Commissioner Bart Chilton: Price Discovery In The Commodities Markets



welcome to crash concepts where the economy energy and the environment are explored up next fresh ideas and insights into the factors that are driving the world at shaping your future presenting information you can't afford to live without here's Chris Martenson welcome to this peak prosperity podcast i am your host Chris Martenson now whatever our personal views are on how financial markets operate today it's essential to know what the game is and how it's being played now ignorance of the rules is no excuse even if those rules are unwritten and constantly changing now what do I mean by that beginning around 2007 the rise of computer driven trading algorithms change the rules and the markets have not been the same since they now trade at lightening fast speeds where quotes are massively dominated by computer algorithms which also account for more than half the volume on the visible portion of the market while so-called dark pools are more than a third of overall market volume in short markets today are not even remotely the same as the markets of just ten years ago they are too fast to comprehend and more increasingly hidden from view than ever before now to help us understand the pitfalls and the blessings of these new markets is Bart Chilton a former commissioner on the United States commodity futures trading commission or CFTC from 2007 2014 in in april 2014 he joined the law firm DLA Piper as senior policy advisor he's the author of the agency's best-selling investment fraud book ponds ammonium how scam artists are ripping off America commissioner Chilton has graciously agreed to join us for an explanation of how the u.s. commodities markets work it's a topic many of our resource focus members are heavily invested in both figuratively and literally in particular those who track the commodity markets like myself have questions about the mechanics and dependability of the price discovery process and I can think of few people more knowledgeable on this topic that Commissioner children Commissioner Chilton I'm extremely grateful that you've taken time from your busy schedule to join us welcome Chris it's great to be with you so let's begin with a brief summary of the role of the CFTC what's its mission mission is to do what you talked about just a moment ago and that is to ensure efficient and effective price discovery these markets many of the people who listen to you and watch you know this but not everybody does that commodity markets really impact almost everybody on the planet every single day because some derivative or variant of about everything that they consume is impacted by those prices whether or not it's a home loan or a piece of jewelry or a fill-up at the at the petrol at a gas station or a gallon of milk or a loaf of bread so they're they're vastly more important than most people actually realize and the job of the CFTC is to ensure that the prices that are developed they're not higher they're not low but that they're fair and that the price discovery process is efficient and effective so at a very high level then how does the commodity market work in terms of setting those efficient prices it all takes bids and offers from myriad traders and comes up with a price and then it's agreed on that actually transaction transacted and those prices make up that the basis on which all these variants of the price can affect people in everyday life so then let's talk about the enforcement powers that the CFTC has what are they and how does it typically go about applying them well their vast actually when people think of enforcement and the Financial Regulator in the commodity space they think about manipulation as the probably the first one but there's other authorities fraud in particular is one that the agencies looked after four decades but all the things that go into making those markets efficient effective the enforcement division tries to root out any nefarious actions whether or not it's a fraud halation whether or not it's pushing prices around one way or another and they have a full load believe me at any one time Chris may surprise people at everyone at any one time there are between 750 and 1000 individuals or entities who are under investigation by the CFTC and that's with a staff and the enforcement division of just about 250 folks just under 250 so they've got a big job and they aren't actually able to get to all of these cases as much as they would like and that's a big problem going forward well certainly I just from a capacity standpoint but also I would imagine that that with the rise of the computer trading there's been just whole new technologies to understand new approaches new processes there's quite a lot to just stay current on let alone prosecuting the existing caseload right well you're you're spot on Chris and and it's not just the the people power with the advent of electronic trading and of high-frequency trading the technology needs at the agency are greater than they've ever been in their recent budget request just a few weeks ago they requested upwards of 50 million dollars for increases in technology to try and keep up with the markets that's a company also by staff but trying to figure out what's going on based upon sort of the old way of thinking and the old tools just doesn't work anymore these are these markets have changed in monumental ways and you noted that you know almost a hundred percenter means just shy of a hundred percent of markets are electronic trading now 99 plus percent and of that roughly fifty percent depending upon which market is or which exchange is taking looking at the trades the that's high frequency trading it's usually described between thirty and fifty percent in commodity markets and then about fifty percent in equity markets but that's been increasing of late in commodity markets and at some point you know I think it'll most of the training will be I mean all of the most of the training will be high frequency trading in all of these markets ultimately so I'd like to talk about that high frequency trading you're talking with a gentleman