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It sounds like the actions went something like this: Modern Settings places a large order for 100k oz platinum from BASF. BASF buys mined platinum stock at pri

by Dwolb 12y ago

It sounds like the actions went something like this: Modern Settings places a large order for 100k oz platinum from BASF. BASF buys mined platinum stock at price Y and takes 1 month to produce the refined platinum order. BASF doesn't want to be exposed to price movements with platinum that swing +/-20%. (if the price of platinum drops, BASF doesn't want to make thinner margins on a product they've already produced) Therefore, BASF calls up their friendly bankers, Goldman and HSBC, to reduce BASF's exposure to platinum price swings through derivatives. BASF hears both banks' proposals over respective dinners. The conversations between the teams range from difficulties with the business, the client that BASF is dealing with, and what could be done to make everyone's job a little easier. The relationships get cozy over time and BASF starts an open flow of information about who's purchasing what metals so Goldman and HSBC can 'just handle' the derivatives BASF should buy. Unscrupulously, the banks start trading on the information on when large orders will be placed on which metals markets and get discovered insider trading.

nickff 12y ago
I think you are right in describing this as insider trading rather than price-fixing; and it brings up the issue of what to do about the general problem of insider trading. When there are many routinely violating a law which is very broad, it is generally seen as an argument in favor of getting rid of the law, especially when the law is of dubious or debatable benefit to the public. This is one argument in favor of the legalization of narcotic drugs, and it seems to be a good argument in favor of the legalization of insider trading. If insider trading were legalized, then BASF's customers could either make discretion an explicit condition of their purchasing contracts, or else sell their information (to futures market participants and analysts). This would raise the table stakes for participating in markets like this, but it is not clear that there would be any substantial negative impact to the efficiency of the market; the additional transparency and increased flow of information might even improve the liquidity of the assets, and smooth price fluctuations through better predictions in then futures market. I am not the first to make these points, but I would be very interested to hear what HNers think of them.
- dllthomas 12y ago
  It's my understanding that insider trading is basically not illegal in commodities, even on paper. The above sounds a little bit like front-running[1], though, which is far more likely to be illegal if the banks were serving as broker. [1]: That is, accepting an order and then trading for yourself based on the fact that you received the order before you fill the order.
- Dwolb 12y ago
  I'm not sure getting rid of insider trading laws makes markets more fair. The incentives are still unchanged and the situation is still unchanged. For example, let's take two worlds: one with illegal insider trading and one with legal insider trading. With illegal insider trading: Banks learn about BASF's customers and front run derivatives to make money off the ensuing price change. With legal insider trading: Banks learn about BASF's customers and front run derivatives to make money off the ensuing price change. The two situations are the same but in one scenario the bad actors go unpunished. I think a better solution analysis would include upstream and downstream market participants, their goals/interests, and analyze the incentives for each institution and individual.
conistonwater 12y ago
How exactly is this insider trading? Insider trading is a fairly specific concept, and it doesn't seem to be relevant here (for example, this informal description is clear enough and doesn't apply: http://www.sec.gov/answers/insider.htm http://www.sec.gov/answers/insider.htm). When a company trades with a bank to manage its risk, it gives information away by telling the bank that it wants to trade. That is not "insider" information at all. What it gets in return depends on how the company negotiates the price; it could get nothing at all, in which case it's a bit of a failure on its part. The bank is under no obligation to not use that information to make guesses about the market situation. That information is valuable to the bank, and the bank might even offer discounts to the client to get the client to trade with it first. If the company believes it leaves money on the table by disclosing the information about its order flow, it's free not to deal with the bank. What you're describing is mostly market-making, there's no insider trading here. P.S. Another thing this is not is front-running. If you come to me wanting to trade, I trade with you, complete the trade, then decide for myself that you're clever and you probably know where the price will go, then trade for myself, that is not front-running because of the order in which those things happened. If you "leave money on the table" by disclosing to me what you know about the price and I take advantage of that, conventional market theory says it's kind of your own fault, regardless of how unhappy you are about it. There are things you can do to not disclose such things, such as trading with many dealers at once. In fact, the skill of trading without moving the market is really valuable.
- ealloc 12y ago
  Umm, the site you linked appears to say exactly the opposite. Here's what is says: > Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Here is an example it gives of insider trading: > Employees of law, banking, brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded; Isn't that exactly what the parent is describing? The banks used nonpublic information given to them to provide other services.
  - 12y ago

