Gold Manipulators Busted after Zero Hedge Report on Flagrant Gold Spoofing
by Tyler Durden on 05/01/2015

In the aftermath of the Nav Sarao scapegoating farce, one week ago Zero Hedge decided to give the confused CFTC a helping hand and launched a daily series highlighting the constant spoofing and “manipulation” (in the CFTC and DOJ’s own words) that takes place in every asset class, but mostly in the E-mini futures (“Dear CFTC: This Is The Market Manipulating “Spoofing” Taking Place In The E-Mini Just Today“). Virtually every day since then we presented the “regulators” at the commodity trading commission a clear example of stock market manipulation, with the exception of Tuesday, when with the exclusive help of Nanex, we showed a clear case of gold spoofing.

This is what we said on April 28: “Here (courtesy of Nanex) are several examples in the June 2015 Comex Gold Futures this morning. All times are Eastern Daylight. In each of these cases, no trades (or a tiny few) executed against the large “spoof” order. You can see how prices were influenced by the sudden appearance (and disappearance) of these large, outsized orders.

1. June 2015 Comex Gold
Note how large buy and sell orders push prices up and down.

2. Another set of instances appear about 50 minutes after the first set (shown in chart 1).

3. Another set of spoofing instances appear about an hour after the second set (shown in chart 2).

You’re welcome CFTC — it’s the least we can do. Best wishes, Zero Hedge

[Reminder: We won’t stop this until you are forced to address the glaring hypocrisy and utter incompetence of everyone involved in the regulation of market microstructure.]

Much to our dismay, overnight we learned that while the CFTC continues to be very, very confused and challenged by all those lobby payments by the world’s “liquidity providing” HFTs and ignores all documented evidence of manipulation, the Chicago Mercantile Exchange – owner of the futures exchange wheer the bulk of modern manipulation takes place – did read this evidence of manipulation, and decided to immediately take action, suspending two traders for placing the manipulative “spoofing and layering” trades profiled here three days ago which were virtually identical to the ones that got Navinder Singh Sarao into headlines around the world last week. Except, of course, the asset class manipulated was gold. And, perhaps what’s far worse, the manipulation sent the price of gold briefly higher. The names of the perpetrators: perhaps not surprisingly, Heet Khara and Nasim Salim. Extend to Navinder Sarao and a pattern emerges…


This is the full CME release:

A. The Chief Regulatory Officer or his delegate, upon a good faith determination that there are substantial reasons to believe that such immediate action is necessary to protect the best interests of the Exchange, may order that: 1) any party be denied access to any or all CME Group markets; 2) any party be denied access to the Globex platform; 3) any party be denied access to any other electronic trading or clearing platform owned or controlled by CME Group; or (4) any Member be immediately removed from any trading floor owned or controlled by CME Group.

This is the house where Navinder Sarao traded his account.

On April 30, 2015, CME Group’s Market Regulation Department (“Market Regulation Department”), through its Chief Regulatory Officer, summarily denied Nasim Salim (“Salim”) direct and indirect access to all CME Group markets, the CME Globex electronic trading platform, any other electronic trading or clearing platform owned or controlled by CME Group, and all trading floors owned or controlled by CME Group. The summary access denial prohibits trading, placing orders, and controlling or directing the trading for any person or entity in any CME Group exchange product. The summary access denial further prohibits the affiliation or business dealing with any member or member firm of CME, CBOT, NYMEX, or COMEX. CME Group’s Chief Regulatory Officer’s summary access denial of Salim was based upon the findings of an investigation conducted by the Market Regulation Department, which revealed that on multiple trade dates during the time period of March 1, 2015 through April 28, 2015, Salim engaged in a pattern of activity in which he repeatedly entered orders or layered multiple orders for Gold and Silver futures contracts without the intent to trade.

