Precious Metals: 6 Degrees of Separation as HFT Goes Mainstream

precious metals

A recent 60 Minutes television show interview revealed the long established electronic trading mechanism used to front run and carry out price management and profit schemes across trading seconds. In the wake of the interview, one cannot help wonder how many degrees of separation exist between public awareness of this and its connection to futures and precious metals price manipulation.

Furthermore, for all the pomp and circumstance surrounding this bombshell, one also wonders why a tightly controlled media would set this red herring free into a public holding a dwindling institutional confidence.

High frequency trading has been around for at least a decade, beginning in earnest in the aftermath of key regulatory changes. Such changes have mainly been in equities, and have recently spread to futures and forex. Insiders have been chronicling the farce for years.

As part of Michael Lewis' tour promoting his book, "Flash Boys", he was given access to a much wider audience in his interview with 60 Minutes. While most of the damage has already been done, one might rationalize that we have potentially skipped a few chapters on the way toward collapse of confidence. But I would not hold my breath.

The HFT story, combined with algorithm trading strategy, is known to most precious metals investors. It has been a key racket for at least a decade following regulation changes.

HFT, which accounts for more than 70% of equity market volume, is legal and nearly as damaging. But it is certainly in line with changes such as Glass Steagall, which gave the green light for commercial banks to become full-fledged investment banks, while exchanges became for-profit entities.

For all the news hitting the mainstream, the exchanges themselves are the real beneficiaries for precious metals. The self regulated CME is the main focus for price discovery and the COMEX.

The metals HFT trading is used by the large commercial banks to push the market in whatever price direction they deem "necessary" to affect a profit. They routinely spoof or create un-fillable orders to induce hedge fund or speculative algorithms to sell automatically. This enables the commercial banks to buy back positions, profiting and painting the tape so that the whole world of technical analysts and professional traders think the market is fundamentally this way or that. But in reality they are a complete farce. This, of course, trickles down to the mainstream investor and public sentiment where complacency rules for those with a voice.

Regulators talk and we will soon see a giant storm of action and debate regarding the fairness and/or evil of HFT. But this issue has occurred despite regulation - if anything, regulation serves to add more complexity as it is often written by future traders. Additionally, it will soon revolve into the very system that exploits the flaws.

It's perfectly legal in the same way intervention by the ESF has been a legal cover for gold (and silver) manipulation. Heaven forbid the day an official uses this to "calm" the markets.

In the end it is a road that ultimately leads to a failure or confidence among the confluence of various other tremors. This is true especially in the context of financial and currency wars waged behind the scenes as the developing world slowly chips away at Western monetary dominance.

HFT leads to further disconnect in fundamentals which leads to absence of the market maker or human broker, leading to greater trading volume followed by growth and consolidation of the players that profit most from that volume (CME). This leads to increased fragility when machines buy and sell suddenly and all at once, followed by crash, collapse and more stimulus and bailouts, along with more credit creation and more pressure on interest rates.

Then follows foreign tensions as dollar holders accelerate dis-hoarding of dollar denominated assets, then volatility and shattered underlying economy, leading to widespread mistrust, fear and civil unrest. Next is scarcity of metal, then policy implementation accelerates demand, shortages create a two-tiered market, then paper physical split which leads to large institutional investors taking massive position in retaliation for political sanction and, ultimately, hyperinflation.

In the end, HFT is yet another consequence of a much larger and more fundamental issue.

It's well known throughout human history that once the control of money is usurped from the market by those in power, it is merely a matter of time before the final unwind begins in earnest. HFT is one more loophole, allowing a small subset of elites to gain the upper hand.

Private banks are allowed to create the public "money" supply out of nothing, as debt is the government enforced FRAUD which is the foundation of the entire market.

The fear is that the coverage of this story will be viewed as merely a recasting and not necessarily stir up issues. In much the same way, the most recent silver investigation (led by the CFTC) simply recasts the denial - and this time with silence.

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