Commissioner Bart Chilton: Price Discovery In The Commodities Markets

The commodity markets 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 it’s a home loan, or a piece of jewelry, or a fill up at the gas station, or a gallon of milk, or a loaf of bread -- commodity pricing is vastly more important than most people actually realize.

~ Former CFTC Commissioner Bart Chilton 

In theory, regulation is supposed to set and enforce the rules of the game that market participants play by, in order to ensure that price discovery remains efficient, effective -- and most important -- fair.

In practice, there's plenty of debate to be had on how successful our regulators are in effecting their mission. And one investment class in particular, commodities, frequently comes under criticism for questionable price action.

So, this week we talk with Bart Chilton, former Commissioner of the Commodity Futures Trading Commission (CFTC), about price discovery within the commodity markets, and whether investors can have confidence in the "fairness" of the current system.

Perhaps it will come as little surprise that Commissioner Chilton, a longtime inside player, does not see the current environment as 'broken' or 'unfair', as some critics claim. And as a former regulator, there are certain topics he is not allowed to comment on. But that said, he's a vocal advocate for several reforms that he believes will reduce the chances for manipulation within the market -- particularly position size limits and better rules for high-frequency trading (HFT) algorithms:

[Position] size is an important thing to look at. That’s why in my career as a financial regulator I sought to have limits placed on speculative positions. And unfortunately, there haven’t been. Even though it’s law now, my former agency has not sought to finalize those rules.

Size does impact markets and it can push prices around. In electronic trading, even a small size can move prices just because they’re so quick. You don’t need just to have size. If you control 20% of the crude oil market, and I’ve seen that in the past, 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 20%. You just need 2-3%. If you put a price out there very quickly, it can move markets.  

When asked directly if there's a manipulation problem in the precious metals market -- silver, especially -- he did not confirm or deny. Instead, he laid out the 4 pillars of evidence the CFTC looks for in determining whether manipulation can be proven: intent, size, trading action, and impact on price. From his experience during his tenure, it sounds like there were a lot of cases where many of the pillars were present, but few where all 4 were in enough abundance to overcome the "dueling economists" quagmire that ensued when bringing the case into a courtroom.

Commissioner Chilton is sympathetic to the perception many frustrated and bruised investors have about the precious metals markets -- he himself is on record saying that the large short position concentrations have been outrageous -- and he urges them to share their observations and demands for reform with their elected legislators. Why not the CFTC directly? Sadly, Commissioner Chilton notes, "regulators by and large aren't listening to average people".  

Click the play button below to listen to Chris' interview with Bart Chilton (27m:35s)

This is a companion discussion topic for the original entry at

Commissioner Chilton is sympathetic to the perception many frustrated and bruised investors have about the precious metals markets -- he himself is on record saying that the large short position concentrations have been outrageous
You mean like these?

Sadly, yes

I think Bart is a controversial person to interview given your audience here (people concerned with the ability of the government to do their job). I will listen to it later.
Jim, that chart has been the same for many years now, yet nothing has happened regarding it's implications. Looking at the chart below, would you agree that the number of short positions by the banks did not have the impact you would expect on silver price in 2010?

Given that the chart is both the same in bullish and bearish periods, wouldn't that imply that the reason for the price decline is not found within that chart?

By the end of this month/next month I think we will see the silver price move back up based upon price patterns. It' been a long winter, and I have not really even looked at silver prices until now, but I think it is now time to start paying attention to the metals again.

So here's something you can read two different ways.
Commercial shorts seem to pick tops and bottoms pretty well - except for the spike high in 2011.  But certainly lately, a concentration of commercial silver shorts seems to mark the highs, and a decrease in shorts marks the lows.  Kind of feels like its a money-maker for someone.

So either they are causing the peaks and the valleys, or they simply have a pretty good sense of when they will probably occur.  Presumably, if one player is able to own 30% of the market, they can pretty well set price at least in the short-ish term - if they are willing to pay the money.

But it is interesting how they got the year 2011 mostly wrong.

That is a great additional chart Dave. Thanks. The only correlation within the time period that I see in that chart is that there may be a relationship with extremes and price movements. I which case, this is may be another indicator that we are do for a price movement shift within the next month or two.



In a nutshell, the FTC is hopelessly understaffed to accomplish their objectives.  Second, the laws favor the people involved in questionable behavior, rather than the honest investor.
It sounds a lot like the criminal justice system.

Therein lies the argument.  Our legal/justice system is hopelessly misguided and ineffective.

It reminds me of a leaked, tape recorded quote from a Goldman Sachs Executive.  Paraphrased, once a person reaches a certain wealth level, they are above the law.

