Whistle Blower

Source: wallstvsmainst.wordpress.com

The economic doctrine that market prices are determined by supply and demand doesn't fully explain how market prices are set. In practice there are other factors at work which could also have an influence on prices. For example, when suppliers collude to set prices at a certain level the laws of supply and demand are frankly irrelevant. 

This actually does happen in the markets and there are many instances when suppliers get together, behind closed doors to form cozy fixed price agreements. This is known as a supplier's cartel and there is an obvious commercial benefit for the supplier to form cartels; put simply by keeping prices artificially high they are able to extract monopoly profits.

In theory, cartels are illegal and frowned upon by market regulators because they distort the workings of the market, stifle competition and make buyers pay more should. 

But in reality, if the supplier is operating a cartel and is just too big to jail, or bust, then again we see double standards at play. The most famous mother of all cartels is the Oil Producing Export Countries (OPEC). Think about it; OPEC members meet on a regular basis to discuss output quotas. When the members believe that future global demand for oil is likely to fall, due to say the northern hemisphere moving into summer for example, or a slowdown in global economy the dons of the oil world typically decide to cut output, which has the effect of maintaining oil prices at their coveted level with the aim of retaining profits. Conversely, if the OPEC member countries take a bullish view, they could decide to increase quotas. So what we have going on in the oil market is member countries getting together, or colluding on output quotas, in order to fix oil prices.

Then apply the “duck test,” "If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.” Isn't that a cartel? 

Therefore, with it being common knowledge amongst traders that the oil market is manipulated by the world's largest and most famous cartel OPEC, could there be other markets that might also be rigged.

Take for example, the precious metals market. The famous whistle blower, Andrew Maguire comes to mind. Probably, the name sounds familiar to every precious metal trader. Indeed, Mr. Maguire, features high up the list of famous whistle-blowers. Mr Maguire, an independent London-based metal trader for thirty years standing, dared to say what most precious metal traders suspected; that precious metal market was rigged.

In an interview with CBC aired in April 2013 Andrew Maguire described how cryptic traders, allegedly working for the bullion banks JP Morgan and HSBC waited for the major exchanges from Shanghai to London to be closed then channeled their dealing on COMEX, which is the primary market for trading precious metals, such as gold, silver copper and platinum . He revealed in the interview that traders were trading virtual or electronic silver anonymously using “algorithmic trading systems,” which is a fancy name for saying automated trading on electronic platforms. Trading orders are entered with an algorithm and pre-programmed trading instructions, which might include the following variables; price, or quantity of the order. When certain variables are reached the trades are triggered by automated computer programs. So the trades aren't executed by human traders but via a programmed computer.

Algorithmic trading is widely used by investment banks, pension funds and mutual funds and other buy-side (investor-driven) institutional traders, to divide large trades into several smaller trades to manage market impact and risk. The advantage of using computers, rather than humans to trade is that the former can execute trades at the speed of light. So it’s not difficult to see that if you have a participant in the market with massively deep pockets with the ability to execute trades at lightning speed prices can then be determined as and when they decide to hit. In the words of the whistle-blower, they were, "moving in and out of the futures markets at the blink of an eye. Four hundred contracts a second, each contract represents 5,000 troy ounces of silver." Maguire described a sudden and massive wave of selling of up to 45,000 contracts which drove the price of silver down. "Investors big and small tried to cut their losses and sell as the price drops." People who had invested heavily lost everything. Then the mysterious seller just as suddenly started buying the electronic silver again. The price of silver soared as did profits for the seller. 45,000 contracts with a profit of $80,000 per contract totaled $3,600,000,000 (3.6 billion USD) for the mystery seller.

So at some point the dons decided to attack the market, they flooded it with massive silver selling at lighting speed, the market tumbled the bulls cut their losses and also sold. Then the dons reappeared snapping up silver at rock bottom prices and made a killing.

This is another classic example of market manipulation, it happened, it’s not fiction and it’s probably happening right now. Retail investors need to be mindful of this and always take extra care when margin trading, if you can't afford to lose it don't play it/the game.