Or, to quote General Steele from MASH:
GRADE A 100 % BULL COOKIES!!!
Two caveats for this post:
1) I favor the free exchange of dissenting ideas, and support Chris for having interviewing Mr. Chilton.
2) We should acknowledge that Chris has to use moderator decorum and tact, so I did not expect a severe challenge or strong language, though I thought the questions and follow ups were too soft considering the responses by Mr. Chilton, but after all, it is indeed Chris' site.
With that said, I feel compelled to completely rebut Mr. Chilton's comments.
For two reasons-
Because he is supporting a criminal and corrupt system that greatly harms the average citizen, by not speaking truth to power (assuming he knows the truth- which I suspect- and doesn't believe what he is saying), and,
Because some new readers may read these falsehoods and actually be swayed by these nonsensical statements.
There are so many wrong ideas promoted in the interview, it is truly a target-rich discussion.
It is important to focus on the main ones.
The CFTC is a crack enforcement agency, and is effective at policing the futures markets.
"At any one time Chris, it may surprise people, at any one time there are between 750 and 1,000 individuals or entities who are under investigation by the CFTC. And that’s with a staff in the enforcement division of just 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."
Bull cookies. With the vast amounts of untold billions being made by criminal trading (see below), and even larger damage to the average investor, the CFTC enforcement record is a tiny pinprick.
Trillions and trillions of dollars move through these markets.
One of the largest markets, the derivatives market, is thought to be over a quadrillion dollars and is almost completely unregulated. The CFTC openly acknowledges this, and whines about not having enough staff, which may be partially true, but I do not have any confidence that if their budget was increase and legal framework introduced, that they would be any more effective, based on their abysmal track record.
Of the remaining markets of trillions of dollars, and tens of billions of dollars of profits, and in spite of these alleged thousands of entities under investigation, in actual reality the CFTC reported that there were 240 new investigations and 67 enforcements for a total of $3.27 billion in monetary sanctions in 2014, http://www.cftc.gov/PressRoom/PressReleases/pr7051-14. And if one takes just a cursory look at the enforcements, the largest was the LIBOR judgement of $580 million. This may sound like a lot, but spread out over many global banks, all who are making billions of dollars of profit, apparently often from illegal and fraudulent trades, $580 million is a pinprick and is nothing more than a PR soundbite than any meaningful and serious enforcement. The vast majority of the other enforcements listed are to my eye simple fraud, and for tiny to minute amounts, relative to the market size.
I note that 17 defendants had criminal judgments apparently. None of them named Corzine or Dimon to the best of my knowledge.
None of the enforcements, upon inspection, with the sole exception of LIBOR, have anything to do with true punishment for market manipulation of trillions of dollars of critical commodities and other assets. These "enforcements" are pinpricks, and would have zero effect on market participants that are committing fraud. It is like writing $1 dollar speeding tickets once a year to chronic speeders.
Did you really expect them to change, Mr. Chilton?
So, apologies if I don't give a standing ovation to the great enforcement work of the CFTC. I tend to favor results over activity. No one was ever extricated from a burning car by good intentions.
2. HFTs are an improvement to markets.
"You noted that almost 100%, I mean it’s just shy of 100% of markets are electronic trading now—99 plus percent. And of that, roughly 50% depending upon which market it is or which exchange is taking – looking at the trades, that’s high frequency trading. It’s usually described between 30 and 50% in commodity markets and then about 50% in equity markets but that’s been increasing of late in commodity markets and at some point I think most of the trading will be high frequency trading in all of these markets ultimately."
"Well 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 floor traders. As a former trader yourself my guess is that you would tell us 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 floor 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 keeping the lights on and the heat running at these – air conditioning at these trade floors probably just isn’t there in the long term. It doesn’t mean there wasn’t some value that computers don’t have is my main point."
Total Bull cookies. This statement isn't even able to be interpreted. I really don't exactly know what Chilton is trying to say. "Floor traders still have value", even though they are less than 1% of trades??? As museum exhibits?
