INDEPENDENT VIEWPOINT

Of algorithmic trading and gold and silver price manipulation

How algorithmic trading is being used to manipulate the silver and gold markets by inducing shakeouts in weak long positions.

Author: Dr Jeffrey Lewis
Posted: Sunday , 16 Dec 2012

Orinda, CA (silver-coin-investor.com) - 

Those who follow the day to day developments in the gold and silver markets have typically seen rampant market manipulation by large traders and bullion banks.

Although supposedly against the rules — and even being subjected to an ongoing investigation by the CFTC that now reaches into its fifth year — this market bullying is nevertheless allowed to happen over and over again without effective regulatory intervention.

Some of these big players even employ algorithmic trading systems to move into and out of the market faster than any human can. The transactions initiated by these computerized trading programs happen rapidly and often in huge size.

ALGORITHMIC TRADING CONTRIBUTES TO MANIPULATION

Despite these challenges, both precious metals have been able to rise over the last decade, so the real question is how high the prices of silver and gold would be if the market had not been subjected to recent downside price volatility?

The bullion banks typically need only a minute — as their algorithms quickly trade tens of thousands of Comex futures contracts —in order to induce a dramatic shakeout of weak long positions.

According to Nanex, that is an average of 200 or more contracts traded per second. Furthermore, these sharp moves almost always occur just prior to the trading pit’s open, which is a time frame when the algos tend to dominate the market.

As a very well-informed discussion forum writer contributing under the name James Mc of GATA Chairman Bill Murphy’s Lemetropolecafe recently noted on November 28th:

“Unlike last Friday, when it took over 165,000 contracts trading to net a gain of $23.20, gold fell $25.60 between 8:20 and 8:21 AM this morning. Furthermore in just 5 minutes (8:20-8:25AM) a whopping 21,205 contracts traded. No long would ever dream of unloading a position in this manner”

Basically, only a very deep-pocket entity, cartel, or bullion bank aided by an intimate knowledge of where the sell-stops are located could make this happen with the help of algorithmic trading.

This price action effectively negated yet another widely observed technical breakout, which is the result that the manipulators typically accomplish in the market’s managed retreat toward ever higher and higher precious metal prices.

PREDICTABLE TRADING PATTERNS OBSERVED

For years, it was GATA speaking out as the lone voice against this practice, but now ZeroHedge has somewhat begrudgingly brought the issue to its fight club by pointing out the increasingly obvious pre-opening trading pattern typically employed by a large “not-for-profit”.

A review of the predictive trading patterns shows these tendencies:

On most trading days, gold and silver prices are bombed just before the Comex market opens.

Fresh speculative longs get washed out, creating sentiment “at the margin” — which is poor.

The price of both metals gets crushed at and around options expiration.

If one metal trades higher or looks stronger, it matters little, and they are not allowed to follow each other higher. For example, over the past few weeks, silver has traded relatively strongly, but gold was leaned on despite this strength.

Over and over, the HUI or the miners index, works as a tip off indicator. When the mining index is weak, the likelihood of a manipulative raid the following day rises substantially.

This all reflects the real interests working behind the scenes to move gold and silver prices in ways that suit their manipulative purposes. Not the Fiscal Cliff, the FOMC meetings, the Debt Ceiling, nor any other well publicized geopolitical crisis. Precious metals pricing happens in the pits, apparently oblivious to world events or actual physical demand.

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