The Commodity Futures Trading Commission (CFTC) is reportedly investigating potential manipulation of silver prices after those prices rose dramatically in recent weeks, and the Department of Justice will likely investigate as well.
Silver prices may have followed a pattern first observed in the prices of GameStop and other stocks, in which retail buyers encouraged each other on Reddit and other websites. As with GameStop, the retail interest in silver may derive at least in part from a desire to “punish” institutional traders who, the retail traders believe, are suppressing prices to benefit their short positions.
Any CFTC or DOJ investigation will likely include close scrutiny of communications by retail traders for potential “coordinated-trading” price manipulation. Ultimately, however, the authorities may be more inclined to focus upon institutional traders who traded silver in a manner intended to influence prices, and in particular on traders who sold in order to defend lower prices against the increased retail buying interest.
Was There Coordinated Trading?
In determining whether retail traders engaged in manipulation or attempted manipulation, the CFTC and DOJ will likely look to previous settlements based on “coordinated trading.” In the foreign exchange and ISDAfix settlements from 2014 to 2018, the authorities alleged that traders at various banks shared information about their positions in chat rooms and agreed to trade in a manner that would mutually benefit their positions.
Authorities will be interested in determining whether similar coordination occurred among retail silver traders. In order to prove manipulation, the authorities would need to show more than retail traders taking to social media as cheerleaders.
Rather, authorities would need to demonstrate that:
- the coordinating traders had the collective ability to influence market prices;
- the traders intended to create an artificial price (or, perhaps, that they traded with a reckless disregard for price integrity);
- an artificial price was created; and
- the coordinating traders caused the artificial price.
However, the authorities could prove attempted manipulation merely by demonstrating that coordinating traders had both the collective ability and specific intent to create an artificial price, without needing to prove the existence of an artificial price.
Institutional Traders With Long or Short Positions
The authorities may be particularly interested in determining whether institutional traders with long or short positions engaged in any misconduct.
Investigation of the longs could focus on so-called “momentum ignition,” which would involve aggressive buying of silver, coupled with efforts to encourage others to join in, including social-media posts aimed at inducing retail buying. That sort of trading could potentially be prosecuted under either an anti-manipulation authority or an anti-fraud theory. Under the latter theory, the authorities would need to show that a trader had made a knowingly or recklessly false statement of material fact intended to induce trading.
Investigation of institutional shorts would likely focus on trading to “defend” lower prices. For example, in the 2013 “London Whale” matter, the CFTC alleged that a London-based trader, known as the London Whale, engaged in fraud-based manipulation by recklessly selling credit-default swaps. This selling activity allegedly caused prices to fall, benefiting the London Whale’s large short position.
There—as may be the case in today’s silver market—other traders bought aggressively after deducing that there was a very large short position in the market, and their buying exerted upward pressure on price. The London Whale’s large sales in response exerted downward pressure on price.
Arguably, the CFTC could have charged both the London Whale and the aggressive longs under the same theory of reckless manipulation, but it chose to focus its fire on the short-seller “defending” price rather than the buyers seeking to push prices up. If the authorities are similarly minded today, they may be particularly interested in the activities of institutional shorts.
Practical Considerations
Ultimately, any charging decisions may come down to practical considerations. As the CFTC’s loss in 2018 following a bench trial in the DRW Investments case demonstrates, the authorities will struggle to prove actual or attempted manipulation against traders who seek to move prices to a level which they sincerely believe reflects the value of silver.
One can imagine a circumstance in which retail traders band together to bid up silver prices on a supposedly sincere belief that those prices have been suppressed by institutional shorts, and those shorts sell aggressively to defend lower prices that they supposedly believe reflect silver’s actual value. In such a circumstance, the authorities’ decision to align with the retail longs or the institutional shorts might come down to a practical judgment about the strength of evidence—particularly any communications that would support or undercut a party’s defense that it sincerely believed its trading was moving the price of silver toward its actual value.
Bringing factually complex manipulation and attempted manipulation cases against dozens, or even hundreds, of retail traders may be a particularly daunting task for the authorities. While the CFTC and DOJ strive for independence from political considerations, each may face pressure to focus its efforts on institutional short sellers, who have been the target of wide and vocal popular criticism for their role in the markets.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
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David Yeres, senior counsel at Clifford Chance in New York, concentrates principally on derivative transaction law matters and related investigations and disputes. He provides legal and regulatory advice on the development and operation of various financial products and markets.
Robert Houck, a partner at Clifford Chance, represents clients in government investigations and complex commercial litigation with a specific focus on cross-border matters. He has specific expertise in complex trading and markets issues.
Benjamin Peacock and Gege Wang are associates at Clifford Chance.