Tag: Commodities

JP Morgan Manipulated Gold to Keep Hedge Funds Happy

JP Morgan manipulated gold
Market News: JP Morgan manipulated gold and silver market

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.

Here’s the latest market news.

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JP Morgan manipulates gold and silver market

Gold and Siver Market
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

JP Morgan Precious Metals Desk
JP Morgan Precious Metals Desk

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?

JP Morgan manipulated gold and silver market to keep hedge funds happy
JP Morgan manipulated gold and silver market to keep hedge funds happy

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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Related: Chicago Tribune Says Citadel Securities' Dark Pool Targets Small Investors

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Investing in Commodities: An Easy Introduction

Investing in Commodities
Everything you need to know about investing in commodities

Published by FrankNez Team.

Commodities trading goes back further in history than trading stocks and bonds.

Commodities are simply goods that can be exchanged for money or other goods.

In other words, they are the heart of the market – the stuff that gets bought and sold.

The commodities market runs on the basic principle of supply and demand.

Since prices of a given type of commodity fluctuate in response to market forces – including anything from natural disasters to the COVID-19 pandemic – commodities can be a riskier investment option than stocks unless you have enough expertise and resources, making it a historically more prohibitive investment option for individuals.

Keep reading to learn more about investing in commodities and your options for getting started.

Commodities Trading Basics

Commodity Market
Commodity Market – what is commodities trading?

What is commodities trading?

Commodities trading refers to the practice of buying and selling goods at agreed upon prices.

A commodities exchange may refer to the exchange of the goods themselves, or to regulatory bodies that facilitate commodities exchanges through the enforcement of contractual and legal rules, such as:

Who engages in commodities investment?

Historically, commodities trading has been reserved for commercial or institutional producers or consumers.

Think farm owners selling crops or airlines buying jet fuel.

Other commercial or institutional investors may not be involved in the direct production or consumption of goods but look to investment in commodities as a way to diversify their portfolios or hedge against the volatility of other investments, such as stocks.

In fact, because commodities and stocks tend to have an inverse relationship, many investors will put money in commodities like gold during bear markets, periods of high stock market volatility, or times of high inflation.

Finally, individual investors can also profit on commodities through speculation.

Because speculating on commodity prices requires a high level of expertise across many fields – including macroeconomics, microeconomics, and the specifics of a given industry and commodity – this can be an expensive and risky investment option for individuals.

What are the risks of commodities investment?

It’s important to note that commodities investment comes in many forms with different levels of risk.

By far the riskiest options for individual investors are direct investment and futures contracts, which will be explained later in this article.

However, all commodities trading is subject to the effects of market forces on supply and demand, and thus the effects of supply and demand on commodity prices.

One major risk of direct commodities trading is that small price fluctuations can amplify your gains or losses exponentially, meaning that you could gain significantly more than you invested – but you can also lose much more too.

The Commodity Futures Trading Commission – a regulatory body that registers commodities trading professionals, among other things – warns that “many individuals lose all of their money” in futures markets.

Types of Commodities

different types of commodities
Different types of commodities

Commodities are divided into the following four categories:

1. Metals

Metals include gold, copper, palladium, etc.

As mentioned, gold and silver are popular investments for those hedging against losses due to stock market volatility.

According to the CFTC, metals are typically most impacted by industrial and macroeconomic factors.

2. Energy

This category includes a broad range of natural resources, including natural gas.

Risk factors usually relate to supply and storage availability, or actions made by regulatory bodies like the Organization of Petroleum Exporting Countries (OPEC).

3. Livestock and Meat & 4. Agriculture

Both livestock/meat and agriculture are typically affected by weather patterns, but can also be affected by natural disasters, epidemics and pandemics (human and animal), or other global supply chain issues.

Options for Investing in Commodities

Futures Contracts

A futures contract is a contract in which one party agrees to purchase and receive a given commodity at a certain price and at a certain time.

For example, a developer might agree to buy lumber at a certain price for a certain number of months.

If the market price falls below the contract price before the contract is up, the developer will lose money.

But if prices rise beyond the agreed upon price, the developer is locked into the better deal.

Futures trading – or the buying and selling of futures contracts – is the most common way to directly invest in commodities.

It’s also expensive and can be risky.

As mentioned, it is typically reserved for commercial or institutional investors who need to be sure they can buy the goods necessary for the operation of their businesses at prices that are protected from volatility in the market.

Otherwise, futures trading is done by large organizations or individuals to profit on price fluctuations or hedge against other investments.

Futures trading usually requires a brokerage account (which will charge brokerage fees), as well as deposits for the commodity investments themselves.

Sometimes investors even receive a “margin call” from their broker requiring them to deposit more money than what they initially paid.

With some exceptions, commodity futures and options must be traded through an exchange by professionals or firms who are registered with the CFTC.

As you can see, futures trading can be prohibitive to individual investors and should be approached with caution.

Stocks

Stocks can be an alternative option for investing in commodities.

With this strategy, an investor buys stocks in a company that deals with the commodity they’re interested in.

However, this is fundamentally different from investing directly in the commodity.

With futures contracts, an investor is directly purchasing ownership of the commodities themselves, while with stocks an investor is simply buying a share of an entity that deals with the commodity.

As Investopedia points out, stocks are affected by different factors than commodity prices, including internal company factors that have nothing to do with the macroeconomic factors impacting the commodities in question.

ENTs, ETPs, ETFs and Mutual Funds

Like stocks, ENTs, ETPs, ETFs and mutual funds can be less volatile investment options than direct commodities trading.

These options come with risks similar to those of stocks, but also similar advantages: good money management (if you’re using a broker), diversification opportunities, and the ability to make a profit on commodities without losing lots of money on speculation.

Commodity Pooling

Sometimes, a group of investors will pool their investment and go in on a futures contract together.

This type of arrangement is typically facilitated by a professional commodity pool operator (CPO), who will hire a commodities trading adviser (CTA) registered by the CFTC.

Pooling resources can offer the advantage of lower upfront investments from all parties, and the CTA helps make money management easier.

What to Consider Before Investing in Commodities

The CFTC suggests that investors consider the following before investing in commodities:

  • Your financial experience, goals and financial resources
  • How much you can afford to lose (beyond your initial investment)
  • All of the obligations of your contract(s)
  • The risk disclosure documents the broker is required to provide
  • Whom to contact with problems or questions

As with any prospective investment, do your research carefully and thoroughly before making any purchase, and take a look at some of the resources available from the CFTC.

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