Welcome to the 21st Century: Electronic Auction-Based Trading Replaces Silver Fixing

As the LIBOR and FX fixing manipulations scandals have unfolded, a quieter but quite important investigation by the Financial Conduct Authority (FCA) has been targeting the precious metals fixings. The days of the ancient methodology of conversing over the phone to reach a price has been finally ditched today. After alleged vast manipulations of silver and gold prices, such an effort should consume much more time and resources.

The new electronic trading system will be run by the CME Group and Thomson Reuters in partnership with the London Bullion Market Association (LBMA). As silver trades on the over-the-counter (OTC) and futures market for almost 24 hours a reference rate will be posted at noon every weekday. The "LBMA Silver Price" mechanism will be served by the CME Group's electronic price platform, with a proprietary algorithm designed to set the opening quotes, while Thomson Reuters will handle governance and administration services, as the LBMA accredits price participants.

Precious Metals Fixing Investigations

Back in June, a survey of 440 London Bullion Market Association Members brought a solution to the table - an electronic auction-based process. Back in April, after Deutsche Bank resigned its seat on the London precious metal fixes, in July a Manhattan Federal court accused Deutsche along with HSBC and Bank of Nova Scotia of rigging silver prices.

After the decision to leave the fixing process was taken by the German bank’s management, the silver price fix was left with only the other two banks setting it. The state of affairs on the gold market is not very different, with participants there amounting to four.

This is why the implementation of the new methodology for silver pricing will be a key benchmark as to how to proceed with the gold price fixing going forward. A successful launch will result in a precedent to trigger a new era in precious metals trading.

"No Clear Evidence"

While the UK’s FCA found “no clear evidence” of gold price manipulation after launching a formal investigation in November last year, the regulator's head of market infrastructure and policy stated to MPs that participants could in theory manipulate it.

Back in May, the regulator announced that it was fining Barclays $44 million, because of traders who attempted to influence the price setting mechanism back in 2012. Following the stark decline on precious metals prices last year, conspiracy theorists have been blaming central and bullion banks for suppressing prices of gold and silver.

The introduction of a new methodology of price discovery will shed light as to whether or not these allegations have any merit, as the prices for silver will be exposed to a new set of market forces. Speaking about precious metals, editor and publisher of the “Gloom, Boom and Doom” report, Marc Faber, recently said in a CNBC interview that he finds gold, silver, platinum and palladium to be solid investments at the moment.

In Their Own Words

Companies involved in the process have been keen to comment on the historic development. The CME Group's Senior Managing Director, William Knottenbelt, stated, "CME Group has a long and successful history of offering benchmark Risk Management Risk Management One of the most common terms utilized by brokers, risk management refers to the practice of identifying potential risks in advance. Most commonly, this also involves the analysis of risk and the undertaking of precautionary steps to both mitigate and prevent for such risk.Such efforts are essential for brokers and venues in the finance industry, given the potential for fallout in the face of unforeseen events or crises. Given a more tightly regulated environment across nearly every asset class, One of the most common terms utilized by brokers, risk management refers to the practice of identifying potential risks in advance. Most commonly, this also involves the analysis of risk and the undertaking of precautionary steps to both mitigate and prevent for such risk.Such efforts are essential for brokers and venues in the finance industry, given the potential for fallout in the face of unforeseen events or crises. Given a more tightly regulated environment across nearly every asset class, Read this Term and price discovery solutions for the global precious metals markets. With the recent launch of CME Europe, strong growth in CME Clearing Europe and the other recent announcements around our European growth strategy, the launch of the LBMA Silver Price adds another commodity benchmark service to our quickly growing suite of leading European services."

Global Head of Metals at Thomson Reuters, Kris Carlson, elaborated, "This new system combines a robust and reliable pricing mechanism with strong governance, as well as transparency for all of its users. It also aims to involve as many of those users as possible – from miners to Market Makers Market Makers Market makers or called dealing desk brokers represent a type of broker that internalize flows and are taking the opposite side of a transaction submitted by their clients. The market making broker is only quoting a feed of prices to its clients. These feeds may or may not be the exact same as the prices quoted on the interbank market.Any order a client enters is processed internally and never goes out to the market, except in rare cases where a market making brokerage identifies a client as a v Market makers or called dealing desk brokers represent a type of broker that internalize flows and are taking the opposite side of a transaction submitted by their clients. The market making broker is only quoting a feed of prices to its clients. These feeds may or may not be the exact same as the prices quoted on the interbank market.Any order a client enters is processed internally and never goes out to the market, except in rare cases where a market making brokerage identifies a client as a v Read this Term. There is no fixed number of participants, and we look forward to welcoming many. We are combining continuity with innovation, ensuring not only that everyone continues to receive a reliable daily silver price through this transition to the new system, but also that they enjoy a greater understanding of how this process works by watching the auction live on their desktops."

LBMA's Chief Executive, Ruth Crowell said, "The new mechanism allows more direct participation and the automated auction feed ensures that the same real-time information is available to all participants and market users via numerous data vendors."