Courtesy of EconMatters
License to steal
Every single day the oil market is manipulated, it is easy to see, right out in the open, and nobody does anything about it. It literally is like having a license to rob banks right in front of everybody, including the armed security guards.
Large Fake Order Strategy
Here is a technique that is used by large players to manipulate price in either direction, and it needs to be banned, it is outright cheating. So a trading Dom is an order entry price ladder which shows a collection of bids on one side, a typical default setting would be ten levels deep. On the other side of the price ladder are ten levels of asks, going from nearest to farthest away from the current, or last traded price in oil.
For example, if oil is trading at $96.00, there will be asks (offers to sell) going from 96.01, 96.02…96.10 and conversely there will be bids (offers to buy) going from 95.99, 95.98…95.90. The cheating technique is as follows: Let`s say oil is trading at $96.00, and the bids and asks size on both sides of the ladder are relatively all the same size, let`s say 30 contracts.
Large institutions, Hedge Funds, and anybody with a large capital base can play this game. At strategic points, when they want to move price in a certain direction, the large funds will flash a 115 contract size order right beneath the current price in the direction they want to move price. Say 115 contracts now bid at the $95.98 price level.
Of course, these large flashing orders relative to other orders stand out, and that is the purpose, to stand out in the market! Which in and of itself would not be a problem if these were “legitimate” orders with the actual intent to buy 115 oil contracts at $95.98 per contract in this example. However, even a casual observer can see that these are fake orders!
The Large Fake Orders will disappear before touched
They have no intent on buying with these 115 contracts, as they could just hit the bid or ask with their order. And if they really wanted to buy at a good price they would do so with a hidden order or break up their order so as not to move the market.
The sole purpose of these flashing large sized orders in relation to all the other price bids and asks at the various levels is to influence price, i.e., scare anybody from selling into their order, and invite others to front run their fake order. In short, to move the market!
Needless to say the same firm that flashes the oversized 115 contracts is already positioned in the direction that they want to influence price to go with these “fake orders”, these are not real orders, and will be pulled the instant someone hits their order.
Move Price in Firm`s previously positioned Direction
So the intention was never there to buy or sell these 115 contracts, it is merely for show to “help” move price in a given direction. This is the reason for the huge size relative to all other orders on the price ladder, to scare the market in the direction that the firm is already positioned. In the above example, the fund with the 115 contracts to buy at $95.98 is positioned long and really intends to sell – it wants the price level to rise and is pretending there is more interest than there is in buying, helping to drive the price up so it can sell at higher prices.
Strategy Works: That`s why it is consistently used to move markets!
Moreover, it does work or else the firms wouldn`t continue to use this type of flashing large fake orders strategy. It can also be interpreted by other traders; this serves as a form of open collusion, signaling to the entire market to go this way.
Maybe the CFTC needs a new leader!
This is blatant cheating, and it happens right out in the open every single trading day. Where is the CFTC or the government for that matter? All they have to do is monitor the oil markets for a week and they can find hundreds of examples of this cheating technique used to move the markets through artificial means.
It is about time some of these blatant cheating, and pure market manipulation techniques used in the oil market are identified and cleaned up by the regulatory bodies that have been asleep at the wheel. The abuses that go on every day in the oil markets are a real failure on behalf of the CFTC and the government to properly regulate these markets from price manipulation. It is about time for Washington to investigate why the CFTC fails to properly regulate the oil market.
© EconMatters
