After suggesting there was collusive behavior in the gold market in a draft research paper that made headlines, economist and professor, Rosa Abrantes-Metz is shifting her focus to silver.
Metz, an adjunct professor at NYU’s Stern School of Business, burst onto the precious metals scene after she published a research paper examining how the former London gold fix may have been manipulated for a decade by the banks setting it. Metz had found unusual trading patterns around 3 p.m. in London, when the afternoon gold fix was set during a private conference call between five of the biggest gold dealers. The fix has since disappeared, replaced in March with a transparent electronic auction process.
Silver also received a new benchmark in August 2014 – the new London Silver Price – which has third party administrators CME Group and Thomson Reuters handling the governance. The end of the silver fix was initially caused by the withdrawal of Deutsche Bank, which ran the benchmark with HSBC and Bank of Nova Scotia.
Metz said the new electronic benchmark is a step in the right direction with more transparency but it can’t prevent manipulation from happening. “Both administrators are independent, but it is still concerning that there are not many market participants,” Metz said. After launching with only three accredited participants, the auction has now expanded to six: HSBC Bank USA NA, JPMorgan Chase Bank, Mitsui & Co Precious Metals Inc, The Bank of Nova Scotia – ScotiaMocatta, The Toronto Dominion Bank and UBS AG.
“Also, I don’t see the need for an auction setting,” Metz said. The auction process lasts for a short period, usually less than 15 minutes. Metz explained that price discovery over a longer trading period is more difficult to manipulate.
In her current research work on silver prices, Metz said she has found similar results to her findings on gold.
“Looking into CME futures settlement prices, I found several unusual patterns. I find that prices move in the opposite direction from the rest of the market returns very often, particularly while silver prices are moving upwards,” Metz explained. She added that she has found “drastic increases in volume traded in the space of one minute,” and “very sharp price movements.”
Abrantes-Metz’s 2008 paper “Libor Manipulation?” helped uncover the rigging of the London interbank offered rate, which led financial firms including Barclays Plc and UBS AG to be fined about $6 billion in total. The interest rate manipulation set off a slew of other investigations, including precious metals and currencies.
In May, five of the world’s biggest banks had to pay $5.8 billion over a currency-rigging probe. Four of which pleaded guilty to felony charges of conspiring to manipulate the price of U.S. dollars and euros.
“I think it is a critical way to fight crime,” said Metz in regards to the hefty fines. “More needs to be done by regulators and institution themselves, in order to deter this type of crime – obviously large fines are important.”
But Metz added there has to be a change in corporate culture. “If that change does not occur we only deter a few people from doing it, on top of it, we also make it harder to detect these type of manipulations in the future because knowing there is higher surveillance, they will not leave traces as they did before with emails and instant messages,” she explained. More developed methods of detection would have to be implemented in order to detect this type of behavior in the future, Metz added.
Who’s next? “We all know the scandal of FX but my belief is that is just part of the story.I think for example treasuries are also being investigated for potential rigging in auctions – I think it can be the next big target,” Metz said.