Analysis on the Strategies of Institutional Investors to Control the Market

Institutional investors are the most important participants in the commodity futures market. Mainly divided into investment banks, large international resource companies, various funds (such as macro funds, hedge funds, index funds, CTA funds, ETF funds, pension funds, private equity funds, etc.), upstream and downstream companies in the industry chain, Futures brokerage companies, securities companies, trading companies, industry information consulting companies, etc.

A few large international investment banks, international mining giants, and large hedge funds are typical representatives of institutional investors. They are the absolute main force among institutional investors and the most important participants in the commodity futures market. They have an impact on market prices. A pivotal role. Whether it is trading volume and open interest, or trading frequency and the ability to manipulate prices, they are undoubtedly “out-of-the-box” and occupy the top spot. Of course, this is determined by the size of its funds, the means of controlling the market, and the nature of speculation. In the commodity futures market, some large international investment banks, international mining giants, and large hedge fund investors can be said to be arrogant and arrogant, playing with the market in the hands of stocks. For example, former Man Group director Frederick Demler pointed out in many international industry conferences: “Over the past years, more than 60% of the trading volume and open interest in the international copper futures market were controlled by institutional investors, and copper has long become a financial product. “As for financial derivatives, including commodity futures markets, one after another manipulation cases have already emerged one after another.

If institutional investors have common trading characteristics that are stable, accurate and ruthless, then their market manipulation strategies are even more chilling.

“Taigong Jiang took the bait for the fishing wisher”

“Jiang Taigong phishers get the bait” is a common tactic used by institutional investors and their main market manipulation strategy, and tailor-made products are their important bait. This tailor-made product is also known as OTC product-over-the-counter product or structured product. Generally, it is a one-to-one contract, some may be related to the variety listed on the exchange, and some may not be related in any way.

Large institutional investors are particularly keen to provide customers with tailor-made products. Because such products are generally carefully designed by them, they naturally understand the mystery, but customers often find it difficult to understand the mystery. Some products appear to be very tempting and are very close to the customer’s demand for value preservation. In fact, they are very complicated and obscure, hidden in many traps, and involve many financial mathematical models. Among them, the most attractive is undoubtedly the various zero-cost options that have been tried and tested by investment banks. The investment bank claims that customers can exercise their power without having to invest any costs. But in fact, the pie in the sky can only be the whims of customers. Once a customer or counterparty is deeply involved, it is generally difficult to extricate themselves, and eventually they are forced to reap the consequences, or admit their losses or go bankrupt. Over the past few years, there have been many examples of domestic customers suffering from investment bank structured products.

For example, in 2005, the copper loss incident of the National Reserve Bureau was a typical victim of tailor-made products. Certain investment banks and brokerage companies have customized a Collar copper option product called Zero Cost for the National Reserve. On the surface, this option can exercise power without paying any cost, but it implies many conditions. From 2005 to 2008, many domestic airlines were lured by investment banks to engage in crude oil OTC structured product transactions, which eventually led to huge losses. In 2019, Sinopec’s United Petrochemical Company suffered heavy losses in the trading of crude oil structured products. According to public reports, United Petrochemical Company was engaged in zero-cost option trading when the international oil price was above US$70/barrel. While buying crude oil call options, it also sold crude oil put options, and ultimately crude oil prices fell sharply. The crude oil call options produced no value, but the put options sold incurred huge losses.

Build momentum

Taking advantage of the momentum to build momentum, also known as leveraging strength, is one of the usual tactics used by institutional investors to manipulate the market. Institutional investors, especially US investment bank executives, often have relatively close relationships with government departments. Many government officials come from major investment banks or funds. For example, former US Treasury Secretary Henry Paulson once served as chairman of the Goldman Sachs Group. They tend to use the many inside stories they often have in their hands to create market momentum. In the futures market trading on behalf of customers, they also conduct proprietary trading, so they have a lot of information about customers’ transactions. Sometimes they will use the information of their customers for their own benefit, so as to take advantage of their efforts. At the same time, they will use their research team to create a bullish or bearish market atmosphere, take advantage of the global macroeconomic situation, country policies, central bank policies, commodity supply and demand conditions and other factors to fool other market participants and use the power of other market participants. Push prices in a direction that is beneficial to them. For example, during the global financial crisis from 2008 to 2009, a few speculative institutions such as Goldman Sachs knew in advance that the US government would invest funds to rescue some large investment banks and commercial banks facing failures in the US, so they bought a large number of financial assets when their financial assets were at a low level. After the purchase, they sang a lot of market and made a lot of profits. In the first quarter of 2020, certain European and American institutional investors took advantage of the global epidemic to arbitrarily short financial derivatives markets and commodity markets, causing panic selling globally. Then they frantically grabbed long chips when the price was low. After causing the price to fall sharply, it rises again.

