6th June 2014 by Adrian Ash
Gold and silver rise for the week vs. Dollar…
ECB fails to devalue the Euro, QE next…
World stockmarkets hit new record highs regardless…
London Fix – Priceless Irony
The race is on then to replace London’s Silver Fix. So far however, the solutions put to the press appear only to create a magic number – a target for hucksters and gamblers to bet on, as well as investors and industry to value their holdings at – rather than providing a deep, unique point of liquidity.
This would be the world market’s loss, and much to the City’s shame. Price only exists where business is done. A benchmark acting merely as reference, without unique trades to create it, risks speeding a more fundamental shift of bullion dealing elsewhere.
The silver and gold Fixes have always swallowed so much London business, and London has swallowed so much of the globe’s wholesale bullion trade (as it still does, for now) that they became the market price – the key daily benchmarks worldwide. But such use only came and comes about after the fact. The Fix is a trading point first, and a benchmark after. And anyone choosing in advance to deal at that price goes towards achieving it. That makes the Fix a rare benchmark indeed.
Libor, on the other hand – like the London 4pm FX Fixes – was always intended as a reference rate. Post-2013 and the last rash of Libor fines, big banks will now report to the FCA what rate of interest they really had to pay one another to borrow at short-notice. A complex average is then spat out with the specific aim of being used to price everyone’s corporate and retail contracts on that day.
London’s currency benchmarks have always looked at real transactions since launch in 1994. But again, taking a sample of exchange-traded deals made 30 seconds either side of 4pm (there’s an 8pm Fix too) doesn’t create a market. It merely observes an existing one. Fair enough if that’s what you want. But who wants the Silver Fix to end after 117 years?
Not the market, says the wholesale industry’s trade association. As soon as the Silver Fix’s end was announced in mid-May, the London Bullion Market Association launched an open survey and consultation. This week it said 72% of 440 respondents think the age-old mechanism is “sufficient” as a route to price discovery. Moreover, and judging “usefulness” out of 10, the respondents’ average score was 7.5, with 88% saying they use the Silver Fix either daily or periodically. Asked if they would contribute to finding that market-clearing daily price, fully one-in-four respondents said yes.
Hope yet then for a dealing point, rather than simply a polled or averaged number to act as a benchmark post hoc. The LBMA’s executive team will present their recommendations to members later in June, and there’s a raft of non-bank solutions on offer according to press reports. But as far as we can see yet, those ideas only propose finding a benchmark, rather than offering a singular point of trade. That’s what London’s bullion Fixes have always provided, but you need market makers to make a market – and they need size to handle the unlimited volumes currently offered. The biggest bullion banks, however, are moving the other way in commodities right now.
With or without a specific Fix replacement, the world will stumble towards a commonly agreed benchmark for valuation. People always identify one or other price reference point in all tradable markets – be it the day’s close or some other auction process to smooth out “noise”. As the FCA’s judgment against Barclays last month makes plain, however, that same benchmark – whether formally agreed or found by convention – will also attract knock-out options and other binary bets. “Fix higher than X and you pay me Y” is one way to make a living, perhaps. But while it’s irrelevant to the business of buying, selling and settling metal, it washes back into the bullion Fixes just as surely as it does into every other benchmark, howsoever they’re set.
What to do? Prosecuting the crooks might be a good start (“Not our job in bullion,” Bloomberg effectively quotes the FCA today, even though the Barclays trader was screwing a derivatives client. False markets are illegal with or without FSMA.) Banning free trade really isn’t our thing, but restricting knock-out options would also help. All cultures at some time ban derivatives in the wake of wider financial crisis. Thirdly, everyone in tradable markets should stress – to clients, regulators, government and Joe Public in general – that price does not exist in the absence of trade. Each trade comes with a size, and that will affect how much the buyer is willing to pay the seller, and vice versa. Reference points may be a human necessity, but price is not some Platonic ideal. Real buying, selling and settling is needed.
If the London Fixes are replaced by mere averages or algorithms, the irony will be truly priceless.