here who's and a lot of time actually trading on futures markets we have did it for a number of years and so I got very used to the rhythm in the flow of the market seeing what bids were there what what what the ask structure would look like and there was some rhythm to them that now when I look at a market and it could be gold it could be silver could be oil it could be weak but I will notice that to understand what happened in a severe price moving events sometimes requires us to parse the data down to the millisecond resolution and notice that an entire bid stack was destroyed in maybe 200 milliseconds or maybe a second that these that there's a just a concentration of orders will just flood in at very precise moments in time first your comment on that and second it is it unfair for me to say that that doesn't look like legitimate price discovery well the two things one it doesn't mean that there's not some value still even though it's going to be small with regard to the floor traders as a former trader yourself I mean my guess is that you can would tell us that you think there's a lot of value to what those guys do and I still think there is particularly at the open and close when there are lots of bids and offers and I think for traders actually have a way of keeping some order to markets many times through loud voices or hand signals but I still think there's a value there but the business proposition for the exchanges for you know keeping the lights on and the heat running at these are the air conditioning at these trading floors probably just isn't there in the long term doesn't mean there wasn't some value that and tutors don't have as my is my main point so the question about whether or not a flood of orders is good or bad or is it the right price discovery is one that a lot of people have been thinking about lately and and by and large the research that's come out even just in recent days from the Bank of England show that actually price discovery is improved through all of these orders and it goes back to a very basic premise of liquidity so the more people that are trading the greater liquidity and the greater liquidity the better price discovery because there's more people out there to either make bids or offers and again you know I if it was just you know me are you contending one way or another would be harder defend but the numerous studies that are out there sort of show that price discovery is better with more trading there's also a just really in the last several days a barons report that showed a similar result so it's almost to the point now where people are accepting that it's good but the issue that I've been raising over the years is is there something that regulators need to do differently because of these metastasizing and morphing markets and I think there is well yeah it's interesting I you know what I notice is seeing like I was watching this in the oil market and it happened for a while somebody would go out and take a lot of positions say put positions on us oh they would take some put positions over on major equity indices and then there would be this flood of sell orders that would come into oil in the futures market and so it feels to me it's not just a single market anymore that there are trading strategies which straddle markets and allow certain individuals who have the ability to move prices to do so in a way that seems to obviously they do it because they make money doing it but about you know to me that feels more like a trading strategy the legitimate price discovery art is is the argument then that that even those strategies such as they are which are merely executed to scoop money from the market that that still provides an important market service it does provide an important market service now look don't get me wrong I mean there are many as you say complex trading strategies they look at multiple products at the same time and make determinations about what what bets they should place and it's more complicated than ever and so but what different doesn't mean that it's you know derogatory that it's negative in any way just means that we need to look at things differently and be careful we shouldn't just accept it with open arms and open eyes let's be careful about how we deal with these things the size is an important thing to look at and that's why for my career I've been it's a financial regulator I've I sought to have limits on speculative positions and unfortunately that hasn't been even though it's the law now they my former agency is not sought to finalize those those rules so size does impact markets and it can push prices around in electronic trading even a smaller size can move prices in a way just because they're so quick so you don't need just to have size so if you're a do you control twenty percent of the crude oil market and I've seen that in the past just by moving your trades you can doesn't have to be fast trade you make a big trade you can move a market well today with electronic markets and high frequency traders you don't have to have twenty percent you know you can just two three percent if you put a price out there very quickly it can move markets but that doesn't necessarily mean it's bad if you are abiding by all the rules and regulations so you've seen recently a number of cases regarding spoofing and that is putting out bogus bids or offers that in order to try and move a market so there are rules regulations laws that guard against these things but we shouldn't regulator shouldn't just assume that everything should be static and they need to look and be more nimble and quick and look around the corner at how market you're changing in the future to ensure that the price discovery process is continuing to be efficient and effective well let's talk about the the size and concentration of orders in a market or concentration of holdings now there are many out there for been reading this for years who watch the precious metals market in particular the silver market feel frustrated by what they perceive is as a clear evidence of price manipulation you know the CFTC looked into it I'd love to get your comments