Specifically, Salim entered these orders or layered multiple orders to encourage market participants to trade opposite his smaller orders resting on the opposite side of the book. After receiving a fill on his smaller orders, Salim would then cancel the resting order or layered multiple orders that he had entered on the opposite side of the order book. Salim introduced Heet Khara (“Khara”), who is also the subject of a summary access denial action, to his first FCM and Salim had an account at the second FCM at which Khara traded in a disruptive manner. Further, it appears that on multiple occasions Salim and Khara coordinated efforts to engage in disruptive activity. In an example from April 28, 2015, Salim entered small-lot orders on one side of the market in Gold futures, after which Khara entered large orders on the opposite side. When Salim’s small orders were filled, Khara canceled the large orders. Salim has not responded to correspondence from the Exchange. The foregoing conduct, as well as Salim’s failure to cooperate with the Exchange, present a good faith determination that there are substantial reasons to believe that such immediate action is necessary to protect the best interests of the Exchanges and the marketplace.

Pursuant to Rule 413, this access denial will remain in effect for 60 days, commencing on the effective date below and continuing through and including June 29, 2015, unless the Chief Regulatory Officer or his delegate provides written notice that this access denial will be extended for an additional period of time.”

“Daily declines in gold’s paper price over 2% in less than 20 minutes spiked to 12 days (chart courtesy of Dmitri Speck of GATA). So now we know why bankers use HFT algos to create fake quotes in gold and silver derivative markets to artificially move prices, but why would bankers have to create 75,000 fake quotes per second? When bankers use HFT programs to create massive volumes of artificial traffic, not only do they effectively slow down the rate of processing information down for all others, but it also raises the cost to process information as well as masks the fraud committed by the HFT programs as no information can be obtained while they provide tens of thousands of fake quotes per second. Thus, the use of HFT algos to quote stuff makes it much more difficult for competing algos, and certainly human beings, to understand that their buy and sell orders are being skimmed for illicit profits by bankers. In other words bankers can use HFT algos to create waterfall declines in gold and silver prices in a step-down manner when they are buying and likewise, when selling, can use them to get traders to chase prices higher in a step-up manner, all without a single trade even executing before prices have been moved well lower or higher.

We expect the CFTC and the DOJ to unleash the wrath of god now that the CME showed them how gold manipulation works, something they figured out by looking a this article. And while we are delighted that yet one more alleged case of gold manipulation is now confirmed, we are curious if the CME, CFTC and DOJ will also prosecute instances of gold manipulation when the ultimate outcome is the price of gold going lower instead of higher, such as the one documented in “Vicious Gold Slamdown Breaks Gold Market For 20 Seconds“, “Stop Logic” Gold Slam Was So Furious It Shut Down CME Trading Again” and on countless other occasions most of which have been duly documented on this website. Finally, we wonder: will the CME, CFTC, DOJ, and FBI pursue as promptly all those instances of constant S&P 500 manipulation and spoofing we profiled over the past week in particular, and over the past 6 years in general? Or was this merely another “Sarao” case when several (non-Caucasian) traders are scapegoated by the regulators, with the naive expectation that investors will suddenly assume the market – in this case that of gold – is no longer rigged?

Flash Crash Arrest Lays Bare Regulatory Lapses at All Levels
by  &   /  April 22, 2015

CME Group Inc. concluded within four days of the 2010 flash crash that algorithmic trading on futures exchanges didn’t exacerbate losses in the market. When Washington regulators did a five-month autopsy in 2010 of the plunge that briefly erased almost $1 trillion from U.S. stock prices, they didn’t even consider whether it was caused by individuals manipulating the market with fake orders. Their analysis was upended Tuesday with the arrest of Navinder Singh Sarao — a U.K.-based trader accused by U.S. authorities of abusive algorithmic trading dating back to 2009.

