from Reuters


PROPOSALS


The U.S. Commodity Futures Trading Commission proposed rules aimed at cracking down on traders who try to manipulate markets, using powers granted to the agency in the Wall Street reform law. Here are the details:



PROHIBITION OF MARKET MANIPULATION

Goal: Ban all forms of fraud and manipulation in all markets overseen by the CFTC, including swaps.



Adds new provision to prohibit “intentionally or recklessly” using any kind of scheme to commit fraud, defined as any conduct that impairs, obstructs, or defeats the integrity of the market.



The “recklessness” standard is considered easier to prove than specific intent.



New measure is “broad, catch-all” provision that could catch infractions that fall through existing “gaps” in rules.



Bans making untrue or misleading statements “of a material fact,” or omitting material facts.



Bans knowingly delivering false or misleading information regarding crops or conditions that can affect commodities.



Penalties include civil fines ranging from US$1-million or triple the monetary gain of each person for each violation, whichever is greater. Restitution also required.


DISRUPTIVE TRADING PRACTICES

Goal: Seeks comments on what measures CFTC should adopt to address disruptive trading.



Dodd-Frank reform law specifically bans three practices — violating bids and offers, “banging the close” by acquiring a big position and then offsetting it before the close of trade, and “spoofing” — making bids or offers but canceling them before execution.



Those three bans come into effect in July 2011.



CFTC is seeking comment on 18 questions about whether to go further with its new power, including rules on testing, monitoring and use of algorithmic trading systems.

[mamboni]

Price of silver has been subject to attempted manipulation

by Rob Mackinlay
26/10/2010
http://citywire.co.uk/money/price-of-silver-has-been-subject-to-attempted-manipulation/a444201?ref=citywire-money-latest-news-list



Silver markets have been subject to 'repeated attempts to influence prices', according to Bart Chilton, commissioner at the Commodity Futures Trading Commission (CFTC).

In a statement released today he said: 'There have been fraudulent efforts to persuade and deviously control that price. Any such violation of the law in this regard should be prosecuted.'

Chilton (pictured) suggested that it would be too difficult to prove actual manipulation: 'Under existing law, to prove manipulation, the government is required to demonstrate not only specific intent; we also need to prove that as a result of the intent and market control, that activity caused an artificial price -- a point that can certainly be debated by economists.'

Instead he hoped the CFTC will attempt to prove attempted manipulation which is less difficult to prove.

'Attempted manipulation is less difficult to prove -- requiring an intent to manipulate and some overt act in furtherance of that intent. There are also other violations of law that could contort markets and distort prices,' said Chilton.

Chilton's comments come after frustrations about the lack of progress made by the CFTC on its investigations into the manipulation of the price of silver. The CFTC's enforcement division has been investigation for two years but has yet to officially report any findings.

A spokesperson for the commission said that the investigation was 'ongoing' and would not comment on the progress. He also declined to say how much access Chilton had to the investigation.

However he did confirm that the acting head of the enforcement division, Stephen Obie - who led the silver investigation - was replaced by a new acting head of enforcement earlier this month. The spokesperson said Obie had returned to the CFTC's New York office.

Veteran silver commentator, Ted Butler, whose email campaigns have forced numerous CFTC investigations into silver manipulation allegations, told Citywire: 'I'm very impressed with Chilton's comments, as it goes a long way towards restoring integrity in the CFTC. He said previously he would speak out on silver and he has held true to his word. He did so clearly and forcefully. Coming from such a high official of the primary regulator, any statement about possible or probable manipulation must be taken seriously.

'Manipulation is the most serious crime possible in the markets. That Chilton is dealing with the matter head-on is commendable. That he is raising issues that I have petitioned the agency about for more than two decades is, of course, re-assuring to me that the CFTC intends to deal with an obvious ongoing price suppression and manipulation in Comex silver market. This manipulation can be traced to the extreme concentration on the short side of Comex silver.'

Chris Powell, secretary of Gold Anti-Trust Action committee (Gata), said: 'Gata salutes commissioner Chilton for his courage and conscientiousness and hopes that the CFTC will follow his lead in laying before the public all the available evidence of manipulation of the precious metals markets, much of which Gata itself has collected over many years.' The documentation Powell referred to can be found here.'

Earlier this month commissioner Chilton told Citywire that he intended to make a statement on silver price manipulation.

[JohnQPublic]

The sudden jump in the dollar is a very convenient short covering opprtunity for JPM and crew! I am sure the softening in price wuill be very temporary. It looks like it may be Europe's turn for a few days.