The offensive and defensive alliance advances and retreats together

When manipulating the market, institutional investors sometimes attack and defend alliances and advance and retreat together. They will work together to plan for concerted action in the same market. Jointly share market information, trading pair holdings information, high-level government information, and other inside information. Sometimes they will have a unified operation strategy and action plan. Of course, there is no evidence of text, video or audio in all of this. Because the West has always been advertised as “open and fair”, it is clearly illegal to conspire to manipulate the market. But from the previous cases of institutional manipulation of the market, we can see obvious signs of collusion. Both before and after the market manipulation, they all showed a high degree of tacit understanding-the accuracy of information judgment, the directionality of holding positions and the consistency of action.

On November 25, 2003, the British “Metal Leader” reported that from the 1990s to 2003, some international mining giants jointly controlled the copper concentrate market for more than a decade. The relevant investigative agencies of the European Union, the United States and Canada accused them of manipulating the market by fixing sales prices, sales conditions, customer quotas, and market sharing. They often hold secret meetings or single-line telephone calls to artificially lower the copper concentrate processing fees. The report said: “Five companies account for 46% of the global copper concentrate market.” As one of the examples of collusion, they sometimes “discuss unified production cuts, causing the illusion of market supply shortages, and suppressing processing fees below (smelting) Plant) under actual operating costs”.

On December 25, 2003, Reuters reported that: “London metal trading investigations found that there was some form of collusion in the Aluminum market.” “There is a large majority of people in Europe holding a large proportion of LME aluminum stocks, which artificially caused spot tensions. “

In 1997, institutional investors led by Soros’ Quantum Fund and Canadian hedge funds Herbe Black and Dean Witter defeated Sumitomo Corporation of Japan in the LME copper market. This is a typical case of offensive and defensive alliances advancing and retreating together. From 1994 to 1997, Sumitomo of Japan manipulated the copper futures market on the London Metal Exchange for a long time, and controlled 5% of the LME’s copper inventory and spot at that time. Several large hedge funds such as Soros Quantum Fund of the United States, Herbe Black, Dean Witter of Canada and other large hedge funds formed an alliance to suppress the long positions of Sumitomo Corporation, and finally suppressed the LME copper price from about US$2,400/ton to US$1,700/ Tons, forced Sumitomo to liquidate its long positions when the copper price was low, resulting in a loss of US$2.6 billion (Sumitomo’s official data at the time, but some people believed that the loss was far more than that).

Readers may think that the above example is too old to explain the problem, and perhaps there is no such market manipulation behavior now. In fact, as mentioned earlier in this article, in recent years, investment banks have been punished for market manipulation frequently in the newspapers. It’s just that when people discover cases of market manipulation and report them, it has often been a year or even several years. This may be able to explain why the examples chosen by the author are all very old. In fact, as long as there are speculators in the market and there are speculative behaviors, the behavior of market manipulation cannot disappear. The control strategy of the offensive and defensive alliance will continue to be favored by institutional investors.

Control the forwards in the futures marketAnd recent holdings and inventory

There is a time limit for futures trading. Whether it is long or short, delivery or hedging transactions must be carried out within the specified time, that is, the position is closed. Therefore, if the open interest is relatively large and the delivery date is relatively concentrated, it is easy to be run on. Institutional investors consciously control the forward, short-term, spot, and inventory holdings in the futures market based on the position of the counterparty, so as to achieve the purpose of manipulating prices.

“A certain large trader or player currently controls more than 60% of LME copper futures long positions”, or “A certain large player or trader controls 80% of the current LME copper futures spot long positions, warehouse receipts and inventory , There is a huge backwardation in the market, and the player has both warehousing and spot business”, or “a spot trader is running on a certain short or long position”, etc. Similar reports are often seen in Reuters And Bloomberg and other daily market comments or reports.

