An ex-trader says JP Morgan spoofed gold to keep hedge funds happy.
He says client orders made a lot of money for the bank.
Big hedge funds like Moore Capital Management and Tudor Capital Corp. were so important to JPMorgan Chase & Co. that its precious-metals traders routinely manipulated gold and silver markets to get the best prices on client orders, the former trader for the bank told a Chicago jury.
“They brought in a huge volume of trading, which made the bank a lot of money and our team a lot of money,” John Edmonds, a former trader on JPMorgan’s precious metals desk, said on Wednesday when asked about the incidents.
This isn’t the first time a bank colludes with hedge funds to cheat non-institutional investors from their money.
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JP Morgan manipulates gold and silver market
Edmonds worked on the JP Morgan precious-metals desk for more than a decade and pleaded guilty in 2018 to conspiracy and commodities fraud related to “spoof” trading. – Bloomberg
Spoofing is a term used when traders place market orders and cancels them before the order is fulfilled, initiating fake orders into the market without the intent of paying them.
Earlier this year the DOJ targeted hedge fund Muddy Waters for flooding the market with fake orders.
John Edmunds is currently testifying against his former boss, Michael Nowak, the longtime head of the trading desk, gold trader Gregg Smith and hedge funds salesman Jeffrey Ruffo.
They’re accused of thousands “spoof” trades in which huge orders were placed and quickly canceled in the hope of moving prices up or down so they could complete desired trades.
Prosecutors allege the traders were influenced by the needs of hedge fund clients, whom at times were looking to buy or sell millions of dollars in gold or silver in a matter of seconds or minutes.
Edmonds said that when a client needed an order filled, everyone on the desk would stop trading so as not to “get in the way” of filing that order.
Edmonds said he’d regularly watch Nowak or Smith use spoof trades to fill those order, per Bloomberg.
Bank gets caught red-handed
Jurors were shown instant messages between Ruffo and traders at Moore Capital and Tudor, as well as Smith’s trading records around those communications as evidence of improper trading in gold and silver futures.
Edmonds, who sat near Ruffo and Smith, said the hedge fund clients were “price sensitive” and concerned about even small differences in prices of gold and silver given the massive size of their orders.
One example from prosecutors was an order on Dec. 12, 2011, by Moore Capital, which sought to sell 1 million ounces of silver at $31 an ounce.
Smith placed orders to buy 1,190 futures contracts, each for 5,000 ounces of silver, data presented to the jury showed.
Edmonds said that was consistent with a spoof trade designed to drive the price higher, where Smith wanted to sell.
Minutes later, Smith sold 200 contracts, which is the equivalent to 1 million ounces, and canceled his buy orders.
The jury also heard about a Jan. 18, 2012, gold trade on behalf of Tudor where Ruffo was asked to unload more than 900 contracts.
As the price of gold decreased around 8 a.m., Tudor’s James Phelan wrote to Ruffo, “tell Gregg to wake up,” according to a chat log.
Shortly thereafter, Smith started entering orders on the buy side. “He was trying to move the market higher so he can sell at a higher price for an important client,” Edmonds said.
Sources – Bloomberg.
Will JP Morgan face any consequences?
The case is US v. Smith et al, 19-cr-00669, US District Court, Northern District of Illinois (Chicago).
For the reasons explained in this Opinion, the Defendants’ motion to dismiss, R. 114, is denied except for the bank fraud counts (Counts 5–7).
Those counts are dismissed.
The remainder of the Superseding Indictment survives.
You can view the entire case text, opinion, and details here.
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