[JohnQPublic]

Wednesday, October 27, 2010
CFTC’s Chilton Probably Not Why Silver Strong (http://www.gotgoldreport.com/2010/10/cftcs-chilton-probably-not-why-silver-strong-.html#more)
In our weekend COT Flash update to Got Gold Report subscribers, after noting a reduction in the relative commercial net short positioning by commercial traders, we said:

Isn’t that interesting? We are speaking of course about the fact that as silver has challenged new 30-year nominal highs the largest commercial traders in silver futures are apparently not willing to take on much higher net short positioning.

How about that? We have to ask ourselves the question, with silver at 30-year highs why aren’t the largest futures hedgers and short sellers willing to really pile on the short side of silver futures? What signals do they see and what is keeping them from selling the heck out of this $5.00-plus rally since the August consolidation breakout?

Just below is our own chart which we shared with Got Gold Report subscribers in our COT Flash Report Sunday, October 24. It is the nominal amount of commercial net short positioning of silver futures on the COMEX, division of CME. More about that in just a moment.





Perhaps not coincidentally, yesterday CFTC Commissioner Bart Chilton issued a statement regarding the silver market. Commissioner Chilton said in that statement:

“I believe that there have been repeated attempts to influence prices in the silver markets. There have been fraudulent efforts to persuade and deviously control that price. Based on what I have been told by members of the public, and reviewed in publicly available documents, I believe violations to the Commodity Exchange Act (CEA) have taken place in silver markets and that any such violation of the law in this regard should be prosecuted.”

The full CFTC statement is available at this link.

If the link doesn’t work properly, please copy and paste the full link below into your browser.

http://www.cftc.gov/PressRoom/SpeechesTestimony/chiltonstatement102610.html

Has Commissioner Chilton opened a window for us? Could it be that silver is not being hammered in the futures markets on the short side because traders that have used their ability to game the system in the past are now under a CFTC microscope? (In which case the futures game may have changed.)

Continued …

Is this a case of a regulator stepping in to alter the trading habits of futures market makers operating on the short side of the market, thus causing their opponents to take advantage of that possibly temporary influence to press their own long positioning? (In which case the game has changed, but only temporarily, and we need to beware.)
Is this merely a case of a U.S. regulator taking advantage of a historic rise in the silver market to grandstand – posturing to take credit for “action” that is responsible for the now apparent absence of concerted heavy short selling of silver futures by an elite few traders which have historically had access to unfair size exemptions as “bona fide hedgers”? (In which case we have to applaud Commissioner Chilton’s sense of timing, but at the same time prepare for a whiplash at some point.)

Or is silver rising purely on the basis on stepped up demand from outside investors meeting static and quite limited supply in a smallish, highly volatile market dominated by a small number of firms in the physical markets in London? (In which case nothing the CFTC does or says will stop the momentum. Only a reduction in demand for silver will do so.)

Silver Trading Substantially Different

In truth we do not know with certainty which (if any) of the scenarios above are in play, but we do know that silver has not been trading anything like it “normally” does since at least the end of September.

Just below is our own chart which we shared with Got Gold Report subscribers in our COT Flash Report Sunday, October 24. It shows the relative net short positioning for silver for the traders the CFTC classes as “commercial” in the legacy commitments of traders (COT) reports. Notice that the relative net short positioning (the commercial net short positioning compared to the total open interest) actually fell as silver has been rising sharply in price.





In the three reporting weeks since September 28, the traders the CFTC classes as commercial collectively reduced their net short positioning from 65,413 to 58,150 contracts net short silver. (From being net short 327 million ounces to 290.8 million ounces – a reduction in net short positioning of 7,263 contracts or 11%). Why is that not “normal” comparatively speaking? Because it occurred as the price of silver advanced from $21.74 to as high as $24.90, then settled Tuesday, October 19 at $23.36.

Notice that over the past seven trading weeks, the relative net short positioning of the largest commercial hedgers and short sellers has actually declined from 45.4% of all contracts open to 38.5%!

The unusual part is that the commercial hedgers and short sellers reduced their net short positioning on a material increase in the price of silver. In the past that would be considered strongly unusual. Hedgers in retreat? Hedgers NOT selling into a 30-year price high? A historic change is underway in the futures markets, friends. We are witness to it right now.