Even that action was spurred not by regulators’ own analysis but by that of a whistle-blower who studied the crash, according to Shayne Stevenson, a Seattle lawyer representing the person who reported the conduct. The episode shows fundamental cracks in the way some of the world’s most important markets are regulated, from the exchanges that get to police themselves to government agencies that complain they don’t have adequate resources to do their jobs. Regulators were aware of Sarao’s trading behavior as early as 2009, when officials at CME — which runs the exchange where Sarao allegedly placed his problematic trades — spotted him placing and then canceling large numbers of orders, and warned him against placing deceitful trades, according to an FBI affidavit. Sarao continued to manipulate markets through March 2014, the FBI said. “How this continued for six years when the CME appeared to know about, it kind of boggles my mind,” Dave Lauer, president of Kor Group, a lobbying and research firm, said by phone. “This is about as simple and easy as you can get, and it took them this long to do anything about it.”

CME Rebuffed
Market regulation relies on a chain of oversight, starting with brokerages and clearing firms that are obliged to keep customers from misusing their access to markets. Even though Sarao wasn’t registered as a broker in the U.S., the four firms he used to place his trades, including the now-defunct MF Global Holdings Ltd., had a duty to tell regulators about any suspicious actions he would have taken. According to the FBI, exchanges in the U.S., including CME, and Europe noticed that Sarao was possibly manipulating markets and told his broker about it. In response, Sarao told his broker that he called the CME and told them to “kiss my ass,” according to the affidavit. The 2010 flash crash laid bare the lack of regulatory grasp on markets that have become increasingly driven by high-speed computerized trading and fragmented over dozens of exchanges. Even after five years, concerns persist. On Oct. 15 of last year, U.S. Treasuries went for a wild ride, enduring the biggest yield swings in a quarter century. The turbulence left investors wondering whether electronic trading was now impacting what’s considered one of the most stable markets. Regulators’ response to the 2010 flash crash — a five-month dissection by the Commodity Futures Trading Commission and the Securities and Exchange Commission — was meant to demonstrate a strong understanding of what went wrong. Allegations that a lone day trader helped spark the tumble, if borne out, suggest regulators missed the mark.

Incomplete Data
It turns out regulators may have missed Sarao’s activity because they weren’t looking at complete data, according to former CFTC Chief Economist Andrei Kirilenko, who co-authored the report. He said in an interview that the CFTC and SEC based their study of the sorts of futures Sarao traded primarily on completed transactions, which wouldn’t spotlight the thousands of allegedly deceitful orders that Sarao submitted and immediately canceled. Spoofing wasn’t even part of the CFTC’s analysis of the crash, said James Moser, a finance professor at American University who was the agency’s acting chief economist in May 2010. The flash-crash review marked the first time that the agency worked through the CME’s massive order book. CFTC officials often needed to call the exchange for help interpreting the data, he said in an interview. “We didn’t look for any sort of spoofing activity,” said Moser, who added that he doubts that Sarao’s activity was the main cause of the crash.

“At that point in 2010, that wasn’t high on the radar, at least in our minds.” On the day of the flash crash, Sarao used “layering” and “spoofing” algorithms to enter orders for thousands of futures on the Standard & Poor’s 500 Index. The orders amounted to about $200 million worth of bets that the market would fall, a trade that represented between 20 percent and 29 percent of all sell orders at the time. The orders were then replaced or modified 19,000 times before being canceled in the afternoon. None were filled, according to the affidavit. The imbalance on the exchange due to Sarao’s orders “contributed to market conditions” that saw the derivatives contract plunge and later also the stock market, the CFTC said this week. CFTC Chairman Timothy G. Massad said Wednesday that the lag between the 2010 analysis and this week’s arrest owes to the complexity of markets. “There were many factors that came together to cause the flash crash,” Massad said in a briefing to reporters in Chicago. “Sometimes it takes a long time to put together these cases.”

