1 year, 3 months ago #29371
1 year, 3 months ago #29372
I hadn’t heard of this particular story before your post but I get what these guys were doing.
Upon reading the story, I actually know one of the guys who was ultimately responsible (he is unnamed in the article but was “reassigned” as a result of this).
I don’t have experience in the commodities markets, but I definitely get the gist of what they were doing. At the crux, they were basically fabricating fictitious supply and/or demand in an effort to manipulate market pricing.
Assuming (based on your past) that you’re familiar with bid/ask. Let’s say that a commodity is 100.10(1)/100.12(1). The entire market can see that the highest price someone is willing to pay for that “something is 100.10 for at LEAST 1 unit of it and that the lowest price someone is willing to sell at LEAST 1 unit of it is 100.12.
Some market participants have access to see live orders and quantities that are at inferior prices. Those orders can provide information on market “depth” which can influence trading decisions. So (to be as simplistic/brief as possible), there might be a bid-side order that is 100.09 (1500). That might tell market participants that the price is unlikely to fall by very much after a sale because there is a “large buyer” waiting in the wings. It might even lead some to believe that if they buy 1 unit @100.12, the 1500 unit buyer might get nervous and raise his bid price, so as not to let the market “get away from them”. These orders are supposed to be real and represent supply/demand from REAL buyers/sellers.
This JP Morgan dude was entering in fictitious orders off the market (meaning no chance of their being executed immediately) in order to trade against those reacting to the existence of those orders. Once the market moved toward the fictitious order OR he’d generated his desired profits under false pretenses. those fake orders would “disappear” indicating to others in the market that the (false) market participant had lost interest or had satisfied their demand via another commodity/contract.
They must have been either egregious/sloppy or had a disgruntled former co-worker whistle-blow on them because this stuff can be pretty hard to detect.
Again, I don’t have intimate, direct knowledge of the inner-workings of commodities markets, but I’d be surprised if this kind of thing wasn’t pretty wide spread.
This happens in the bond markets quite often in ways that are different in a nuanced way that makes it completely legal. The bond market is an over-the-counter market rather than an exchange, therefore the distinction of whether brokers are acting as principal or agent is obscured by design—which removes the illusion of end-user supply/demand to a large extent.
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