both in terms of what the CFTC found or didn't find in terms of price manipulation and importantly the concentration of positions held by a couple of couple of big players out there sure and from what limited Chris as you know and what I can say I can't release any of the confidential information from the investigation that the agency had but I will tell you that there are four different criteria for manipulation when when people talk around their dinner tables or with their neighbors over a beer they talk about manipulation and in a context of what they think it means but they don't talk about it from a legal standard from a legal standard there's really four pillars in a commodity world is a different set of pillars under the SEC s 10 B 5 rule but in in the CFTC the fixie rule that deals with these four pillars the pillars are intent sighs a trading action and then an impact on price and let me just spend if you will allow made a little bit of time explaining these things in more detail so intent means I have to find something it could be an email it could be a wire recording because all the traders are required to record their their telephone conversations and by and large you know traders talk with a lot of bravado about what they might do whether or not they do or not is one thing but such evidence as you might imagine and we looked at a LIBOR scandal there was plenty of evidence where traders talked about pushing the libor rates around and you started out their language and talked about if you do this for me I'll buy you a bottle of Bollinger or I'll send over some Thai food things like that so the intent is actually something that was pretty easy to get because of how traders operate but then you have to have sighs so you had to have a large enough position that if you used it if you traded it that it could roll a market then you actually have to show the trade so you can't just say I've got the size and talk tough you actually have to make the trade and even if you found all those three pillars crisp you still have to hurdle over the last one which is that trade impacted the price and what happens a lot with those is that if you were going to go to court with somebody and say you look you had these four pillars and the impacted price well they'll hire their economists to say how can you say that this trade impacted price when there's so many things going on in markets that can impact the price so it gets to be you know dueling economists so the standard is a fairly high standard those four pillars for proving manipulation and with regard to silver the agency never got to where they had all four of those pillars and why can't talk in detail I just said that didn't mean we there weren't some of those pillars but we were not sufficient to reach that level where you could go forward with manipulation there were significant concentrations of size in excess of thirty percent of the silver market at one point and I spoke about that years ago publicly it was something that drove me crazy that we would continue to allow one trader to have such a large concentration then it's one of the reasons why I continue to say that we need speculative position limits and I'm amazed at the agency still to this day has not finalized to rule in that regard in what's the hold up on that it seems pretty obvious to everybody that it makes sense that concentrations of size are market moving events and also they create the potential for market weakness or structural weakness if that one position gets in trouble one way or the other what's what's the holdup do you think oh well I know what the holdup is but I don't buy it so i'll give you the argument the argument is that the wall went too far and end-users those that actually have skin in the game whether or not it's an oil company or an agriculture company that actually are hedging their price risk in the market whether or not they should be exempt from limits and i think they should be that there weren't why we have a big problem now those are speculative positions that you know a large agriculture company or a large oil company has that's a different matter but if they're just hedging to rid their risk they should just be exempt but what the agency has been doing is trying to slice and dice different variations of what an end user should be required to do and it gets very complicated very quickly but there are purchase their our agreement to buy energy in the future if certain conditions are met they call it volumetric optionality so you have an option to bought two to enter into a contract in the future should that be allowed and if that's allowed does is that does that constitute a hedge so they're slicing and dicing this thing and I think sort of you know dancing on a head of a pin here and to me we should just exempt end users from anything that remotely looks like they're hedging the risk and get the rule in place for the excessive speculation folks which is what has been the problem and the reason that I fought for these position limits that were part of dodd-frank passed in the summer of 2010 but the reason that I sought them and I was the lead guy seeking them was not because of the end users of course it was because of unbridled expected unbridled expected unbridled speculation that was I am sure and studies have proven it was that the speculation was causing divergent price moves all you have to do is go back to 2008 and look at crude oil at 147 27 and supply and demand had stayed relatively constant for several months prior to that when prices were down in the 90s there are no explanation other than speculation for those price moves so i hope the agency will get on the horse again and get these things passed as soon as possible oh absolutely because as you mentioned at the outset the things that trade on the commodities futures board those impact everything every every facet of life so whether it's the price of oil across the whole globe or the price of wheat or the price of gold silver all these things everything everything is sort of hinged off of that and so from my mind you know these position limit seems like a very obvious