The Futures and Derivatives Markets, Part 2: Rigging the indices to win.

The Futures and Derivatives Markets, Part 2: Rigging the indices to win

by tonytran2015 (Melbourne, Australia).

Crlick here for a full, up to date ORIGINAL ARTICLE and to help fighting the stealing of readers’ traffic.

(Blog No.20x).

#futures market, #index, #rigging,

This blog post is designed to explain the method of manipulations of those markets. The blog does NOT advise anyone to enter those high risk markets.

The future and derivative markets are usually rigged and manipulated by “investment institutions”, genuine users of those future index contracts for hedging are actual losers.

1. “Investment institutions” have all the advantage:

1a/- Ability to move the indices at decision (score setting) time.

“Investment funds” manage the investment portfolios of their wealthy clients. In those contracts of management they are allowed to borrow from their clients the shares or the contracts of delivery of commodities. So they can borrow from their.clients massive amounts of shares or contracts of delivery of commodities to flood the markets, which are not liquid, with sell orders in the final minute leading to decision time to drive the relevant indices down.

On the other hand, *investment funds” can also borrow massive amounts money from the “cash management accounts” of their clients. So they can borrow money from their.clients to flood the markets, which are not liquid, with buy orders in the final minute leading to decision time to drive the relevant indices up.

“Investment funds” and “hedge funds” thus have the ability to drive some indices up or down by flooding the non-liquid markets in their final minutes leading to decision (score setting) times. The computers of the markets may even get overloaded by such flooding.

Obviously, although they can move their chosen indices, they have brokerage fees and interest payments as their costs.

1b/- Ability to bet large amounts of money using margin loans from the “league of investment funds”.

With such loans, a bet player allows his creditor to close off all his bettings if the index moves against him and he cannot provide more money to hold on with his betting position.

“Investment funds” use their available credits from margin loans to bet for winning ten times the costs of moving the relevant indices. They become counter-parties for genuine “hedge users”.

1c/- Winning bets by moving the indices.

Most of the times, “investment funds” sell down or buy up the commodities or shares prices effecting those indices for betting to make themselves winning their bets on each score setting day.

2. Illustrative example 1:

Suppose that current gold price is $1000/ounce. A gold producer wants to produce 1000,000oz of gold at that price in one year time. So if gold price goes up $1/ounce on that date, the producer will win additional $1M and similarly will lose for the other direction. To stabilize its finance the company would enter bets that makes it win $1M for every $1/oz fall in gold price and lose $1 Million for every rise of $1/oz in Gold price (“going SHORT” on gold price”).
. The gold producer is the genuine hedge user. An “investment fund” took the bet and became its counter party.

At the end of the period, the gold producers have 1M oz of gold to sell on the market. Suppose that its sales during that month are only around $950/oz. It got $50M less than required. An honest gold index would be 950 and its counter party has to hand it $50M. However, the counter-party is an investment fund and on the score setting day, the fund can easily move the index to $990/oz and have to give to the gold miner only $10M, rather than $50M.

So the “investment fund” has ripped off $40M from the gold producer.

It is also possible that some big seller may decide to take advantage of flooding purchase orders from the investment fund at the last minute to sell all his gold at $990/oz

It is possible that some big seller may also use the same trick of selling at the last minute to sell all his gold at $990/oz. In this case the investment fund may lose big amounts and go bankrupt. A financial melt down may then follow. The government would hastily jump in using tax payers’ money to rescue the investment fund.

3. Example of unintended consequences:

Flooding the market with orders at the last minute to move an index sometimes causes unintended serious consequences.

It is most dreadful when the market is flooded with sell orders of shares of banks and financial institutions with non-transparent periodic reports. Automatic sell orders by large holders of those shares may get triggered and these “sell at market price” orders may join the selling flood, causing a meltdown of financial stocks on the market. Those going short on those stock may win big amount but the market enters an official crash!

References.

Tuesday’s announcement by the Department of Justice of a guilty plea by a former trader of JPMorgan for systemic “spoofing” and price manipulation of gold, silver, platinum and palladium traded on the COMEX and NYMEX futures exchanges (owned by the CME Group) sure seemed like a very big deal …. The infractions occurred from 2009 to 2015 and the trader admitted to engaging in a conspiracy to commit market manipulation on hundreds of occasions, with the knowledge and consent of his immediate supervisors. [1, 2]

[1]. http://silverseek.com/commentary/crack-dike-17474

[2]. https://socioecohistory.wordpress.com/2018/11/10/a-crack-in-the-gold-silver-manipulation-dike/

