Research Revives Manipulation Debate; Suggests Gold & Silver Collusion
Wednesday January 27, 2016 13:56
(Kitco News) - Researchers from three universities are re-opening the manipulation debate with their study, which suggests gold and silver prices are more likely to be meddled with on options expiry dates.
The research paper released last Sunday on the Social Science Research Network, suggests manipulation in the gold and silver markets, with the authors hedging that its findings are not conclusive.
“Do these findings clearly support the notion of price suppression? No. They are at best suggestive,” said authors, Jonathan Battena of Monash University in Australia; Brian Lucey of Trinity College in Dublin, and Maurice Peat of the University of Sydney Business School.
The study highlights contract expiration dates as a likely time for price manipulators to step in. The researchers said they noticed large spikes in returns around the last three days of each month, which is typically when futures and options contracts expire.
Gold Day of Month Absolute Returns
“This spike in large returns is suggestive of the existence of contract roll over manipulations of the type that have been observed for other assets,” they explained.
“Looking at the largest 1% of returns, there is evidence of a concentration of large returns on contract expiration dates, which is suggestive of manipulation on derivative expiry dates,” they added.
Tuesday was the last day February 2016 gold and silver options could be traded on the Chicago Mercantile Exchange.
The researchers looked at five-minute intervals from Thomson Reuters Tick History (TRTH) database from January 1, 2010 to April 30, 2015. TRTH provides time-stamped global tick data on more than 45 million over-the-counter and exchange-traded instruments worldwide. The study looked at two series – one for gold and one for silver -- containing 383,640 observations sampled at five-minute intervals, they said.
Silver Day of Month Absolute Returns
In order to look for hints of price manipulation, the researchers focused their attention on “anomalies” or “negative runs” in the data collected. In other words, they looked for times where abnormal downward price pressure occurred in gold and silver prices.
According to the research, the data showed that the proportion of negative runs in the abnormal cluster was greater than the proportion of negative runs in the control cluster. However, even if the data suggests price suppression is occurring, the researchers said it is not enough to be conclusive.
“What constitutes market manipulation is not in fact well understood. What we know from instances where market regulators launch legal action (such as the LIBOR scandal) is that manipulation can and does take place. However, given that we only observe those instances that are prosecuted by regulators we do not know the true extent of market manipulation and all of the mechanisms that could be used to manipulate market prices,” they said.
In 2014, well-known researcher and New York University professor, Rosa Abrantes-Metz released research suggesting collusive behavior in the London gold and silver fixes over the past decade. Metz was previously responsible for bringing the Libor Scandal to light in 2008.
In an email response to Kitco News, she declined to comment on this particular study, noting that she cannot comment on “anyone’s work in metals due to ongoing investigations.”