Turn the Tables on the Market Manipulators By Peter Krauth

In theory, we have free markets, where manipulation is illegal and punishable.

We've found that's not often the case in the financial markets.

Unfortunately, this web of "disruptive practices" and "market rigging" is not likely to change any time soon.

Despite a government "crackdown" on illegalities that occasionally makes the headlines.

The problem may be especially manifest in the futures market.

But you don't have to be a victim...

In April, I took a close look at the issue of silver price manipulation.

Judging by the response to that article, it struck quite a nerve.

For insight I talked to Ted Butler, an expert on the silver market he's followed for 30 years.

Here's how Ted explained exactly how dominant players could be manipulating silver futures prices:

The current exact mechanism they use to suddenly rig the price lower is High Frequency Trading (HFT). This is the placing of sell orders in great quantities by computer programs that suddenly appear as legitimate orders, but are really mostly "spoofs," or orders entered and canceled immediately (in the fractions of a second). When the sell orders first appear, they spook others into selling as they give the appearance of great selling about to hit the market. Instead, it is all a bluff, intended only to scare others into selling, as the vast majority of these original sell orders are never executed, nor were they ever intended to be executed. They were designed for one purpose only - to scare others into selling.

Keep in mind this was a full year before Michael Lewis's book on high frequency trading Flash Boys.

Ted knows his stuff.

Back in 2008 the CFTC (Commodity Futures Trading Commission) opened an investigation following concerns of misconduct in the silver market. Five years later in 2013, the CFTC finally concluded that, "Based upon the law and evidence as they exist at this time, there is not a viable basis to bring an enforcement action..."

Meanwhile there's little doubt the gold price fix was rigged. After Deutsche Bank announced it was dropping out as one of the three fix participants Barclays (another one of the three), was hit with a $44 million fine for manipulating the setting of gold prices.

That came after $450 million in fines assessed to Barclays over attempted Libor rigging.

So recent news that the CME, where Comex silver futures are traded, was implementing new rules to eliminate "funny business" is extremely intriguing, to say the least.

Just last month the CME announced its new Rule 575. Effective September 15, it essentially says:

DISRUPTIVE PRACTICES - It shall be unlawful for any person to engage in any trading, practice, or conduct on or subject to the rules of a registered entity that -

(A) violates bids or offers; (B) demonstrates intentional or reckless disregard for the orderly execution of transactions during the closing period; or (C) is of the character of, or is commonly known to the trade as, "spoofing" (bidding or offering with the intent to cancel the bid or offer before execution).

Wow. In sifting through the detail of the new rules, here's what especially stood out in its explanations:

Once the smaller orders are filled, the market participant cancels the large orders that had been designed to create the false appearance of market activity. Placing a bona fide order on one side of the market while entering order(s) on the other side of the market without intention to trade those orders violates Rule 575.

And further...

A market participant places a large quantity of orders at the beginning of the pre-opening period in an effort to artificially increase or decrease the IOP with the intent to attract other market participants...

It gets more specific from there.

So there you have it. The CME itself detailing exactly the type of market manipulation that they know has gone on, and now specifically outlaw.

Which brings up three questions that should've been asked at least five years ago.

Question No. 1: Exactly why was this kind of behavior tolerated, and since when have they known of it?

Question No. 2: Given how many of these manipulative practices have been going on, what are those poor traders going to do now since that surely must have taken up most of their time?

Question No. 3: Should these new rules provide hope that we can finally get true price discovery?

Unfortunately, to this point the answers are uninspiring, to say the least...

Frankly, I'd like to remain optimistic.

Yet this is the very same CME that's being entrusted with providing the electronic auction platform to calculate the new LBMA Silver Price, since the old London Silver Fix was ended amid scrutiny by regulators.

But wait, that's not all, to use the commercial adage.

Now, the CME is competing to provide services to the new and improved London gold bid, and seems to be a frontrunner in this race. It must be that pristine reputation that sets it apart and gives it an "edge."

Should we be worried? Well, given recent shenanigans in these and other major markets, I wouldn't call it encouraging.

But consider that, even with the likely decades-long rigging (as indicated by recent studies on the gold fix), the gold price has still managed to rise from $250 to $1,900 over a span of 10 years, for a 660% gain.

Odds are manipulation will only work up to a point, with true market forces eventually overriding and overwhelming these intentional "disruptive practices."

So given the amazing returns so far, despite some artificial headwinds, precious metals are a market you'll want to stick with.

And if we can eventually approach free markets with real price discovery, that will only act to send prices higher. The much larger fundamental market forces will determine the true prices of gold, silver, and a host of other resources.

These bull markets are far from over.