The mere fact that competing firms are building servers closer to exchange servers to gain milliseconds of trading (e.g. front-running) advantage, tells you all you need to know about how corrupt the markets are.
If a trading firm had superior analytical skills, superior algorithmic predictors, superior research and understanding of markets, superior trading positioning strategies, in other words, market participants were participating on the basis of free market fundamentals as opposed to thievery, you would not need millisecond advantages in trading.
Period.
The arguments have been made by the HFT firms that HFT adds "liquidity" to the markets.
That is complete and utter nonsense.
To quote Ted Butler (a previous guest of Chris', November 1, 2014)
"The problem is that the CME has relied on High Frequency Trading (HFT) and other speculative trading schemes to pump up trading volume to drive corporate profits. This is a problem because it has forced the COMEX to cease accommodating real producers, consumers and investors in silver, gold and copper and instead to cater to those trading with HFT computers and to those speculating in large quantities of electronic contracts.
Real commodity producers and users have little use for the rapid short term speculative trading that has come to drive profits for the CME. Why would a silver mining company be involved in electronic trading measured in small fractions of a second? This can be seen in how little actual trading is done in COMEX silver by actual miners or silver users; I would estimate less than 5% of all COMEX silver futures trading is transacted by real producers and consumers of silver. More than 95% of COMEX silver trading is purely speculative in nature, with much of it nothing more than day trading by HFT algorithms. " http://www.silverseek.com/commentary/comex-%E2%80%93-why-it%E2%80%99s-corrupt-13323
There are finite amounts of commodities available at any given time, and a finite number of market participants. The numbers of trades may grow over time, as will numbers of trades naturally, as market sizes grow.
But trading speeds and raw numbers of trades have vastly outgrown the natural, organic grow of markets. But more on liquidity next.
3. Naked shorting is good because it increases liquidity.
Total 100% Bull cookies.
"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 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 if it was just me or you contending one way or the other it would be hard to defend, but the numerous studies that are out there sort of showed that price discovery is better with more trading. There’s also just really in the last several days a Baron’s report that showed similar results. 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 there’s something that regulators need to do differently because of these metastasizing and morphing markets and I think there is."
In contrast to Mr. Chilton's reference to the Bank of England (actually a co-conspirator with other central banks in price manipulation, so forgive my lack of confidence), a report in the Connecticut Law Review asserts that HFTs are likely illegal.
"This Article posits that some high-speed pinging tactics violate at least four provisions of the Commodity Exchange Act—the statute governing the futures and derivatives markets—and one of the regulations promulgated thereunder. The better approach is not to view high-speed pinging as a form of front running or insider trading, but as analogous to disruptive, manipulative, or deceptive trading practices, such as banging the close (submitting a high number of trades in the closing period to influence the price of a contract), spoofing (submitting an order for a trade with the intent to immediately cancel it), or wash trading (self-dealing, or taking both sides of a trade), all of which are illegal."
Gregory Scopino, Connecticut Law Review, February 2015.
Regarding the liquidity issue, this is the number one talking point of many people, including Davefairtex, who would defend criminal and corrupt markets, all in the name of glorious and magical "liquidity".
First of all, "liquidity" is an unnecessary $2 word created by economists to make them look smart and confuse people so as to steal their money.
From Investopedia.com, liquidity defined as:
"1. The degree to which an asset or security can be bought or sold in the market without affecting the asset's price. Liquidity is characterized by a high level of trading
activity. Assets that can be easily bought or sold are known as liquid assets.
- The ability to convert an asset to cash quickly. Also known as "marketability."
I see. There is no specific liquidity formula; however, liquidity is often calculated by using liquidity ratios" (Is it not telling there is "no specific liquidity formula"- in other words, this liquidity is really good and really important- I can't measure it or define it quantitatively, but take my word for it! Right! Got it!)
So it is the "the degree to which an asset can be sold without affect the asset's price? What are we talking about precisely?
The entire point of markets is for assets to be bought or sold and have price affected, if there are imbalances in supply and demand.