“Chronically Underfunded”
The CFTC, whose leaders say it is chronically underfunded by Congress, still doesn’t monitor all trading activity in the futures markets that it oversees. The Justice Department relied on an outside consulting group, not the CFTC, to audit Sarao’s years of trading. The agency needs “more discrete, nuanced information about these particular trades that could inform us on our regulatory obligations,” Vince McGonagle, the CFTC’s director of market oversight, told the Senate Agriculture Committee in May 2014. That data would come from exchanges like CME, which are responsible for policing everyone who trades on their markets. Over several years, Sarao appears to have rebuffed CME’s warnings. Order data in the futures market primarily resides at the exchanges where futures are traded. Terrence Duffy, executive chairman of CME, told the Senate Agriculture Committee last year that requiring all trading firms to register with the CFTC — which would require them to report more of their trading activity — wasn’t necessary. “We maintain a complete and comprehensive audit trail of every message, every order and every trade,” Duffy said.

Kirilenko said there was no shame in relying on criminal authorities to dig out all of the factors that contributed to the flash crash. “If it takes the powers and resources of the DOJ and the FBI to help us find out more about what happened on that day and help make the markets more resilient, then maybe that’s what’s needed,” he said. SEC Commissioner Michael Piwowar, speaking Wednesday at an event in Montreal, said there needs to be a full investigation into whether the SEC or CFTC botched the flash crash analysis. “I fully expect Congress to be involved in this,” he said. Senator Richard Shelby, the Alabama Republican who heads the banking committee, said in a statement Wednesday that he intends to look into questions raised by Sarao’s arrest. Mark Wetjen, a CFTC commissioner speaking at the same event, echoed Piwowar’s concerns about regulators’ understanding of the events. “Everyone needs to have a deeper, better understanding of interconnections of derivatives markets on one hand and whatever related market is at issue,” Wetjen said. “It doesn’t seem like that was really addressed or looked at in that report.”

Sarao, who was arrested in the U.K. on Tuesday and faces an extradition request, was also accused of cheating throughout the period of June 2009 to April 2014. Four days after the plunge on May 6, 2010, CME said algorithmic trading — the sort of automated technique Sarao purportedly used — didn’t exacerbate losses in the market. “There is no visible support of the notion that algorithmic trading models deployed in the context of stock index futures traded on CME Group exchanges caused the market fluctuations in question,” the exchange said in the report on May 10, 2010. “Further, we find no evidence in CME stock index futures of any undue concentration of activity amongst algorithmic or any other types of traders.” The CME “did a thorough analysis of all activity in our markets during the flash crash, and concluded – along with regulators – that the flash crash was not caused by the futures market,” Anita Liskey, a CME spokeswoman, said in an e-mailed statement.

“If new information has come to light, we look forward to reviewing it with the commission.” The CME even suggested at the time that the real problem that day stemmed from the regular stock market — the pool of trading distributed across the New York Stock Exchange, Nasdaq Stock Market and dozens of other venues — rather than the derivatives transactions CME hosts. The U.S. government said Sarao traded CME’s futures contracts tied to the S&P 500, the key benchmark for U.S. share prices. “While inconclusive at this point, we believe that the stock market incident of May 6th might be traced to divergent trade practices and price protection mechanisms amongst the various stock trading venues on which domestic equities are traded,” CME said in the report five years ago. In November, the CFTC told CME it needed to improve how it polices trading on its exchanges. The CME generally met surveillance obligations, but took too long to finish probes and imposed penalties that were too soft, the CFTC said. The agency also said that two CME markets, Nymex and Comex, needed to keep developing ways of detecting spoofing.

CME had interacted with Sarao, even on the day of the flash crash, according to the U.S. government’s complaint. The exchange contacted him about his trades after concluding he appeared to be significantly swaying opening prices. Sarao explained some of his conduct to the CME in a March 2010 e-mail as “just showing a friend of mine what occurs on the bid side of the market almost 24 hours a day, by the high-frequency geeks.” He then questioned whether CME’s actions regarding his activity meant “the mass manipulation of high frequency nerds is going to end,” according to the U.S. Department of Justice’s complaint released Tuesday. Former Senator Ted Kaufman, who sits on an SEC advisory group that will recommend policy changes to the regulator, said market police need better information. “Here we are years later finding they spoofed in a major way for a long period of time,” he said. “We just have to get the data we need to have the regulator independently determine what is going on in our markets.”

