SAY IT ISN’T SO! SPOOFING, THE OLYMPIC, OR TITANIC (OR WHICHEVER ...February 10, 2020
Every now and then a story comes along that seems dull, boring, and rather uninteresting, until you stop and think about it. In this particular instance of a story shared by S.D., the story makes a point I've been trying to make, and in making the point, it reminds me of a little "drama" that played itself out when the RMS Titanic, or RMS Olympic or whichever she was, departed Southampton on her fateful maiden voyage (or not) to New York City in April 1912. Here's the story:
The story, you'll have noted, concerns the conviction of Christian Trunz, a Morgan bullion trader, for "spoofing," and in the process, helping Morgan to accumulate more silver in its bullion vaults than the Hunts did in the 1980s, or Buffet in the 1990s:
So what is "spoofing"? Essentially, it's an attempt to send the wrong signals to a particular market in order to manipulate prices by manipulating buyers, and to make a profit from the activity. In commodities markets such as bullion, this can be done with the actual price of the physical object, to all derivatives of it, options, "paper bullion" and so on. How is this done? By placing orders, and then not executing them. Suppose, for example, that you want to drive up the value of the silver in your vault. You then place massive amounts of sell orders, increasing the potential amount of bullion on the market, driving prices down. As the orders begin to be placed, traders notice the drop in prices, and begin to sell their silver. When the price drops sufficiently, you then buy up the silver. The trick is that you place the orders, but never execute them.
The US Department of Justice accepted the admission that Trunz placed thousands of pretending orders for silver, gold, and other precious metals futures contracts which he did not intend to execute (2007-2016).
Coincidentally Trunz's timespan at JP Morgan also covered a span in time in which JP Morgan was alleged to have been naked short selling silver derivative contracts in late 2010 silver trading.
By using false price signals, derivative traders in precious metals can gain profits by creating market moves in price to both his and JP Morgan’s advantage.
The real danger here, is, as I've warned before, that such activity - and its effects - are multiplied once one throws computers and algorithmic trading into the mix. Supposed you program a computer to place thousands of trades in a particular commodity, to buy a commodity in x amounts when it hits y price; this done, other computers almost instantly notice the trades have been placed, and respond by placing buy or sell orders accordingly, and within seconds, a trend can emerge that is wildly removed from market reality. Meanwhile, with a pre-programmed hold, the order is suddenly canceled, while a new set of orders are made. Within minutes, a market trend can be created (and made to vanish) that relies on two effects: the fraudulent spoofing itself, and the magnification effect caused by algorithmic trading itself. The result is a market condition in a certain sector that is wildly different than the actual prevailing human market reality, because the price signaling mechanism is so distorted it has broken down. In a way, it's a variation on the old bait and switch routine, the bait in this case being the trades you don't intend to execute, and the switch being the cancellation of those original trades, and the execution of new ones.
If you think this whole type of activity is new to JP Morgan, think again, and that brings us back to the Titanic, or the Olympic, depending on which one you think sailed from Southampton. Most readers here are probably familiar with the "bait and switch" theory that the White Star Line switched the two sister ships in a deliberate plot to sink the badly damaged Olympic and collect the insurance on "Titanic". Of course, the Morgan part of this story is that JP Morgan himself owned controlling interest in the White Star Line. But that's not the bait and switch I'm concerned with here. I'm concerned with something very different.
Morgan was, of course, booked to sail with the Titanic (or the Olympic, take your pick, we'll just call her the RMS Whatever from now on), and accordingly had had several crates loaded on to her at Southampton. These were ostensibly supposed to be full of bronze statues and other art objects he was removing from Britain to bring to America. While the RMS Whatever was still docked, more crates suddenly arrived under armed guard, containing a secret shipment of gold that was being evacuated to America from Europe for safekeeping with the war clouds that were gathering. After these crates were loaded into the RMS Whatever, Morgan, for reasons that remain inexplicable - and highly suspicious - to this day, suddenly cancelled his booking on the doomed ship, and had all his crates removed. The RMS Whatever sailed into history, sinking like an unsinkable rock in the conveniently deep waters of the Grand Banks after allegedly striking an iceberg, and where she would remain until her eventual rediscovery in 1985.
The overlooked part of the story, however, are a couple of unusual expeditions by the Royal Navy to the area in the late 1950s, and again in "secret exercises" with the US Navy in the 1960s... perhaps they were looking for a treasure that wasn't there...
... because Morgan, who had "special customs arrangements" with both British and American customs, had already shifted the gold into his private crates, conveniently offloaded from the RMS Whatever prior to her sortie from Southampton...
Of course, all of this is high octane speculation, but it is perhaps a fitting metaphor of our financial system: a bait and switch for insurance fraud, a cargo that was supposed to be on board but wasn't, and a passenger list of middle and lower class people on a sinking ship owned by a scoundrel with insider knowledge, and not enough lifeboats for them, an unsinkable system, an orchestra playing on as it sinks, and boards of inquiry that are farcical in the extreme.
See you on the flip side...