For example, recently speculative institutions on the London Metal Exchange copper market have aggressively controlled the LME copper warehouse and have taken stocks for several consecutive days, resulting in inventories falling to the lowest level since 1974. LME copper spot premium (the price difference between the spot delivery price higher than the March futures price) rose from about 150 US dollars/ton on October 14 to the highest of 1103.5 US dollars/ton on October 18, the highest in history. In just two trading days, the increase was as high as 633%. So much so that the London Metal Exchange had to urgently raise the initial margin for copper trading.

Manipulate the official settlement price of the LME

As we all know, the London Metal Exchange stipulates that the final bid for the second round of on-site trading every morning is the official settlement price of the day. The global bulk non-ferrous metal industry basically uses the settlement price as the pricing benchmark for trade or production operations. Some institutional investors, such as a large international mining company (also a very large company in the trading of minerals and metals), sometimes manipulate the settlement price in the LME based on the needs of their own spot physical pricing period. Assuming that a large international mining giant sells 100,000 tons of copper concentrate to multiple customers, the contract price is based on the LME spot settlement price on October 12, 2021. In order to maximize profits, the mining company may drastically increase the LME spot copper price at the end of the second round of trading on the morning of October 12, 2021, causing the price to deviate far from the previous normal value in the short term. Assuming that the mining company can artificially increase the price by US$50-100/ton by buying 1,000 tons of long futures contracts in the LME, it means that the mining company’s 100,000 tons of copper concentrate on the same day can earn an extra profit. Take 50-100 US dollars / ton. In fact, from the past history, there have been many rumors that a certain company manipulated the official settlement price of the LME.

Malicious run on counterparty

Malicious runs on counterparties are the housekeeping skills of institutional investors. The reason is simple. Only the more counterparties lose, the more they earn. Therefore, in the commodity futures market (in fact, the same is true for other derivatives markets), if an institution catches a counterparty, it will often pursue it until the counterparty surrenders and surrenders. If a large number of short positions held by the counterparty are not closed for a day, the price of buying will rise every day. The pace of price increases will only stop when the counterparty cuts its position at a historical high and has a huge loss. vice versa. Sumitomo Copper Futures loss incident from 1995 to 1997, 1997 Zinc Zinc Futures loss incident, 2005 State Reserve Copper futures loss incident, 2008 domestic aviation oil company crude oil futures loss incident, and China United Petrochemical Company crude oil futures loss incident in 2019 And so on are all typical cases of institutional investors acting maliciously on counterparties.

In 2011, the book “Sue Goldman Sachs” detailed how investment banks headed by Goldman Sachs in the United States hunted down Chinese jet fuel companies in the financial derivatives market. From 2003 to the first half of 2008, crude oil prices rose from less than US$30/barrel to a maximum of nearly US$150/barrel. In the process, they carried out malicious runs against the short positions of China Aviation Oil Corporation’s crude oil. In the end, aviation oil companies were forced to liquidate their positions at historically high oil prices, causing losses of up to tens of billions of yuan. This is also a typical case of an investment bank maliciously running on a counterparty.

In 2009, an American author named Tom Bower published the book “Runs-Crude Oil, Capital and Greed in the 21st Century”. The book is a long documentary masterpiece, revealing in detail the inside story of many market manipulations and runs in the crude oil market. Among them, the United States Commodity Futures Trading Commission (CFTC) in June 2006 accused British BP Oil Company of long-term manipulation of the propane market and fined BP Company US$303 million. “Capital, conspiracy, and political fraud are the common language of the global volatile crude oil market. Over the past century, this precious commodity has always been in surplus or shortage. Low oil prices drove economic prosperity, and high prices. Oil prices have caused the global economy to fall into recession.” The US newspaper “The Observer” once commented on the book.

As we all know, once a market is kidnapped by capital, it is easy to be distorted or manipulated or run on. Historical experience tells us that as long as there is capital and as long as institutional investors actively participate, shady scenes in the commodity futures market will continue to take place; various greedy market manipulation behaviors of institutional investors will still occur from time to time. As value holders and other small and medium-sized investors in the market industry chain, perhaps they should always maintain a high degree of vigilance and vigilance. They should have a comprehensive understanding and understanding of the market, and they should have their own basic judgments on prices. Don’t be fooled by institutional investors. Make sure One’s own interests are not harmed.