Metal Manipulation and Negative Rates

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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Metal manipulation.

You can distinguish two types of benchmarks, which are subject to two types of manipulation. There are benchmarks that are defined as observed prices at some instant or period of time in active markets -- currency fixes, for instance -- which you can manipulate only through actual risky trading behavior that moves prices. And then there are benchmarks where you just make up numbers -- Libor, preeminently -- which you can manipulate by just making up the wrong number. I'm no expert on precious-metals pricing, but the system where a small number of banks hop on the phone to hash out a benchmark price, while simultaneously trading in electronic markets with people who aren't on the call, sounds uncomfortably close to the second category. It's changing, of course:

The daily silver fixing, a price-setting ritual dating back a century, was overhauled last year with the help of the London Bullion Market Association after Deutsche Bank stopped taking part in the procedure. A similar telephone-based process for platinum and palladium was also replaced by an electronic, auction-based system as regulatory scrutiny increased over how market benchmarks are set, and the same will happen to gold fixings next month.

But not in time to head off a Justice Department investigation into "at least 10 major banks" for manipulating those fixings on those calls. What is the right model for the benchmark-fixing-investigation economy? It is a multi-billion-dollar business, at this point. Is it sustainable? Is it just a bubble? Will the regulators get through Libor (done, right?), foreign exchange (like halfway done?), precious metals (early stages), industrial metals (maybe?), and then weep because they have no more worlds to conquer? Or will there always be shady but common practices that can be recast as crimes? I feel like there's a lot of money riding on those questions.

Negative rates.

Yesterday I said that I was a little puzzled that we hadn't heard about anyone issuing negative-yielding Swiss-franc commercial paper, but that was the royal "we," and my Bloomberg View colleague Mark Gilbert pointed out that there has been commercial paper issued -- in euros, no less! -- at negative yields. So, the answer to the question "can companies get paid to borrow money?" is unequivocally yes.

Of course if you expand your definition of "companies" to include banks, and your definition of "borrow money" to include taking deposits (and why not?), then that statement is almost trivially true. The latest news on that front is that JPMorgan "is preparing to charge large institutional customers for some deposits," though that is not a function just of interest rates but also of rules that discourage run-prone institutional deposits as a source of bank funding. "The moves have thrown into question a cornerstone of banking, in which deposits have been seen as one of the industry’s most attractive forms of funding," and the goal is not for JPMorgan to get paid for taking deposits but to just get rid of the deposits altogether. They could go to a different bank, for instance, or to "a similar J.P. Morgan product such as a money-fund sweep account." It seems like only a few months ago that regulators were worried about run-prone institutional money market funds; now their worries about run-prone institutional bank deposits are pushing those deposits into (newly safe!) money market funds. The interplay between banking and shadow-banking regulation is a beautiful thing to watch.

Insider trading.

Here is Peter Henning on calls for a statutory prohibition on insider trading, and it is pretty depressing. On the one hand, it is sort of rotten that people get decade-long prison sentences for committing a crime -- insider trading -- that is entirely invented by judges and not actually prohibited by any written statute. On the other hand, if there is a statute, it will be terrible stuff:

If Congress were to try its hand at defining insider trading, I expect that the push would be for a broader proscription of the types of trading that would violate the law. There has not been a public outcry to allow more trading on confidential information, and recent concern about the impact of high-frequency traders that rely on tiny informational advantages is unlikely to generate support for allowing increased use of market-moving information to generate profits.

Right? The obvious rule is: "It is illegal to trade on any information that the rest of the market doesn't know." You and I know that that's a terrible rule, but there's no guarantee that Congress does. It sort of sounds good. And limiting it sensibly is not as easy as you might think. The current U.S. approach -- misappropriation, personal benefit, etc. -- is clunky and inconsistent, but it more or less works, and I'm not sure that a more consistent statutory rule would.


