The Early Bank Catches the Trade

Yesterday I recounted the story of the Hunt brothers and their attempt in the late 70s to corner the silver market.  This fascinating story is especially relevant today after the huge moves in the silver market over the past week.

The main point of the story was that the futures exchanges changed the rules to bring the Hunt brothers down.

The final rule change by the Comex to ban any new open positions in the silver market was an extraordinary event that proves once and for all that we are not playing on a level playing field when we enter the markets.

Nine of the 23 board members of the Comex had a total short position in silver of 38 million ounces at the time they changed the rules.  It was certainly in their interests to see the price of silver fall and they had the power to make it happen by changing the rules of the game mid-stream.

Last week we saw the same thing happen with margins increased three times within a week, forcing a sell-off in silver positions that turned into a landslide.

The reason I am harping on about this is because I assure you no one else in the general media is going to point out the fact that the banks that run the show have the power and the inclination to change the rules to suit themselves.

Not only that, but they will position themselves to profit at the expense of other traders and investors.

High Frequency Trading (HFT) is getting a lot of attention at the moment but very few people really understand what it is.

A lot of the money that HFT traders make is based on front running other traders’ orders due to the sheer size and speed of the computing power HFT traders wield.

Exchanges sell space in their computing nerve centres to HFT traders so their computers are positioned close to the hub and therefore shave nanoseconds off their execution speeds.

This ensures that they can front run other orders that they see coming from other exchanges or to dark pools.

So basically when you hear about investment banks making money on every trading day in the quarter (something that every trader worth his/her salt will know is impossible for any real trader) you should understand that they are basically stealing money by front running other traders’ orders.

This is the world we live in and the trading arena that all of us must understand before we enter the fray.

It would be incredibly naïve to think that the current market environment is a free market that reflects the true state of things in the world and is a true reflection of fundamental value.

US 10-year bonds are trading at 3.14%!!!  Would you lend someone money at 3% for 10 years when you knew that they were already up to their eyeballs in debt and there was no end in sight to their problems?

The distortions in the US bond market caused by the continual interference of the Fed are at the epicentre of the distortions that are seen throughout all other markets.  Stocks, corporate debt, commodities, currencies etc. are all beating to the drum of the US bond markets and the US dollar.

The incredibly high correlations that we see between all markets are actually increasing risk because all of a sudden every trade is one and the same.

The US dollar carry trade and the Yen carry trade have been used by the banks to enrich themselves and most recently to help repair their balance sheets.

This is the true reason for the huge spike in commodities since the Fed began printing money again.

This is why commodities could fall in a heap again as they did in 2008, because the unwinding of that trade by the banks will show the true state of affairs; which is that the economy of the world is still battered and bruised and is slowly keeling over again now that the money printing and fiscal stimulus is starting to wear off.

A thorough analysis of today’s markets needs a healthy dose of scepticism about the motivations behind the Fed’s actions and an understanding of the true repercussions of money printing.

Any other analysis will be only looking at the symptoms and not the cause.

I believe you also need a thorough understanding of the structure of price action through technical analysis (not the mainstream variety of technical analysis which is about as useful as a chocolate teapot).  If you are interested in seeing my take on technical analysis then I have included my video market update from last week below.
Source: Mishs global economic analysis

The fact is that 8.8 million jobs were lost during the crash and only 1.8 million have been created in the “recovery” in the US.

Banks are still carrying huge losses on their balance sheets that are not marked to market.

Greece is on the verge of getting kicked out of the Euro and if that happens others will follow.

There is growing unrest from within Europe about the perpetual flow of money from the people to the banks. (If you are interested you should read this article by Timo Soini the leader of the True Finn party.  He says it as it is.)

Just last week we saw the ISM non-manufacturing index plunge far below any predictions from 57.3 to 52.8. (A huge fall.)

And yet the stock market is near multi-year highs after rallying over 100% from the lows in two years on the back of the Fed’s money printing.

June will see that game slow down (although the fact that the Fed is going to keep the balance sheet at the same size is in effect monetising a fair portion of US debt for the foreseeable future).

From where I sit I can see a sharp retracement in the stock market dead ahead based on a large short squeeze in the US dollar.  I believe the recent commodity sell-off is a warning sign and not a one-week wonder.

Murray Dawes
Markets and Money Australia

Murray Dawes
Murray began his career on the Sydney Futures Exchange trading floor in 1993 with Swiss Banking Corporation (SBC). He spent a couple of years in the 3 and 10 year bond and option pits before moving on to the Share Price Index (SPI) futures and options pit. From there he became a broker with SBC specialising in SPI futures and options to institutional clients. After leaving SBC Murray continued his career in broking at Bankers Trust Australia. Then in 2001 Murray moved to Melbourne to work as a hedge fund trader for one of Australia’s wealthiest families. In 2003 he was ready to set up his own firm providing the same proprietary technical trading system to some of Australia’s boutique hedge funds. The success of Murray’s system led to him trading a $10 million account for a high net worth individual. This involved trading Australian and US futures and Australian stocks. Now Murray heads up the technical analysis desk for us passing on to readers some of his experience from 16 years of trading.
Murray Dawes

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3 Comments on "The Early Bank Catches the Trade"

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Richo (the 2nd)

Did increased margins cause the silver sell-off or was the sell-off due to it being overpriced?


What is a short squeeze on the dollar? Is it the US dollar gaining against the aussie dollar?
ie Aussie dollar falling to or below parity?


the wsj article you linked to has been heavily censored. Google the real version, quite different.

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