The $48 Million Platinum Payout

It’s not every day you see a Forbes 400 Member settle a class action suit surrounding market manipulation – but that was exactly the news last week as Futures Industry ‘Hall of Famer’ Louis Moore Bacon’s firm Moore Capital agreed to pay $48 Million to settle allegations of manipulating Platinum and Palladium prices.

Bacon happens to be one of the 400 richest people in the United States. A self-made billionaire, Bacon got his first finance job after spending the summer working on a fishing boat owned by NYSE board member Walter Frank. This led to his job as runner on the NY Cotton Exchange, from which he transitioned to a broker then Sr. Vice President of Shearson Lehman Brothers futures trading division. He started Moore Capital in the late 80s, and all it’s done since then has become one of the largest hedge funds on the planet while propelling Bacon into the billionaire ranks.

The allegations of market manipulation stem back to 2010, when Moore agreed to pay $25 million without admitting or denying the charges after the CFTC made allegations of an illegal practice referred to as “banging the close.” In case you’re wondering, Reuters provides a rather concise definition of the phrase:

 “The U.S. regulator alleged the fund [Moore] was entering trades in the last 10 seconds of trading in a manner designed to exert upward pressure on the settlement prices. The practice is known as “banging the close.”

Were they really trying to “bang the close,” or were they just trying to enter or exit that market, with billions under management, and as such doing huge number of contracts on the close? Just looking at some rough numbers – a $10 Billion fund risking 0.25% (1 quarter of 1%) of capital on each trade and risking an average daily move of say, $10,000 per contract (200 points in Platinum – about 10% of the price in 2007/2008) would be looking at trading 2,500 contracts at a time.  Platinum at the time had average daily volume of about 1,500 contracts. So spreading your trade out over 5 days, for example, would have resulted in 500 or more contracts (1/3 of the volume) on the close every day for 5 days – which would surely be enough to move a market like Platinum into the close.

Now, managed futures managers have been known to trade Platinum and to a lesser extent Palladium on a longer term trend following basis, but that’s where things get weird in this story – because the chart of Platinum in the latter half of 2008 goes straight down just like every other commodity and risk on asset at that time. There sure didn’t look to be odd market behavior on a longer time frame. At the same time – Platinum and Palladium are known amongst traders as some of the most illiquid commodity markets, and generally (in our experience) avoided by most active traders for fear of having trouble getting out.  So, what were they doing in that market in size?  I guess we’ll never really know what went down… Anyway, it is all over now, and Moore Capital is even allowed to trade that market on the close again after a 3 year hiatus was ordered by the CFTC in 2010.

What’s it mean for you? Well, while we’re not big fans of the sort of ambulance chasing done by a lot of class action lawyers, if the money is getting paid out – and you did trade Palladium or Platinum between 2006 and 2010, why not submit your claim for part of it. Just don’t expect to retire – it will likely be one of those miniature checks you get for $8.23 or so.

PS – speaking of Platinum, whatever happened to the idea of minting the $1 Trillion coin to avoid the US Debt ceiling?

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