I guess the least enthusiastic possible congratulations are in order: Greece submitted its list of reform proposals at "close to midnight" yesterday, and the list was deemed minimally acceptable to earn Greece four more months of financing and haranguing. A European Commission official said: "In the commission’s view, this list is sufficiently comprehensive to be a valid starting point for a successful conclusion of the review," while perennial pessimist Jeroen Dijsselbloem called it "just a first step," though that is high praise from him. Here is what seems to be the list, from Peter Spiegel; there are some highlights here, but it ends with a very sad, very brief section headed "Humanitarian Crisis," which in turn ends on the bullet point: "Ensure that its fight against the humanitarian crisis has no negative fiscal effect." That is not how you'd want to go about addressing a humanitarian crisis, if you had a choice. Here is a song from Arcade Fire's Will Butler, allegedly about Greece. Here is a rap battle in Dutch.

High-frequency trading is good.

Here's a Bloomberg News write-up of a new paper from the Bank of England, finding that high-frequency trading makes markets more informed and efficient. This strikes me as simply obvious, and I think that reasonable objections to high-frequency trading have to have forms like "it's efficiency-increasing but unfair" or "it's efficiency-increasing but at too high a social cost" or "it's efficiency-increasing most of the time but bad in a crash" or "it's efficiency-increasing at a micro level but that inefficiently reduces returns to fundamental research." But some people worry about the simple efficiency point, so there you are:

Automated trading had a more lasting impact on prices than the activities of investment banks, which the researchers used as a proxy for the rest of the market, suggesting the computerized firms based their transactions on information about companies.

“If the trade had no information content, its price impact would be temporary,” the bank said in the working paper. “The induced price change would not be justified by any changes in fundamentals and market participants would force the price back to its original value.”

It's funny to think of what the information content could be; it's not like most high-frequency trading firms are actually performing rapid fundamental stock research. The information content of their trades is entirely about supply and demand -- about the order book, basically -- but those trades effectively transmit the information about companies implied by that supply and demand information. Elsewhere, here is a story about active stock managers complaining about the Fed.

Takeover litigation.

From the abstract to an article by Matthew Cain and Steven Davidoff Solomon:

Takeover litigation continued at a "steady state" and at an extremely high rate. Lawsuits were brought in 94.9% of takeovers in 2014 versus 39% in 2005. This is the fourth year in a row that the rate of litigation was over 90%. Multi-jurisdictional litigation continued a two-year decline, perhaps in part due to the rise of forum selection by-laws. 33.8% of deals experienced suits in multiple states compared to 41.8% in 2013 and 52.7% in 2012. Each transaction attracted an average number of 4.3 lawsuits. Median attorneys’ fees for settlements rose to $550 thousand from $450 thousand in 2013. 

So I mean that's obviously socially beneficial.


Here's a story about UBS whistleblower Bradley Birkenfeld, who is agitating to go to France to help authorities make their tax-evasion case against UBS. This is complicated because Birkenfeld is still on supervised release from prison, where he served more than two years for fraud. The fraud was actually "withholding crucial information from federal investigators, including details of his top client," while he was whistleblowing. But he also got paid $104 million, for that same whistleblowing. I found the theory here a bit baffling -- surely you could deter wrongdoing and encourage cooperation by just reducing both the prison sentence and the monetary reward? -- but I guess I'm wrong. The way to deter wrongdoing is (arguably) harsh prison sentences. The way to encourage whistleblowing is (arguably) giant public monetary rewards. Quietly cancelling them out serves neither goal, so, sure, do both, at the same time, for the same guy. It still feels weird.

Things happen.

It's awkward if you're the head of the Securities and Exchange Commission and your husband is a partner at Cravath. Stifel Financial is buying Sterne Agee. One day I want to be rich enough to be as self-deprecating as Warren Buffett isBig jumbo mortgages are popular. A U.K. Financial Conduct Authority cherry-picking case against Aviva Investors. "High aggregate short interest predicts lower future equity returns at monthly, quarterly, semi-annual, and annual horizons. In addition, aggregate short interest outperforms a host of popular predictors from the extant literature both in sample and out of sample." Christie and the New Jersey Booze Train. Wall Street will get around to reading The Goldfinch this spring. It's cold. "Know also that I have the highest respect for some of your work."

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Matt Levine at

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