[3]. https://www.zerohedge.com/news/2018-11-06/jpmorgan-gold-spoofer-admits-manipulating-precious-metals-markets-years

“If this has occurred recurrently, it is a BIG story because it suggests systematic favoritism,”

[4]. https://nypost.com/2018/12/07/nyse-is-freaking-out-looking-for-leakers-after-post-expose/

[5]. https://socioecohistory.wordpress.com/2019/02/15/deutsche-bank-to-pay-c5-5-million-to-settle-canadian-gold-and-silver-market-rigging-cases/

Added after 30 June 2019:

[6]. http://riggedgame.blog/2019/06/15/these-charts-suggest-the-whole-wall-street-casino-has-become-taxpayer-backstopped/

[7]. https://riggedgame.blog/2019/07/02/reimagining-the-structure-of-wall-street-in-the-national-interest/

[8]. https://www.gold-eagle.com/article/dominoes-falling-big-banks-rigged-precious-metals-markets

[8b]. https://us-issues.com/2019/08/28/dominoes-falling-at-big-banks-that-rigged-precious-metals-markets/

[]. https://www.wsj.com/articles/SB864678855732110500

Indeed, after a cornering in the silver market sent prices sky-high on the Commodities Exchange in New York in the 1970s and early 1980s, trading interest in the contract declined substantially and has only recently recovered. In copper, not only the LME, but also the Comex division of the New York Mercantile Exchange has lost copper volume in the last 12 months.

Last year, copper prices plunged by 45 cents, to less than 95 cents a pound from above $1.30, after Japan’s Sumitomo Corp. revealed that its copper-trading division had racked up billions of dollars in losses with copper positions. Because Sumitomo was taking a bullish position in copper, prices for the metal had remained artificially high during the alleged trading activity.

[]. https://www.investopedia.com/articles/financial-theory/08/mr-copper-commodities.asp

Hamanaka’s manipulation was common knowledge among many speculators and hedge funds, along with the fact that he was long in both physical holdings and futures in copper. Whenever someone tried to short Hamanaka, however, he kept pouring cash into his positions, outlasting the shorts simply by having deeper pockets. Hamanaka’s long cash positions forced anyone shorting copper to deliver the goods or close out their position at a premium.

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The Futures and Derivatives Markets (Part 1).

The Futures and Derivatives Markets (Part 1).

by tonytran2015 (Melbourne, Australia).

Click here for a full, up to date ORIGINAL ARTICLE and to help fighting the stealing of readers’ traffic.

(Blog No.20x).

#futures market, #index, #go long, #go short,

This blog post is designed to explain the working of the futures markets so that investors can see through the manipulations of those markets. The blog does NOT advise anyone to enter those high risk markets.

1. The original useful roles of futures markets.

There are many futures markets. The main ones are listed in the following:

1a. Gold Futures (Gold futures for various delivery times)

Gold Futures are for gold smiths and jewelers.

Jewellery makers love to receive contracts to supply jewelleries in advance to smooth out their production. Unless the customers provide raw gold or agree to pay at whatever unknown future market price no contract can be made. This rarely happens. So to get binding contracts, they have to know the price of gold few months or few years ahead, for the time they will start their machining process but knowing the future is impossible.

So a jeweller has to peg his contract price for those items to be supplied on a future date on whatever guesses given by the “Gold Future Markets”. When his contract to supply is binding he simultaneously enter into contracts with some counter-parties to get a payout to compensate for any unexpected rise from that agreed price of raw gold. On the other hand, if gold price falls on that date, he will have to pay out to his counter-parties. In this way he get a fix profit from his contract, irrespective of any fluctuation of gold price.

The same principle applies to gold producers or even national treasurers. For example, during the Asian Financial Crisis (triggered by some billionaire G.S. ‘s attack on Thai’s baht) the treasurer of Korea had to sell Korean gold to repay Korean debts. Whenever there is a due payment by Korea, the price of gold dropped from its othrwise constant value of USD273/oz.

To avoid having to sell gold at the artificial, unfair dips on the due dates, a gold producer (or even the treasurer of Korea) would have to enter into “Gold Future Contracts” (“going short”) with counter-parties to get a payout to compensate for any unexpected fall from that agreed price. On the other hand, if gold price rises on that date, he will have to pay out to his counter-parties. In this way he get a fix price from his contract, irrespective of any fluctuation of gold price.

1b. Metal Futures (Copper futures, Nickel futures, Iron futures).

Metal Futures (Copper futures, Nickel futures, Steel futures) are for consumers and producers of metals.

The same principles also apply to consumers and producers of other metals such as copper, steel, lead, zinc, tin, nickel, chrome, etc…

1c. Food Staples Futures (Soybean futures, Rice futures).