easy way to start we've been looking at it for a long time though so what if if somebody was how do concerned Americans a weigh in on the conversation if they wanted to well difficult because this is like in the bowels of a regulatory agency and my experience although I think I was different is that the commissioners don't listen a whole lot to average folks unfortunately maybe that's changing out that's changing and kudos to anybody that any of the commissioners that respond to individual emails I did that all the time 24 7 365 so since they don't by and large if they aren't very responsive to individual citizens who write to the agency the way to pressure them is actually to go to your member of Congress and tell your member of Congress that you know the law requires position limits to be implemented and the agency has not done so and members of Congress should put pressure on the CFTC to do so it's a little bit of a contorted way to influence regulators but my experience has been that the regulators by and large aren't listening to average folks very unfortunately yeah that is unfortunate so so a long process when you have to get Congress involved but may be worth it because it's an important issue so is a final question we've obviously futures is trading and futures risky business maybe not for the average person but for people who are interested in potentially becoming involved in using futures as a means of diversifying their portfolio or as a stance would you at all advise an average person this day that this is something they should would think about with some cautious study maybe dabble in or just no way this is just a prose game now you have no chance no I wouldn't I wouldn't say that people shouldn't get involved in it but I'd be very careful and do your homework and you're not going to just if it's different than it was sort of back in the day where you said hey I'm going to you know go long on Microsoft or IBM and you let it sit there in your portfolio and you checked it every week or so and decide whether or not you wanted to continue to take the risk you know that's an investment strategy that its work for people and it still works for people the futures are a lot a lot different than that and prices move around a lot and you need to know what you're doing and there are expirations to contracts so you know you buy and larger you're not going to be in it for years and years so just be very cautious and have due diligence and particularly you mentioned pandemonium my book how scam artists are ripping off America do due diligence with whom you trade so if you have a broker or somebody that's doing your bidding for you ensure that they're the real deal a lot of people of these fraudsters pop up Chris and they do some crazy things there is even one that created a fake website and you might not think that's too unusual they create a fake business website but here's the nutty thing this particular firm even created a link to a fake regulatory body I forget exactly what they called it but it sounded a lot like the Commodity Futures Trading Commission might have been the commodity futures trading Association and then this person fabricated a letter that said that the bogus company was in good standing with the commodity futures trading Association so my only point is that the scamsters and the fraudsters out there are very creative and folks need to ensure that they're investing their money with real folks a lot of these people that take advantage of average folks Chris our neighbors they are what we call affinity fraud so there you know a relationship that somebody knows and you've got to get into this good deal so anyway be careful and ponds ammonium how scam artists are ripping off America is now free online at GPO it's a government printing office at gpo dot-gov and so there's listed in there I think it's 20 red flags of fraud so encourage your folks who are paying attention to this before they invest their hard-earned money check it out well fantastic and along with those red flags is there any guidance on where to go to do your due diligence maybe the thin r website other places do you help people with the process yeah the National Futures Association is a good place to go you can check with the exchanges on which where your contracts are being traded or if you want to trade in metals you're going to be trading probably at the new york mercantile exchange and you can go to their website which is actually the commodity or the I Chicago Mercantile Exchange group's website if you're going to be trading and things that are traded on the intercontinental exchange go to their website all those things are good and one of the places that's relatively new but people can go is the Consumer Financial Protection Bureau the CF t be just to ensure that people are in good standing before you again invest your hard-earned money people just need to be careful well fantastic and and in in closing with everything you know that you can talk about with respect to silver would you invest in it today I really want to say whether or not an investor or not Silver's I think it probably going to go up and and it looks to me like it might go up but I never want to give investment advice i'm not a not a traitor i'm a regulator guy but it looks like there's room for growth there but people want to listen to folks a lot smarter than I on this yeah I wasn't wasn't looking for price advice I was just wondering you know how the market is structured if that was a place you feel is uh is legitimate at this stage I wouldn't be concerned about that about how the market operates right now but you know the regulator's need to stay on top of this and sure that that's the case so I would encourage anybody who sees any anomalies and markets whether or not it's silver or anything else that they do report them to the regulator as much as people think that they don't pay attention to all these things it's the bet you do the best you can do in life Chris and sending it forward certainly can't hurt fantastic well Commissioner Chilton thank you so much for your time today great to be with you Chris thank you

