It’s generally accepted that the USA has more lawyers per head of population than any other country, although some authorities give that distinction to Israel. (Why it should be difficult to get a definitive answer is beyond me, given that countries on the whole have a reasonable idea of their population and lawyers need to be on a professional register; divide one by the other, I would have thought. Still, perhaps we need to ask a lawyer.) Anyway, the US has a lot, which means they need a lot of litigation to keep themselves gainfully occupied. This may not be as a direct consequence, but the bandwagon is rolling on – as I think I may have suggested before would be the case – and the next financial benchmark has duly attracted its class action lawsuit for manipulation.
This time it’s platinum and palladium in the cross-hairs and – guess what? – the twice-daily benchmark setting is – still, for the moment – known as the ‘PGM Fix’. The four members of that Fix – Goldman Sachs, HSBC, BASF and Standard Bank – are accused in a suit brought by the law firm Labaton Sucharow, on behalf of a US jewellery manufacturer, of conspiring to “rig” the fixings, “front-run” orders and manufacture phantom “spoof” orders. (I should just make absolutely clear that the issues raised by the lawsuit refer to the former fixing mechanism, not the new, LME-managed electronic auction which replaced the old system on 1st December, and my description below of the process refers to the now superseded method.)
Platinum and palladium are quite small markets, compared with gold and silver, or indeed copper and oil, for example. They are used in the automotive and chemical industries as catalysts, in jewellery, and there is a degree of investment interest, although generally at a relatively muted level. Being small markets, though, they are susceptible to being influenced by players with deep pockets. Indeed, it is possible that on occasion in the past there may have been attempts to squeeze both of them; I would not for a moment defend such behaviour. But that’s not what the allegation is, as far as I can understand. The accusation is not of attempting to corner a market, for example; it is much narrower than that. It is that the four fixing members conspired to rig the Fix.
Not the same as LIBOR
We’ve all seen how the LIBOR fixing went – and frankly, it wasn’t pretty. It was a picture of bad behaviour in pursuit of personal and corporate profit. But equally, the way the reference price was arrived at was fatally flawed – it depended on ideas of what might trade rather than clear information of what has traded. If the PGM traders had been asked “where do you think you could buy or sell X thousand ounces”, then the parallel with LIBOR could be drawn. But it’s not like that. At each attempted price agreement (let’s not use the word fix, to try and avoid the knee-jerk reaction from those who don’t want to understand), the four participants declare whether they are a buyer or a seller, or indeed neutral. Now that’s not them telling each other what they are going to do as part of a conspiracy, it’s rather them committing themselves to concluding a deal at that level if the buy/sell quantities balance. The quantity that they put in is a combination of their own requirements and those of their customers; customers who, remember, can listen to the progress of the price setting and change their order at any time they like during the process. It’s an open operation, even if at the centre of it there is a conference call between the four members.
The one aspect that may be questionable is the fact that the members are, during the fix, operating in dual capacity – in other words, as principals for their own business and as brokers for their clients. That could be problematic, except that it is widely and publicly known that it is the case; the downside of changing it would be that the liquidity provided by the members’ proprietary trading would disappear, and the normal consensus of opinion is that that would increase volatility. It remains to be seen how that particular question plays out in the new, electronic fix which is just starting. Incidentally, it’s also worth bearing in mind that, since – as I’ve already pointed out – orders can be changed at any time during the process, the members themselves carry significant risk in that those changes may be detrimental to their proprietary positions. Dual capacity here has more than one effect.
So where do we get to? Well, like most other markets, PGMs could be manipulated; it’s a truism that if someone has enough money, they can probably – for a short time, normally – influence the price of a financial asset. Has the Fix been manipulated? Mmm, that seems rather unlikely to me; there are too many players able to be involved on a live basis to to make that idea very realistic.
Courtroom or Settlement?
What will happen now? Well, the lawyers will probably do well, as will the expert witnesses. Will it get to court? My guess is quite possibly not; we’ve seen settlements made before to avoid the long, attritional process of going through the full legal works, and it may well be the lesser of two evils just to settle it, regardless of guilt (or its absence). In a way, that would be a shame; it’s about time the metal Fixes were able to be seen, in their dying days, as what they have been for many years – a fair and transparent way of creating a reference price.