The Oil Markets Are Rigged - Here's How
We have remarked numerous times, thanks in many cases to the detailed analysis of Nanex LLC, that oil markets (among others) are manipulated or rigged. But, just as Michael Lewis was what equity market participants needed to comprehend what was occurring stocks, so WSJ reports today on'spoofing' in the oil markets. Spoofing is rapid-fire feinting, which as Tabb group's Matt Simon notes, "raises a question now about whether someone is engaging in legitimate market activity or clear market manipulation." Here's how they do it...
Ironically, the last time we commented on this was the day after The SEC charged another trader (and his machines) with spoofing.
The 2010 Dodd-Frank financial-overhaul law outlawed spoofing, but the tactic is still being used to manipulate markets, traders say. “Spoofing is extremely toxic for the markets,” says Benjamin Blander, a managing member of Radix Trading LLC in Chicago. “Anything that distorts the accuracy of prices is stealing money away from the correct allocation of resources.”CME, the world’s largest futures exchange, put out rule clarifications in August 2014 intended to end spoofing.
Here's how it works...
Spoofing is rapid-fire feinting. A spoofer might dupe other traders into thinking oil prices are falling, say, by offering to sell futures contracts at $45.03 a barrel when the market price is $45.05. After other sellers join in with offers at that lower price, the spoofer quickly pivots, canceling his sell order and instead buying at the $45.03 price he set with the fake bid.The spoofer, who has now bought at two cents under the true market price, can later sell at a higher price—perhaps by spoofing again, pretending to place a buy order at $45.04 but selling instead after tricking rivals to follow. Repeated many times, spoofing can produce big profits.
Rigged by any other name...
“There are stories going way back about the guys in the Chicago trading pits trying ways to disguise their trading or show their cards in a certain light,” says Matt Simon, an analyst at the market-research firm Tabb Group. “It raises a question now about whether someone is engaging in legitimate market activity or clear market manipulation.”
The full extent of spoofing isn’t known, but traders say it is evident in how prices move every day in a range of stock, bond and futures markets.
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