Guest Analysis: JPM Silver Decision Flawed by Vince Lanci



Silver was Rigged in 2011

 - submitted by Soren K.



Written by Vincent Lanci, Echobay Partners, LLC.

Having read the decision and then the articles this morning from Kitco news and Market Slant, I asked to write something here. MarketSlant affords anyone with something to say a soap box from which to say it. So I am thankful to them for this space and hope this is as fun to read as it was to write.- VBL


From Reuters:

JPMorgan Chase & Co on Wednesday won the dismissal of three private antitrust lawsuits, including from hedge fund manager Daniel Shak, accusing the largest U.S. bank of rigging a market for silver futures contracts traded on COMEX.The lawsuits accused JPMorgan of having in late 2010 and early 2011 placed artificial bids onto the trading floor, harangued employees at metals market COMEX to obtain prices it wanted, and made misrepresentations to a committee that set settlement prices.

U.S. District Judge Paul Engelmayer in Manhattan, however, said the plaintiffs, who also included traders Mark Grumet and Thomas Wacker, did not show that JPMorgan made "uneconomic" bids, or intended to rig the market at counterparties' expense.

He also questioned the plaintiffs' use of Silver Indicative Forward Mid Rates ("SIFO") as a benchmark for determining proper levels for the spreads in their lawsuits.

Analysis: The demand was fabricated

The market was only partially backwardated. Spot was below the next 6 expirations. Translation: there was no massive demand for immediate delivery. There was only demand in months where the last remaining MEN who took risk trading their own money had positions. JPM's own book was likely short and had to get liquidity to cover their own positions. We knew Shak from our floor days, and were trading spreads off floor when this happenned. They should not have lost this case. Comex traders do not trade spot. Spot was under the backwardation. Smoking gun? No, but damning circumstantial evidence in the least.


Reuters Again:

Given the (lawsuits') failure both to explain why SIFO should track silver futures spreads, and to concretely plead that it did so consistently, a mere general correlation between these two is not sufficient to make SIFO a reliable benchmark such that deviations from it support a claim of irrational pricing animated by anticompetitive aims," Engelmayer wrote.

Analysis:  a poor job was done explaining the role of SIFO in spread pricing.

SIFO represents the spread between expirations of FORWARD physical contracts in silver. The futures spread markets are derivative of the SIFO spreads. SIFO represents the cost-of-carry for physical silver and is used in determining lease/borrow rates over periods of time. These are in-turn extrapolated and the dominant factor in determining futures spreads on COMEX. Comex spreads are a direct function of SIFO. Without SIFO there are no spreads. And since SIFO was a much bigger market than the Comex spread market. The pricing mechanism was not fully transaparent. It was in the hands of a few dominant cartel-like players, as it had been for 30 years.

If Shak and the other traders had ability to take delivery: warehouse, cash&carry liquidity, etc.. they wouldn't have had a problem. They would have taken delivery in spot and then made delivery on the short contracts in the next months they were short. But due to inability to play in the spot market, they could not "butterfly" their positions. Another reason they could not do this: FCMs only give 50% cash value for physical silver as hedge vs. futures shorts. Think about that next time you hear EU banks guaranteed 100% face on their Greek bonds. The physical is worth only 50% collaterol to the futures. Banks like JPM have no issue with that. They borrow from the Fed window at 1%. Guys like Shak would have had to use their credit cards and sell their homes to carry that position.


Various sources:

Silver was being taken delivery from the warehouse.

Analysis: Define "take Delivery"

During the time phibro cornered the silver market in 1995 (likely for Soros), and in 1997 for Warren Buffet they employed "taking Delivery" as a catalyst to get the market moving. How does one take delivery?

  1. You physically remove the silver from the warehouse-  because of the physical work involved a receiver can take ayt most 6MM oz of Silver daily. Why? Because it's just not that easy to move silver out of the vault and onto a receivers vehicles. So when you see "30MM oz removed" it's not physically possible.
  2. You take delivery, store it nearby and bring it back when you are out of your long futures position
    • Be long 30MM oz of silver in futures.
    • Take delivery of 20 MM in physical using bowrrowed money
    • Store the metal in a warehouse in RedHook Brooklyn and wait for the news to spook the market.
    • Tell your pals with long positions to make their own silver unavailable for delivery. as prices will go up soon
  3. You throw a sheet over the silver stil in the warehouse and say, "this is mine, it is no longer here. I'll pick it up tomorrow- - Phibro was to have employed all 3 methods in 1997 after filling Warren on his buys.- Andy Hall was a genius when he had order flow to front run
  4. Buy the last 1,000 contracts for the customer as sloppily as you can.
  5. Tell the customer you beat the VWAP, i.e. last price on the board is higher than the average price you bought for client.

There is a word for that. It is called Racketeering


Final Word:

How come in 1997 when Warren Buffet, who actually stood for delivery, the market did not rally until AFTER the spreads backwardated all the way to spot? Yet in 2011, the market had rallied already, and all of a sudden spreads (literally overnight duiring asian and london hours) went into backwardation? In a real market, the spread activity predicts the physical demand before the flat price does. You see the spot price start to act squirrelly to the front month future in the EFP. There are exceptions to this. But it is rare.

This trader also remembers that in 1997, Buffet was asked by the Govt to defer his request for delivery a year. He happily complied by selling spot and rolling out to a 1 year future. Payout? He netted an ROR of 40% due to negative carry without selling. Effectively he lent the producers their silver back to them ($7.40) at a premium of approximately 40% higher than his cost ($4.50). So Blythe did A mini Buffet, that's all.