Sarao1CFTC court filing via Bloomberg

SArao2CFTC court filing via Bloomberg

Sarao3CFTC court filing via Bloomberg

“Last week Jeffery Christian of the CPM group was begging for an example of manipulation in the silver markets. While we already obliged Mr. Christian with enough evidence to make GATA proud, this week’s Globex close price action in silver is either the most blatantly obvious case of cartel manipulation and control that can be witnessed in a market, or else there is literally not a single speculator or hedger remaining in the silver futures market. There can be no other valid conclusions.  If silver had merely closed consecutive days at the exact same price we could chalk it up to coincidence.   Three consecutive days with massive raids or smashes occurring precisely upon the COMEX open, followed by 3 consecutive IDENTICAL GLOBEX closes of $27.83 cannot possibly be a coincidence.

by   /  April 25, 2015
Can algorithms form price-fixing cartels?

On the day after Easter this year, an online poster retailer named David Topkins became the first e-commerce executive to be prosecuted under antitrust law. In a complaint that was scant on details, the U.S. Department of Justice’s San Francisco division charged Topkins with one count of price-fixing, in violation of the Sherman Act. The department alleged that Topkins, the founder of Poster Revolution, which was purchased in 2012 by Art.com, had conspired with other sellers between September of 2013 and January of last year to fix the prices of certain posters sold on Amazon Marketplace. Topkins pleaded guilty and agreed to pay a twenty-thousand-dollar fine. “We will not tolerate anticompetitive conduct, whether it occurs in a smoke-filled room or over the Internet using complex pricing algorithms,” Assistant Attorney General Bill Baer, of the department’s antitrust division, said. “American consumers have the right to a free and fair marketplace online, as well as in brick and mortar businesses.”

“…the bankers using these algos and the firms employing these algos are the ones that are stealing from people and profiting from the losses they artificially inflict upon their clients. Bankers always try position all blame for all uncovered fraud and immoral activities solely on “out-of-control” technology as if the technology is somehow beyond their control. The meme that all the mass media has used last week when discussing HFT algos is that it is really not that bad because if it were, it would not be “legal”.

Casual observers might wonder why, for its first Sherman Act antitrust case against an online-sales executive, the Department of Justice targeted a relatively small-time retailer in the wall-décor industry. After all, Silicon Valley is no doubt replete with e-commerce executives who have colluded to bend rules and harm consumers. And the department’s case rested on allegations of fairly standard price-fixing behavior: according to prosecutors, Topkins and his co-conspirators, who were unnamed in the complaint, collected, exchanged, monitored, and discussed how much to charge for posters that were sold, distributed, and paid for on Amazon’s auction site from California to other states. Coupled with the details of the complaint, however, Baer’s statement suggests that prosecutors might have been interested in a tool underlying Topkins’s apparent misdeeds: an algorithm he had coded to instruct his company’s software to set prices.

The first section of the Sherman Antitrust Act, which was passed in 1890, amid the heyday of American oil, steel, and railroad monopolies, suggests the breadth of the activities that prosecutors and regulators have traditionally been able to challenge. “Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal,” it states. Since the Sherman Act was bolstered, in 1914, with the passage of the Clayton Act, the country’s antitrust apparatus has allowed the federal government to go after all kinds of businesses, and has typically encompassed new industries as they have emerged. Algorithm-driven (or bot-driven) selling, however, poses a new and formidable challenge to existing antitrust laws. If the practice hasn’t yet become a full-blown conundrum for prosecutors and regulators, the Topkins case suggests that it soon might. In capturing a plea, the Department of Justice was apparently able to rely on evidence of a “meeting of the minds” among co-conspirators. Topkins’s algorithm wasn’t an impediment to prosecution, because the seller had otherwise demonstrated a will to collude with other parties and then coded the algorithm to carry out the agreement. But often there is no evidence of a prior agreement when computers are in play, which means that antitrust prosecutions involving algorithms could be harder to prove in the future.

