The two major firms that
oversee the daily silver fixing for the London Bullion Market Association
(LBMA) are unexpectedly resigning from their appointments after the passage of
a new European benchmark regulation has prompted a
review of the group’s silver price-fixing administration arrangements.
Thomson Reuters and CME Group,
which each provide the daily service to the LBMA, announced their resignations last week. No immediate reason
was provided, but new legislations scheduled to go into effect in January 2018
cover firm contribution and use a wide set of benchmarks, according to the
London-based Financial Conduct Authority.
The daily silver and gold price
fixing are established procedures that set prices for billions of dollars in jewelry
and mining activities, yet the close scrutiny price benchmarking has received
in recent years, and in some cases, accompanying scandals, leaves more downside
reputational and legal liability than upside appreciation. Ross Norman , an
executive at the London-based Sharps Pixley Ltd., said there was “very modest
commercial reward” for firms providing daily benchmark supervision of the
electronic auction price setting arrangement.
Thomson Reuters and the CME Group, which have been providing
the price fixing since 2014, said they will continue to operate and administer
the auction until the LMBA can find new providers.
Price Fixing Problems Found
daily silver and gold price fixing has been used for years to set commercial prices,
as well as to hedge inventories. However, recent scandals have focused
attention on market participants and market manipulation, and resulted in class-action
lawsuits against some banks. In March 2014, a New York speculator filed a lawsuit alleging
that Societe Generale SA, Deutsche Bank AG, Barclays Plc, Bank of Nova Scotia
and HSBC Holdings Plc., conspired to manipulate the price benchmark. These
banks oversee the London gold fix. In 2016, Deutsche
Bank decided to settle US lawsuits for conspiring to manipulate the gold and
The gold price “fix” is set twice each business day, at
10:30 a.m. and 3 p.m. London time, and sets the transaction price for a large
pool of purchase and sale orders.
While, the banks cited in the lawsuit said the charges were
without merit, an earlier academic paper found irregularities in the price-fixing
process. This was followed by a story in Bloomberg, which said the price fix
could have been manipulated “for
Rosa Abrantes-Metz, managing director of Global Economics
Group, adjunct associate professor at the Stern School of Business at New York
University, and a co-author of papers on price fixing involving gold, silver
and LIBOR prices, said that “with respect to gold and silver, the structure of
these fixings and the empirical evidence were very telling in supporting
collusion and manipulation.”
In a video, Abrantes-Metz said “I have looked into silver at the
London Silver Fixing, as I did for gold, and the results were fairly similar,
but I have also more recently started to look into the CME futures settlement
prices for silver, and I found several unusual patterns. I find that prices
move in opposite directions from the rest of the market returns very often,
particularly while silver prices were moving upwards. I also find very drastic
increases in volume traded in the space of one minute, very often the largest
of the day by far, and very sharp price movements."
A Historical Evolution
The London silver
fixing began in 1897 when a small group of silver bullion dealers, including
the Fixing Members, met in London (initially in-person and later via
teleconference) to set the daily benchmark price of silver. Fixing Members,
acting through London Silver Market Fixing, Ltd., met over a secure conference
call line at noon London time every business day to “fix” the price of physical
silver, according to an anti-trust litigation lawsuit involving the silver price fixing.
Fixing, which was usually done in less than 10 minutes, was conducted through a
private “Walrasian” auction, a type
of simultaneous auction where
each agent calculates its demand for the good at every possible price and
submits this to an auctioneer.
The price is then set so that the total demand across all agents equals the
total amount of the commodity being considered.
At the outset of
the price fixing process, the “chairman” of the auction (a position that
rotated among the Fixing Members) would announce the opening price, reflecting
the current “spot price” of silver. Each of the Fixing Members would then
declare how many bars of silver they wished to buy or sell at the opening price
based on the net supply or demand for spot silver on their order books
(reflecting both client orders and proprietary trading orders).
changed on April 29, 2014, when Deutsche Bank left its position as a Fixing
Member over regulatory concerns. This led to the demise of the Silver Fixing
and the creation of the “London Silver Price.” The new pricing system
introduced an electronic trading system, instead of a private telephone call,
but otherwise retains an “auction-style process” to determine the Fix Price. Two
of the former Fixing Members, HSBC and Bank of Nova Scotia, are members of the
London Silver Fixing panel. UBS is accredited to participate in the London Silver
Price but has never been a member of the Fixing Panel.
By Chuck Epstein