Not Merely Regulator Scrutiny

The idea that silver is now rising merely because of increased scrutiny by regulators on the short sellers is neither comforting, nor appealing, but we sincerely doubt that is solely the reason that silver has found a bid of late.

We are of the firm opinion that silver is not rising merely because of regulator’s newly found desire to promote “fair” futures markets. Indeed we believe that if there is any influence from the CFTC investigation into the silver futures markets, or increased scrutiny, or whatever, that influence is at best minimal, and more likely coincident to what is happening in the much larger and much less regulated physical markets.

To be sure we lament the unfair advantage in the futures markets that the traders the CFTC grants “bona fide hedger” status to (thus allowing a few elite traders access to larger positioning than their long-side opponents). And, it doesn’t take ownership of a tin-foil hat to have noticed multiple bone-crunching sell raids by those “usual suspects” in the past. All long-time traders are certainly aware of them. All long-timers have learned to survive them using one or another money management method (stops, options, nimble trading, etc.).

However, as we have said so many times in the past, one can manipulate the price of something temporarily for short periods of time given enough firepower and given the “right” execution of the trading, but nothing and no one can manipulate the global market price of something – no one, not bullion banks, nor even central banks can argue with the supply/demand/liquidity equilibrium of a global market for any length of time and certainly not indefinitely.

Our view: We believe there is a tectonic shift underway for silver. A shift of historic and generational proportions that is only just now starting to surface in a material way. We believe that global public demand for precious silver is once again returning the metal to its historic role as money – alongside its rarer cousin gold. We believe that the recent absence of concerted short selling is more likely a logical market reaction by hedgers and short sellers to the reality of much higher demand and the realization that existing and available supplies may not be sufficient to satisfy that burgeoning demand at current pricing.

If our view is correct, then it really doesn’t matter if the CFTC or any other regulator is looking harder at the positioning of futures traders. If our view is correct, then the market price of silver will find its own supply/demand/liquidity equilibrium whether or not hedgers and short sellers sell a few hundred million more ounces of the stuff in paper contracts in New York.

Would it be better if the futures markets were played on a more level playing field? One where both sides of the battlefield had the exact same rules and size limits? Where one side of the action didn’t have access to many times the number of contracts – access to more “ammunition” than the other side does? Sure, certainly it would. No question about it. It might cut down on the short-term blood lettings from time to time. Maybe. But, will that make any difference in the long-term price of silver?

No, not really. Futures contracts answer to real demand by the population for silver, not the opposite.

We believe the story has been considerably different for gold, which is held by governments as a reserve-asset and thus has been subject to an unseen hand of “currency management” from time to time in the past, but that is another story for another time. Governments no longer hold silver – and they have all but stopped dishoarding the silver they did have. Governments have stopped supplying the silver that artificially kept the price unreasonably low for decades – and the markets are discovering that now.

For all the latest developments on this issue we strongly recommend bookmarking the Gold Anti-Trust Action Committee (GATA) web site at this link. If the link doesn’t work on your system, please copy and paste the following into your browser: http://www.gata.org/ Chris Powell has been burning the midnight oil dispatching the latest important developments for us. We own him our thanks for doing so!

We’ll close this comment today with a quote from our friends at GoldCore.com to illustrate how many in the gold and silver community view this event:

The US commodity futures regulator is looking into claims by a former JP Morgan trader in London that JPMorgan Chase was involved in manipulative silver trading, The Wall Street Journal reports, citing a person close to the situation. Reuters reports that in recent months, Commodity Futures Trading Commission (CFTC) lawyers have interviewed employees of JPMorgan in its metals trading business, the newspaper said. Along with JPMorgan, CFTC lawyers have also interviewed industry traders, commodity executives, experts and employees of other metals trading firms, The Journal said. Ray Bashford, a spokesman for JPMorgan in Hong Kong, said the bank had no comment when contacted by Bloomberg News today.

It is hard to know how important Chilton's comments are with regard to the ongoing silver manipulation allegations.

They suggest that he himself agrees with the Gold Anti-Trust Action Committee (GATA) allegations that silver prices are manipulated. If the CFTC prosecutes those who may have manipulated gold and silver markets (as Chilton urged today) and violated commodities laws then it could lead to further volatility and higher prices. This would especially be the case if the large concentrated short positions on the COMEX, held by banks such as JP Morgan, were forced to cover their positions.


This may lead to a short squeeze that could propel silver above $30 and towards its nominal high of $50/oz in the coming months.- GoldCore.com (Emphasis ours).

That is all for now, but there is more to come.