According to this definition, if I and Davefairtex exchanged a bunch of bananas for a dollar once this year, and a year ago we exchange the exact same bananas for the exact same dollar, that would be an infinitely liquid market- price change was zero, correct?
Oh yeah, I forgot, "there is no specific liquidity formula".
And frankly, if a market is perfectly matching buyers and sellers, and the money supply and wealth creation are stable (i.e. the Fed is not artificially creating inflation as it has done for decades), then prices should be and ought to be perfectly stable and totally independent of the "level of trading".
I've got a simple revelation for Mr. Chilton, Mr. Dave, and the liquidity apologists.
Markets are not supposed to be highly "liquid" at all times.
Markets are supposed to reflect supply and demand.
There are supposed to be, by design, natural periods of few sellers and lots of buyers.
That is called "price increases".
In free markets, prices will rise until buyers and sellers are in equilibrium.
There are also periods, also perfectly natural and healthy, where there are more sellers than buyers.
These are called periods of "price decrease".
This is the natural law of the free market.
This has nothing to do with liquidity.
The "false liquidity" Chilton and Davefairtex are referring to is corruption of the natural free market. Naked shorting is accomplished by a few "persons and institutes of privilege" market participants.
Naked shorting is creating "paper gold".
Just to remind Mr. Chilton and Mr. Dave some laws of physics, paper gold is not real gold. I'm referring to the stuff with atomic number 79 and atomic mass of 196.9655 g.mol-1. Not the stuff that are LEDs on a screen or magnetic particles on a disk. Just in case it is not clear what we are referring to.
Naked shorted paper gold futures are false certifications that assert that a supplier i.e. market participant has access to piles of physical gold equal to the amount of a gold contract, when in fact, they do not.
This is called fraud.
This is called deception.
This should not be called by a fancy name like liquidity or HFT or high volume market activity.
To demonstrate how absurd this argument is, if the gold market is a market where alledged physical gold is supposed to be exchanged with alledged cold hard cash, and somehow, magically, the gold "producers" are allowed to "produce" magical paper gold by printing a fake certificate (future contract) of gold that they in fact do not possess and never existed, then please, would the liquidity apologists tell me why the purchasers of gold should not be allowed to produce fake dollars in the exact same way, to purchase the fake gold, e.g. representing dollars that I in fact do not possess.
I would very much like to be able to use "naked dollars" that I am allowed to create out of thin air in order to purchase or hedge "naked gold" on these free and fair markets.
Is this not truly the most corrupt bastardization of a free market?
Markets are not supposed to be "liquid" when supplies are tight and buyers are many, and supplies are plentiful and buyers are few. Markets are supposed to be "illiquid" during certain phases in order to allow true price discovery.
The fake paper gold naked shorts and "liquidity" actually do the opposite of they are claimed to do- they harm markets and corrupt true price discovery.
Why is this allowed? Dave Kranzler captures the reasons well:
"One motive of the manipulation is to operate and control Comex trading in a manner that helps the Fed contain the price of gold, thereby preventing its rise from signaling to the markets that problems festering in the U.S. financial system are growing worse by the day. This is an act of financial terrorism supported by federal regulatory authorities. Another motive is to help support the relative trading level of the U.S. dollar, as we’ve described in previous articles on this topic. And, of course, the banks make money from the manipulation of the futures market.
The Commodity Futures Trading Commission, the branch of government which was established to oversee the Comex and enforce long-established trading regulations, has been presented with the evidence of manipulation several times. Its near-automatic response is to disregard the evidence and look the other way. The only explanation for this is that the Government is complicit in the price suppression and manipulation of gold and silver and welcomes the insider trading that helps to achieve this result. The conclusion is inescapable: if illegality benefits the machinations of the US government, the US government is all for illegality."
http://www.paulcraigroberts.org/2014/07/16/insider-trading-financial-terrorism-comex/
In addition to the immorality and corruption of the current system, we should be very aware that actual harm is being done to average families and innocent workers who depend on producing commodities for a living, to support their families.
So apologies if I do not extol the virtues of the "liquid" market composed of fake gold and high frequency trading.
Hrunner
