Move Over FX And Libor, As Manipulation And "Banging The Close" Comes To Commodities And Interest Rate Swaps

While the public's attention has been focused recently on revelations involving currency manipulation by all the same banks best known until recently for dispensing Bollinger when they got a Libor end of day print from their criminal cartel precisely where they wanted it (for an amusing take, read Matt Taibbi's latest), the truth is that manipulation of FX and Libor is old news. Time to move on to bigger and better markets, such as physical commodities, in this case crude, as well as Interest Rate swaps. And, best of all, the us of our favorite manipulation term of all: "banging the close."


The story of crude oil manipulation, primarily involving Platts as a pricing intermediary, has appeared on these pages in the past as far back as a year ago, and usually resulted in either participant companies, regulators or entire nation states doing their best to brush it under the rug. However, it is becoming increasingly more difficult to do so as the following Bloomberg story demonstrates.









Four longtime traders in the global oil market claim in a lawsuit that the prices for buying and selling crude are fixed -- and that they can prove it. Some of the world’s biggest oil companies including BP Plc (BP/), Statoil ASA (STL), and Royal Dutch Shell Plc conspired with Morgan Stanley and energy traders including Vitol Group to manipulate the closely watched spot prices for Brent crude oil for more than a decade, they allege. The North Sea benchmark is used to price more than half the world’s crude and helps determine where costs are headed for fuels including gasoline and heating oil.


 


The case, which follows at least six other U.S. lawsuits alleging price-fixing in the Brent market, provides what appears to be the most detailed description yet of the alleged manipulations and lays out a possible road map for regulators investigating the matter.


 


The traders who brought it -- who include a former director of the New York Mercantile Exchange, or Nymex, one of the markets where contracts for future Brent deliveries are traded - - allege they paid “artificial and anticompetitive prices” for Brent futures. They also outline attempts to manipulate prices for Russian Urals crude and cite instances when the spread between Brent and Dubai grades of crude may have been rigged.


 


The oil companies and energy-trading houses, which include Trafigura Beheer BV and Phibro Trading LLC, submitted false and misleading information to Platts, an energy news and price publisher whose quotes are used by traders worldwide, according to the proposed class action filed Oct. 4 in Manhattan federal court.



The method of manipulation is a well-known one to regular readers: spoofing.









Over 85 pages, the plaintiffs describe how the market allegedly showed that the Dated Brent spot price was artificially driven up or down by the defendants, depending on what would profit them most in swap, futures or spot markets. They allege the defendants used methods including “spoofing” - - placing orders that move markets with the intention of canceling them later. Platts’ methodology “can be easily gamed by market participants that make false, inaccurate or misleading trades,” the plaintiff traders alleged. BFOE refers to the four oil grades -- Brent, Forties, Oseberg and Ekofisk -- that collectively make up the Dated Brent benchmark.



Ironically, spoofing is one of the primary mechanisms by which the HFT cabal has also benefitted, and been able to, levitate the market to ever record-er highs on ever lower volume. That, and Bernanke of course.


What do the plaintiff's allege?









Kovel represents plaintiffs Kevin McDonnell, a former Nymex director, as well as independent floor traders Anthony Insinga and Robert Michiels, and John Devivo, who held a seat on Nymex and traded for his own account. The complaint says the plaintiffs are among the largest traders of Brent crude futures contracts on Nymex and the Intercontinental Exchange. The four, who don’t specify the amount they are claiming in damages, seek to represent all investors who traded Brent futures on the two exchanges since 2002.


 


The plaintiffs allege that in February 2011, defendants manipulated the trade of Forties-blend crude, one of four grades used by Platts to determine the Dated Brent benchmark, which represents the price of physical cargoes for delivery on the spot market.


 


Shell offered to sell shipments to keep the price of Forties “artificially low,” according to the plaintiffs.


 


Morgan Stanley (MS) was the only buyer for one of four such orders, or cargoes, totaling 2.4 million barrels of oil, the traders said. The Feb. 21, 2011, transaction was prearranged to set a lower price for Dated Brent, according to the complaint.



So how was such wholesale manipulation able to continue for over a decade? Simple - same reason why nobody "knew" anything about the Libor cabal until recently - alligned financial interests of every participating party, in this case Platts, a unit of McGraw Hill Financial - the same parents as Standard & Poors rating agency - and all the other major commodity players in the space.









“By BFOE boys,” the plaintiffs said in their complaint, “this trader was likely referring to the cabal of defendants, including Shell, which controlled the MOC process.” The claimants also alleged that in September 2012, Shell, BP, Phibro, Swiss-based Vitol and Netherlands-based Trafigura rigged the market through “a combination of spoofing, wash trades and other artificial transactions” in the Platts pricing process.


 


The defendants pressured the market downward at the start of the month by colluding to carry out irregular and “uneconomic” trades, according to the lawsuit. They drove prices higher later that month, it said.


 


The four traders said Platts was “reluctant to exclude” the irregular trades because BP and Shell are “significant sources of revenue” to Platts.



Or, said simpler, don't ask, don't tell, and keep cashing those checks.


Full lawsuit can be read below:




 


* * *


And in other news, the CFTC just charged DRW Investments with price manipulation by way of "banging the close" in Interest Rate Swap Futures Markets.









Defendants allegedly manipulated the IDEX USD Three-Month Interest Rate Swap Futures Contract by “Banging the Close”


 


The U.S. Commodity Futures Trading Commission (CFTC) today filed a civil enforcement action in the U.S. District Court for the Southern District of New York against Donald R. Wilson (Wilson) and his company, DRW Investments, LLC (DRW). The CFTC’s Complaint charges Wilson and DRW with unlawfully manipulating and attempting to manipulate the price of a futures contract, namely the IDEX USD Three-Month Interest Rate Swap Futures Contract (Three-Month Contract) from at least January 2011 through August 2011. The Complaint alleges that as a result of the manipulative scheme, the defendants profited by at least $20 million, while their trading counterparties suffered losses of an equal amount.


 


According to the Complaint, in 2010 the Three-Month Contract was listed by the International Derivatives Clearinghouse (IDCH) and traded on the NASDAQ OMX Futures Exchange, and was publicized as an alternative to over-the-counter, i.e., off-exchange, products. Wilson and DRW believed that they could trade the contract for a profit based on their analysis of the contract. At the end of 2010, Wilson caused DRW to acquire a large long (fixed rate) position in the Three-Month Contract with a net notional value in excess of $350 million. The daily value of DRW’s position was dependent upon the daily settlement price of the Three-Month Contract calculated according to IDCH’s methodology. As Wilson and DRW knew, the methodology relied on electronic bids placed on the exchange during a 15-minute period, the “settlement window,” prior to the close of each trading day. In the absence of such bids, the exchange used prices from over-the-counter markets to determine its settlement prices. Wilson and DRW anticipated that the value of their position would rise over time.


 


The market prices did not reach the level that Wilson and DRW had hoped for and expected, according to the Complaint. Rather than accept that reality, Wilson and DRW allegedly executed a manipulative strategy to move the Three-Month Contract market price in their favor by “banging the close,” which entailed placing numerous bids on many trading days almost entirely within the settlement window, none of which resulted in actual transactions as DRW regularly cancelled the bids. Under the exchange’s methodology, DRW’s bids became the settlement prices, and in this way DRW unlawfully increased the value of its position, according to the Complaint.



But the take home message here is simple: no matter the pervasive manipulation everywhere else, and seemingly by everyone including such titans of ethical fortitude as Steve Cohen, gold is not, repeat not, never has been, never will be manipulated.

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