WT, you said, 

Jim, that chart has been the same for many years now, yet nothing has happened regarding it's implications. Looking at the chart below, would you agree that the number of short positions by the banks did not have the impact you would expect on silver price in 2010?
There are manipulations going on in different layers, on different timescales.  To my view, saying that there have always been a lot of Silver shorts makes it sound like the situation regarding futures is not dynamic in this longer term time scale - it is actually.  All of these contracts you see accounted for in your 2010 snapshot had an expiration date - some month out in front.  That means that, in order to maintain the large short interest.. the contracts are constantly having to be rolled (closed and reopened)... and renewed.  The giant short interest has to be maintained... it is a fortress of sorts.  I see the short interest fortress as this;  A well established and continuing oversupply of synthetic futures contracts in a Silver market where price is discovered based on supply vs. demand for futures contracts.  That is layer one.. the long timescale layer of manipulation.  It is just possible that the demand for futures contracts in 2010 was so insatiable that the fortress was overrun for a time.... we all know what happened next in terms of coordinated margin increases and futures contract dumps.   

The shorter timescale manipulation is the dumping of massive numbers of naked short contracts into often illiquid markets.  Since the COT reports only show net positioning on a weekly basis, the big players can make their dumps, and then cover after they have created the down wave.  

The Comex is an unregulated joke.  Almost no Gold deliveries anymore… and Silver deliveries are often a circle jerk between the banks (see discussion of that here;

A final note;  One may ask, why so many more Silver shorts vs. Gold?  Simple to my mind;  the bullion banks, in league with the Western central banks control much more Gold than Silver… So they have other options for creating synthetic supply (via fractionalization schemes like leases and swaps) in Gold that they do not have for Silver.  Most of the synthetic supply for Silver needs to come via the Comex futures scheme, and so it does.  


"Ah, ah… ah"   Yes, the silver market is rigged he just cannot say it.

…he means jack shiattt to me. No Sir, Bart is part of the problem not part of the solution.

I cannot believe I got through the entire interview without smashing my keyboard.

Why am i bEing monitORed or qUEDe?

I'll get the innocent until proven guilty comment out of the way first. 
I can not claim to understand everything about how markets work.  I just know that if someone can make money doing a certain thing, someone in society will try it.   So in this interview I took a bit of an open mind, and wanted to reserve judgment until after I heard the words come out of the regulators mouth…

A couple of things…I was SHOCKED to here him imply (about 9 minutes into the podcast) that high frequency trading is a good thing for markets. Either I really don't understand how markets work at all, or the regulators just don't see the risks.  "Price discovery has improved through all of these orders…"

The other part of the interview that I found fascinating was when Chris asked the question about manipulation in the silver markets.  Bart Chilton went out of his way to explain the four pillars where illegal manipulation can be proved.  Key concept, key point…manipulation being proved.  It is sad to think that everyone involved knows manipulation is likely happening on some scale, but little can be done about it.

Legal Manipulation:   Intent, Size, Trading Action, Impact on Price

Is it even possible to prove Intent in a HFT market…again…Chris and Chilton talked about nearly 50% of trades today being high frequency trading. 

Ya…after listening to this I think buying physical metals is sound.




This site offers a great introduction and overview to the mess our monetary system is in.  It starts off a bit slow but it is clear and good for someone new to where we are or anyone frankly.  Reminds me of the crash course with more focus in one area.  Certainly worth the read.

I apologize for the frankness of this post.  It sounded like Chris made a clear example of manipulation where an entity buys puts in the crude market.  Then that same entity goes into the market and uses its ability to move markets to effect the price and make money on the bets they just made.  This is not a trading strategy it is fraud, and as such is illegal.  
How exactly did Chilton say this is not necessary bad.  He is either stupid, or much more likely corrupt.  I know some had hopes he would help some of the manipulation when he came to the CFTC but its clear he's been compromised.  Not surprising considering he now works on the other side of the fence.  I really hope Chris writes a piece exposing the issues with this interview.

Lots of big words, always a plus.  I became confused and felt lost after hearing "Bank of England" and "efficient markets" in the same thought train.
I found his manscaping distracted from the content of the podcast…particularly the aviation blonde.


But I'm glad Chris is willing to post interviews with people who might not agree with him. It gives the site more validity, and if we are unwilling even to listen to counter-arguments then we're heading down the same path of ideological blindness we accuse most members of the financial world (the Fed) of having.

I agree about the manscaping being very distracting, though. :wink:

Absolutely, couldn't agree more.

JBarney, Yeah, I'm with you.  More players mean greater price discovery? How is that possible when interest rates are zero and some, all, most, many have access to the free money?  With free donuts, and a bank of algo makers, the number of traders is irrelevant I would think.
bwh1214, exactly.


Very glad Chris interviewed Bart Chilton. Reminds me of someone who jumps off a 100 story building and when he gets to the second floor says, "So far so good!"

Wake me up when someone debunks “The Thing” with cogent argument.I interpret All as symptoms.
There is no way out but Up.