by Dwolb 12y ago

nickff 12y ago

I think you are right in describing this as insider trading rather than price-fixing; and it brings up the issue of what to do about the general problem of insider trading. When there are many routinely violating a law which is very broad, it is generally seen as an argument in favor of getting rid of the law, especially when the law is of dubious or debatable benefit to the public. This is one argument in favor of the legalization of narcotic drugs, and it seems to be a good argument in favor of the legalization of insider trading. If insider trading were legalized, then BASF's customers could either make discretion an explicit condition of their purchasing contracts, or else sell their information (to futures market participants and analysts). This would raise the table stakes for participating in markets like this, but it is not clear that there would be any substantial negative impact to the efficiency of the market; the additional transparency and increased flow of information might even improve the liquidity of the assets, and smooth price fluctuations through better predictions in then futures market. I am not the first to make these points, but I would be very interested to hear what HNers think of them.

dllthomas 12y ago
It's my understanding that insider trading is basically not illegal in commodities, even on paper. The above sounds a little bit like front-running[1], though, which is far more likely to be illegal if the banks were serving as broker. [1]: That is, accepting an order and then trading for yourself based on the fact that you received the order before you fill the order.
Dwolb 12y ago
I'm not sure getting rid of insider trading laws makes markets more fair. The incentives are still unchanged and the situation is still unchanged. For example, let's take two worlds: one with illegal insider trading and one with legal insider trading. With illegal insider trading: Banks learn about BASF's customers and front run derivatives to make money off the ensuing price change. With legal insider trading: Banks learn about BASF's customers and front run derivatives to make money off the ensuing price change. The two situations are the same but in one scenario the bad actors go unpunished. I think a better solution analysis would include upstream and downstream market participants, their goals/interests, and analyze the incentives for each institution and individual.

conistonwater 12y ago

How exactly is this insider trading? Insider trading is a fairly specific concept, and it doesn't seem to be relevant here (for example, this informal description is clear enough and doesn't apply: http://www.sec.gov/answers/insider.htm http://www.sec.gov/answers/insider.htm). When a company trades with a bank to manage its risk, it gives information away by telling the bank that it wants to trade. That is not "insider" information at all. What it gets in return depends on how the company negotiates the price; it could get nothing at all, in which case it's a bit of a failure on its part. The bank is under no obligation to not use that information to make guesses about the market situation. That information is valuable to the bank, and the bank might even offer discounts to the client to get the client to trade with it first. If the company believes it leaves money on the table by disclosing the information about its order flow, it's free not to deal with the bank. What you're describing is mostly market-making, there's no insider trading here. P.S. Another thing this is not is front-running. If you come to me wanting to trade, I trade with you, complete the trade, then decide for myself that you're clever and you probably know where the price will go, then trade for myself, that is not front-running because of the order in which those things happened. If you "leave money on the table" by disclosing to me what you know about the price and I take advantage of that, conventional market theory says it's kind of your own fault, regardless of how unhappy you are about it. There are things you can do to not disclose such things, such as trading with many dealers at once. In fact, the skill of trading without moving the market is really valuable.

ealloc 12y ago
Umm, the site you linked appears to say exactly the opposite. Here's what is says: > Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Here is an example it gives of insider trading: > Employees of law, banking, brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded; Isn't that exactly what the parent is describing? The banks used nonpublic information given to them to provide other services.
- 12y ago