It’s likely that bot-driven price-fixing is more prevalent than the lack of prosecutions suggests. Algorithms are in high demand, and robotic sellers can combine with other automated pricing and selling mechanisms to monitor human activity and mine data in retail, services, and other areas, with few or no people involved. They can also make pricing predictions and decisions, reacting seamlessly to changes in the marketplace. Uber’s infamous surge pricing, for example, uses an algorithm to push up prices or, as Uber would put it, to balance supply and demand when many cars are needed simultaneously. When such algorithms go deeply awry, we notice: recall when, in 2011, Amazon priced “The Making of a Fly,” a paperback biology textbook, at $1,730,045.91, and that, during a snowstorm in 2013, Uber charged Jessica Seinfeld, the wife of Jerry Seinfeld, four hundred and fifteen dollars to drop off her kids at a sleepover and a bar mitzvah.

In a working paper published by the University of Oxford Centre for Competition Law and Policy, the researchers Ariel Ezrachi and Maurice E. Stucke explain that Uber’s algorithm can lead to horizontal collusion if the algorithm gives rise to an “alternative universe” that pushes up prices based on the perceived market value of a ride, rather than its actual market value. A human need not be involved. When Uber was criticized for the rise in rates that led to Jessica Seinfeld’s expensive trip, the C.E.O. and co-founder Travis Kalanick argued that their algorithms, not the people working for the company, were responsible. “We are not setting the price. The market is setting the price. We have algorithms to determine what that market is,” he said.

Ezrachi and Stucke suggest other ways in which algorithms can behave as cartels. One of these would involve “predictable agents,” which are designed to deliver predictable outcomes in response to market conditions. According to Ezrachi and Stucke, these agents, when adopted by multiple actors, “more easily reach a tacit agreement, detect breaches and punish deviations.” The result is a “conscious parallelism” that leads to higher prices. The pair also identify the potential for price-fixing by “smart machines,” which are programmed to achieve an outcome that they pursue via self-learning and experimentation. Evidence of intent would be difficult to establish in both types of cases, especially ones involving smart machines.

Salil Mehra, a professor at Temple University’s Beasley School of Law, notes in a forthcoming article in the Minnesota Law Review that the potential prosecution-proofing that algorithms provide to companies may leave cartels not only more likely to form but also more durable. Economists typically assert that cartels dissolve naturally after members cheat or become irrational. When computers are the actors, though, detection is faster and not prone to human errors or failings, making defection less likely. Automated participants can identify price changes more quickly, allowing defectors who lower prices at the expense of the group to be sifted out earlier. Given this dynamic, participants have little incentive to either “cheat” the group or to leave it. Put another way, computers are likely to handle the classic prisoner’s dilemma better than humans.

For decades, a movement has been under way to establish a broader legal definition of the level of intent and agreement that a cartel entails. Mehra cites the example, in 1968, of Judge Richard Posner of the Seventh Circuit Court of Appeals, who pointed out the potential problem of companies making pricing decisions with an eye to maintaining “healthy” prices in the industry generally, even if firms aren’t explicitly colluding with competitors. “Tacit collusion is not an unconscious state,” Posner wrote. The late Harvard Law School professor Donald F. Turner, too, advocated for collusion to be defined along broader lines. Decades on, the law has yet to address the potential for bots to exploit the gaps in antitrust law. Ezrachi and Stucke suggest that, in such cases, officials might have to “delve into the heart of the algorithm and establish whether it is designed in a way that would or may lead to exploitation.”


It may also be possible for lawyers to point to the adverse effects of the algorithm, irrespective of how it was designed. There might be room, too, for regulators to jump into the fray. Cartel cases are politically popular: according to the University of Michigan Law School’sDaniel Crane, both the Bush and Obama Administrations brought a steady stream of price-fixing and other fraud complaints. And in fact, just last month, the Federal Trade Commission created the Office of Technology, Research and Investigation, which will explore the effect of algorithms on markets. Should that lead to even more scrutiny of algorithm-based price-fixing, the bots may find that they’re no match for human will.

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