Two Member Firms Resign from Silver Price Fixing

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.

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

The 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 silver markets.

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 a decade.” 

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.

The Silver 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).

This process 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