Why wasn't that opportunity afforded SHAK and other locals? Does that have to be answered beyond this: In Mr. Buffet's case "the integrity of the market was at stake"( Hunt Brother's anyone?). The whole Silver mining industry was in jeorpardy. (TBTF). But  in Shak v.JPM only locals got burned. I'm sure each one of my arguments for manipulation can be taken apart by some lawyer or expert. But that is what they do. Facts against them? Argue the Law. Law against them? Argue the facts. Both against them? Use ad hominum attacks to shoot the messenger. So for the sake of transparency

Author's Background and Caveat:

For the record- I was suspended from NYMEX 12 years ago for manipulating a settlement without a client complaint. I learned that behavior from watching the pros do it and get away with it. I was arrogant enough to think I could. I was a street kid form Philly who had to drop out of college and learn to survive. Got lucky and had 15 Ivy league kids working for me. But I laid down with dogs too long and got a bad case of fleas. A big price was paid for that. And to save an incompetent compliance officer's job I was punished harshly.

Post suspension, most firms wouldn't touch me even as they burned themselves time and time again on derivatives risk in Energy and Metals. I witnessed the FC Stone downfall from them cooking their own books years after  they threw me under the bus as their client.  But you have to move forward. 

Market Structure and Greedy Pols

As time passed I grew to despise manipulators but did not blame them per se. The market structures are the major culprit. Which in turn means the politicians who are lobbied by the corporations to alter market structure to protect Corporate interests are the culprits. In the end it is all about greed.  Dodd-Frank was passed essentially blank. The "bankers will help fill it out. they are the experts" SMFH.

Then, I got my break. I was on other side of  arguably, the biggest Commodity trade of 2007. My firm saw an arbitrage, borrowed money and took on the banks. Not only was Echobay right, but our counterparty, BMO was (ironically) cooking their books.

Full Circle

In the end I was a material witness in BMO's 2007 Nat Gas EOO scandal where they tried to sue the counterparties to their rogue trader. BMO settled the case within days of my deposition involving  manipulated settlements.

So bring it if you think my observations are flawed. I'm all about learning. A million facts do not add up to a single truth, especially where corporate lawyers are involved.

This isn't the first time I've written on this and wont be the last. During my career, I've been victim, observer, perpetrator and now despiser of market manipulators and the market structure that rewards corporate greed at the expense of free markets. The little guy can no longer compete. Organizations that speak for him ( GATA etc) get shouted down because they dont have a PAC. Watch, homogeneous counterparties will be the death of the markets. TBTF means too big to exist IMHO

Judge Engelmeyer, you got it wrong. Daniel Shak, you deserved better than you got.


- Vincent Lanci


Mr. Lanci is owner of Echobay Partners, LLC, a Private Equity and consulting firm in the commodity space. He is a  derivatives trader with 25 years experience in Precious Metals, Energy, and Agricultural Commodities. He is quoted on these markets by Kitco, Reuters, Bloomberg, and has written on background for major blogs on  Market Manipulation. He currently has status as a MarketMaker in the CME WTI CSO product.


UPDATE HERE- someone asked a good qwuestion in Comments. We thought is good to answer here

Question by Paul (not verified)Hey Vince, a great read, thanks. One question, what is JPM aiming to do with all their physical? To protect from a price rise for someone or engineering one ... manipulating it up or down??

ANSWER:Paul, Good Question: the physical in their vault is not necessarily theirs. The lessons of history are that ownership is not as important as control. Lets say a large investor has a couple million oz of silver. He stores it in the JPM vault. Maybe he it just sits there. Maybe he leases it out. Maybe he uses it as collateral to buy stocks. But when JPM wants silver to go up, they just tell the client , :" You know Mr. Jones, we think Silver lease rates are too low and goingto go up. why dont you make your silver unavailable for lease this month?. Thats our recommendation.... get enough clients to listen and you make a short squeeze. A lot of producers will borrow silver for a month as they are behind schedule pulling it out of ground. So when lease rates go up high enough they are forced to BUY silver to make delivery, lease it at higher rates, or sell deferred futures and buy spot in spread form, keeping their position flat but being able to satisfy contract delivery. this method can be used for goosing the market higher or slamming it lower. Of course JPM has its own pohysical silver too. But that is largely hedged, until theyt see a reason to unhedge it or short the market. Having physical silver hedged gives them no price risk, earns a smakll rate of return ,ad nthe vault storage is a bank cost anyway.



From a Previous MarketSlant Article- Soren K.

We were personally active in the Silver market during this time of late 2010 through early 2011 and remember what happenned. During thin overnight hours, JPM was rumoured to be selling the contango in Silver spreads eventually forcing them into backwardation. This is unusual because when it happens in the normal course of events, it is because of a shortage of supply available for immediate delivery. There was no shortage. This was a backdoor short squeeze engineered by JPM to take out several well heeled and important players in the Silver spread market. False pretenses like, technological use, and the Gold/Silver Spread were used to justify what in our experienced opinion was manipulation under Blythe Masters watch. Blythe BTW is no longer at JPM.. Do the Math. Spread traders, Daniel, Shak and 2 others were carried out on stretchers as their positions were largely made up of spread positions with no real direction bias. They alleged:

  • JPMorgan made "uneconomic" bids, or intended to rig the market at counterparties' expense.- we think they were right
  • Shak and coplaintiffs used  Silver Indicative Forward Midrates (SIFO) to substantiate this claim- the "tell" for true short supply is SIFO

Judge Paul Engelmayer was not moved and dismissed the case, as he did not see the correlation between Forward Rates and Silver spreads. Go figure. All he had to do was look at how PhiBro rigged the Silver market for Buffet in 1997 to understand. JPM was copying what they did.  They definitely played dirty. More on this later.

Recommended reading:


-Soren K

Read more by Soren K.Group