An event several years in the making could be just days away. For some time now, the Fed has been debating whether or not it should limit big banks and their participation in the commodities markets. The debate stemmed from a number of accusations of market manipulation for profit, though most of the institutions on the chopping block have maintained their innocence. The decision is expected to fall sometime in the next month and could be a welcomed change for traders [for more commodity news and analysis subscribe to our free newsletter].
Big Bank Manipulation
In 2003, the Fed responded to a request from Citigroup to have a more active role in the commodity space. At the time the Fed agreed and thought that its involvement would actually produce benefits for the public. Thus far, it would appear as if that has not been the case. A number of major institutions have already been accused of manipulating metals prices, the energy space and electricity prices to turn a profit.
If this sounds familiar it is because this is the same kind of activity that got Enron busted for the same thing just over a decade ago. At the time, Enron would plan power outages and other forms of electricity manipulation to allow them to place profitable trades. Now, firms like JP Morgan, Goldman Sachs and Morgan Stanley face similar charges [see also Were Gold and Silver Manipulated Alongside LIBOR?].
JP Morgan has been under the microscope for its involvement in silver markets, but with market manipulation being very difficult to prove in a court of law, the firm has been able to overcome the charges. Another popular belief among the trading community is that big banks are pulling the strings of gold prices to turn a profit; this has yet to be proved as far as recent years are concerned, but many still fear that these financial giants have too much sway over the precious metal.
Legislation and Limitations
The proposed limitations, which could be announced any day, would look to curtail the involvement this firms are allowed to have in the commodity world. Though each company has argued its own case for why it should still hold such privileges, it would appear as though the Fed will not budge on this issue and it is simply a matter of when, not if. The Fed has stated that each company will have adequate time to change its business operations to comply with any new rules and regulations that may go into place.
The news will likely be welcomed by traders who have grown tired of watching technicals and fundamentals thrown into the wind whenever one of these institutions decides to become involved. Commodities markets will likely regain a sense of normalcy once these big players have exited, but they will leave a hole as far as liquidity is concerned. Without a doubt, big banks have the capabilities to be the biggest traders in the business, injecting a handsome amount of liquidity into the commodity world. One of the biggest thing traders need to watch as these giants exit is how liquidity and volumes are impacted, and to adjust accordingly.
Disclosure: No positions at time of writing.