Food Staples Futures (Soybean futures, Rice futures) are for food processors and producers.

1d. Currency futures.

Currency futures are for importers and exporters.

1e. Shares-market-index futures.

Shares-market-index futures are for investment managers of superannuation and pension funds who have holding spread out on many companies and want to instantly peg their buying or selling prices at some fix level.

1f. Rain-fall futures.
Rain-fall futures are for farmers whose incomes and expenses vary widely with rain-falls.

Farmers have to buy water transported by tankers if there is no rain. They would be happy to pay a fix amount to a counter-party whether it rains or not. They will use the payout from the counter-party to buy water.

2. Method of betting on an index.

Players buy units of betting. For example, one unit of betting on the SPI Share Market Index may make a gain or loss of $US 20 for each point of the index in favor or against the player.

The deciding moment may be closing time (4:00pm) of the last trading Friday of the month.

For example, let the betting be $20 per unit and let the current date be 2018 November 13, the Current value of a chosen index on the market is 5950, the current estimate for that index on Friday 30th Nov 2018 may be 6010 as given out by some “betting house”.

A player L may buy one unit of betting on LONG. At (4:00pm) of Friday 30th Nov 2018 if that index is 6020, he wins 6020 – 6010 = 10 units and will be paid $20*10 = $200. At (4:00pm) of Friday 30th Nov 2018 if that index is 5090, he loses 6010 – 5090 = 20 units and will be have to lose $20*20 = $400.

On the other hand, a player S may buy one unit of betting on SHORT. At (4:00pm) of Friday 30th Nov 2018 if that index is 6020, he loses 6020 – 6010 = 10 units and will have to pay $20*10 = $200. At (4:00pm) of Friday 30th Nov 2018 if that index is 5090, he wins 6010 – 5090 = 20 units and will be paid $20*20 = $400.

So a player may win or lose if his guess is better or worse than that offered by the “betting house”.

3. Using index betting for a large investment.

An investor has at hand $100,000 and will spread his total investment of $1000,000 over the whole 200 largest companies of the share markets.

He knows the dip of the index is the best time to buy all stocks but buying is a time consuming process and the dip may not last that long.

Suppose that the current index of the market is nearly 6000. His $1M investment will go up and down with the market according to the index. Suppose that the index is up by 1 unit, his investment will go up by $(1/6000)*1M=$166. So he will need a rough value of $166/$20 = 8.3 units of betting.

His strategy will be to buy 8 units of betting on LONG at the dip of the market, then takes time to buy into individual company without any need for further timing. Any increase or decrease in those 200 company share prices is roughly compensated by the gain or loss on the betting on the index.

to be continued

References.

Tuesday’s announcement by the Department of Justice of a guilty plea by a former trader of JPMorgan for systemic “spoofing” and price manipulation of gold, silver, platinum and palladium traded on the COMEX and NYMEX futures exchanges (owned by the CME Group) sure seemed like a very big deal …. The infractions occurred from 2009 to 2015 and the trader admitted to engaging in a conspiracy to commit market manipulation on hundreds of occasions, with the knowledge and consent of his immediate supervisors. [1, 2]

[1]. http://silverseek.com/commentary/crack-dike-17474

[2]. https://socioecohistory.wordpress.com/2018/11/10/a-crack-in-the-gold-silver-manipulation-dike/

[3]. https://www.zerohedge.com/news/2018-11-06/jpmorgan-gold-spoofer-admits-manipulating-precious-metals-markets-years

Added after 2018 Dec 09:

“If this has occurred recurrently, it is a BIG story because it suggests systematic favoritism,”

[4]. https://nypost.com/2018/12/07/nyse-is-freaking-out-looking-for-leakers-after-post-expose/

Added after 2019 Feb 15:

[5]. https://socioecohistory.wordpress.com/2019/02/15/deutsche-bank-to-pay-c5-5-million-to-settle-canadian-gold-and-silver-market-rigging-cases/

RELEVANT MONEY Blogs

Can most pension funds last?, posted on December 10, 2016

crystal ball

Signs pointing to an impending crash for small investors, posted on December 16, 2016

crystalball2c70.jpg

Living with a probable bubble market posted on 11 August 2017

crystal ball 2

PREVIOUS MONEY Blogs

Your fiat money (Part 2), Your fiat money, Bankers given outrageous incomes by their boards, Signs pointing to an impending crash for small investors, Bankers earn more than interest margin on secured loans.

Click here for my other blogs.

divider43.jpg

polymeraust100dollars

Click here go to Divider63D400 Home Page (Navigation-Survival-How To-Money).

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