34 thoughts on “Commissioner Bart Chilton: Price Discovery In The Commodities Markets

  1. Super high frequency computer trading only serves to disconnect markets and commodities markets from reality,The problem with all markets now is that they no longer reflect the actual conditions of the instruments they claim to represent.
    Bart is far to intelligent not to understand this. This makes him disingenuous.

  2. Hey Chris. See if you can get that guy with the thorium reactor back. That was an amazing interview. Thanks Peter

  3. I wrote my congressmen Ron Paul when crude was 150 dollars a barrel just before the Lehman collapse, and tasked him to get on the CFTC to reign in this wild speculation by the investment bankers, which ultimately caused a credit collapse, you know what is answer was? "Ron Paul set let the free markets work", I guess he was short crude at this time. The system is rigged against the American working families, lobbyists have co-opted this CFTC board along time ago, where is Bearsley Bourne when you need her?

  4. How many nano seconds does it take to plan and build an aluminum plant or refinery for bonafide hedgers, dump the HFT system or guess what will happen, the real users of these commodities will dump the quick buck artist market makers and will do business between themselves instead of getting front runned all the time by the video gamers

  5. I think all of the criticism directed at Chris is probably unwarranted. That interview was a subtle game of cat and mouse. Chris seemed to just be playing with him rather than biting his head off.

  6. Even though you had to kiss Chiltons arse whilst you were interviewing him, you clearly showed him to be the joker that we all know he is.

    The truth is, he made no real effort to combat the criminality in the markets whilst he was at the CFTC.

    He merely made an attempt to deal with all of the criticism.

  7. Unfortunately, Bart Chilton has no power to act even if he wanted to. The CFTC has almost no authority to do anything to enforce existing commodity law. Brooksley Born resigned in 1999 over that very issue. She wanted to stop the Wall St Banksters and their Over the Counter (OTC) derivatives trading, but was forced out by Greenspan, Rubin and Summers. Arthur Levitt (SEC head) later said she was correct and that he should have listened to her.
     
    http://www.pbs.org/wgbh/pages/frontline/warning/interviews/born.html

  8. "Ponzimonium: How Scam Artists Are Ripping Off America" Free epub at GPO – need account to get book first and download an ebook reader if you don't have one  – Adobe or other. cftc-gov/About/Commissioners/BartChilton/ponzimonium $1.99 Kindle at Amazon

  9. #facepalm  Perfect example of why more government regulation won't help if the people regulating don't understand the problems.

  10. Chris, I really appreciated this interview. I greatly respect Bart Chilton for "stepping into the lion's den." I have to believe his heart is in the right place. We sometimes get so overwhelmed with conspiracy theories that it's helpful to hear from the "enemy."

  11. Great guest & interview Chris, because you just never know what might come flying out the mouth of a person like Bart Chilton.

  12. I feel sorry for this guy. He even admits that he only has a staff of just over 200 people to regulate these truly global markets. How much work on investigation and enforcement can 200 people do in a day? Even with 2000 staff there would still be issues with gross fraud and unenforceable laws. Computers trading with computers, invisible to  real people, it's a lost cause.

  13. why would anyone want to listen to this liar and enabler after all of his ‘non productive’ years as a regulator and oversight to the manipulation of silver….His actions for the past many years SPEAK louder than any comments made now….imho

  14. So, if the entire market becomes algo, why would we even need the exchange. Couldn't it just be servers and client software. Then we wouldn't need regulators just set a trading rules that all software must follow.

  15. Mr. Chilton described the function of the agency to ensure price discovery. Markets are there just for that, an agency is not specially required for that. There may be brief periods of the price out of whack with fundamentals due to distortions (manipulations / government policy) but eventually they come back to their fair value. Tax payers hard earned money to the agency should have a real purpose to justify.

  16. Great interview Chris. I knew this wasn't going to be a popular interview when I saw who it was, but I enjoyed it.
    The people who have so much anger and confusion need to spend more time learning how markets work and less time listening to pumpers.

  17. Chilton? Really Chris?
    I've had personal dealings with this scumbag and you simply can't believe a single word he says. The CFTC is a joke and this POS is one of the most cowardly and deceitful people I've ever had the misfortune to encounter.

  18. Wow Chris this a touchy issue with people judging from the comments and criminal in my opinion and should be taken more seriously.  Love your videos, thank you.

  19. I'm disappointed in your choice and this interview Chris!  This guy reminds me of Larry Summers….he has the ability to talk for an hour without making any sense to anyone.   I'm a smart guy and he never makes any sense..  Like talking in a strange language……like "manipulated language code".

    Instead of beating around the bush why don't you just ask him straight out about the Gold and Silver market being manipulated down a while he was over the CFTC.  Most importantly when the physical demand was rising substantially.  It's all BS!

    Bart seems to blame the HFT markets……sounds like one of the crooks in my opinion.  He said they are responsible for commodity fair prices…..not too high or too low?   LMAO!!  Really??

    We'll see what happens this year when the LBMA is taken out of the Gold & Silver price discovery.  

  20. Andrew Maguire: HSBC Just Shocked Clients By Announcing Closure Of All London Gold Vaults!
    http://kingworldnews.com/andrew-maguire-smashed-gold-today-hsbc-shocks-clients-closing-london-gold-vaults/

  21. Chris you are brave to take on this interview and subject. Thanks for doing it. 
    It seems like we are living through the days of Al Capone and his gangs. The era of the untouchables. 

    See no evil, hear no evil, speak no evil. People have no guts or balls anymore.
    Its a sad sad state of affairs.

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