Market manipulation, especially in the commodity space, is nothing new. Hard assets like gold and silver are almost always under scrutiny for fear that large institutions are getting away with fixing the market; JPMorgan Chase & Co.
(NYSE:JPM) just recently escaped such charges
concerning silver markets. The latest scandal has hit the European Union, as one trader has stepped forward, detailing how he (and many others) have been able to successfully manipulate Platts oil prices over the years.
How To: Market Manipulation 101
Oil trader Halis Bektas recently detailed
how he has been able to move prices in his favor. Bektas may be scheduled to purchase tens of thousands of metric tons of fuel, with the price tagged to the daily benchmark provided by Platts. In order to save money, Bektas would offer to sell small amounts of crude at a price lower than the current spot, or at a loss.
The key factor that actually makes Bektas money is that oil traders are not required to report their purchases and sales of crude – the process is voluntary. Platts bases its benchmark price based off of the information that traders voluntarily provide. So when a trader like Bektas reports a sale of the commodity below the current spot price, Platts takes this into account and lowers the spot price.
Next, Bektas is able to make his purchase of fuel at a small discount, only a few dollars per ton, but the savings compound quickly. Let’s say Bektas is scheduled to purchase 100,000 metric tons next week at a price of $100 per ton (the current spot price). This week, Bektas will sell some of his crude assets
for $95 and report the sale to Platts. Platts will then take the trade into account and lower the spot price to $98 per ton. Then, Bektas makes his purchase of 100,000 tons, effectively saving $200,000 on the purchase as the spot price is now artificially $2/ton lower.
Stopping It May Prove Difficult
With such a seemingly well-known scheme plaguing markets, it is tough to imagine how it can possibly still go on. Bektas stated that himself and other traders did not view their actions as illegal because they did not involve “colluding with competitors, reporting fake prices or other obviously forbidden behavior.” And it would seem that from a legal standpoint, he is mostly correct.
Proving market manipulation requires a legal team to show clear intent to mislead markets in order to make a financial gain. Definitive proof of a person or institution’s intent has long been the snag in the legal proceedings for prosecutors. Within the confines of trading, proving intent is often too difficult, allowing many would-be market manipulators off the hook. Even still, the EU and Platts have stated that they will be looking into the matter in an effort to make markets more efficient and safe for all traders.
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Editor's note: This article by Jared Cummans was originally published on Commodity HQ.
No positions in stocks mentioned.