Sideways: Metals trading fuels conspiracy theories

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By:
Jon Macaskill
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The oil markets generate plenty of accusations about skulduggery, ranging from allegations of bribery surrounding production to speculation about suspicious developments in the timing of physical delivery of supplies. But these have been overshadowed recently by conspiracy theories surrounding trading of both precious and base metals.

Jon Macaskill is one of the leading capital markets and derivatives journalists, with over 20 years’ experience covering financial markets from London and New York. Most recently he worked at one of the biggest global investment banks

Jon Macaskill is one of the leading capital markets and derivatives journalists, with over 20 years’ experience covering financial markets from London and New York. Most recently he worked at one of the biggest global investment banks

As banks seek to expand their revenue base across commodities markets, they are inevitably drawn into many of these debates, which range from legitimate attempts to gauge how new instruments such as metals ETFs will affect prices to wilder-eyed speculation about attempts to corner markets such as silver.

JPMorgan and its commodities head, Blythe Masters, feature in many of the conspiracy theories. Masters has an uncanny ability to act as a lightning rod for criticism of an individual asset class. She remained the focus of many critics of the credit derivatives markets long after she had shifted from credit to a CFO role within the investment bank and despite the fact that JPMorgan largely avoided both the trading losses and allegations of sharp CDO practices incurred by some rivals.

Now Masters has become a target of many critics of commodity market practices, even though JPMorgan only recently broke into the premier tier of bank dealers in the sector, to form a new top four alongside Goldman Sachs, Barclays and Morgan Stanley.

Given its rush to develop commodity market share it was probably inevitable that JPMorgan would be the subject of speculation about its exposure to price moves and the potential for its positions to create squeezes.

Some stumbles were inevitable: the bank did lose money with a position in the nascent coal-trading market last year, for example, and it missed its commodities revenue targets for 2010 by a wide margin. But other widely discussed trades either did not go on the bank’s books in the way they were presented by conspiracy theorists or were later subject to an extraordinary cover-up.

For much of 2010 there was speculation that JPMorgan had taken an inherited short silver position from its acquisition of Bear Stearns, then increased the trade dramatically, for example. In the first quarter of this year silver moved from a frothy market to an outright bubble, with prices per ounce coming close to $40. Yet JPMorgan’s investment bank did not record a single day of trading losses in the quarter. Any individual commodity position might not be of consequence in the context of what has developed into the biggest fixed-income trading franchise in the world, but it still seems unlikely that JPMorgan was short much of the global supply of silver at the start of the year.

There are other areas where the legitimate pursuit of market share could end up causing headaches for JPMorgan and for Masters, however. One is in the creation of new products such as commodity ETFs. JPMorgan and BlackRock were both expected to create copper ETFs this year but neither emerged with a product, for example. Anticipation of potential demand from these new funds affected prices and JPMorgan, as a leading dealer, will have been forced to make decisions internally about how to manage position-taking by traders who had knowledge of the likelihood of an eventual launch.

An extension of JPMorgan’s physical capacity into metals warehousing also poses a reputational threat. In late May the UK’s Office of Fair Trading said that it was investigating whether ownership of metals warehouses such as JPMorgan’s Henry Bath unit creates conflicts of interest. When JPMorgan bought Henry Bath last year it joined Goldman and independent traders Glencore and Trafigura in moving into UK warehouse ownership, but JPMorgan led media and online coverage of the regulatory investigation in May. Masters must be hoping that results in her group in 2011 outweigh any concerns investment bank head Jes Staley and group chief executive Jamie Dimon have about the increasing noise surrounding JPMorgan’s push into commodities.



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