Spike in Silver Prices Has Similarities to GameStop Trading; Regulators on Alert

Spike in Silver Prices Has Similarities to GameStop Trading; Regulators on Alert

Speculation surrounds the recent spike in silver prices, with comparisons to the pattern seen with GameStop shares and questions about market manipulation through Reddit posts. Clifford Chance attorneys discuss what regulators must demonstrate to show whether traders engaged in any misconduct.

The Commodity Futures Trading Commission (CFTC) is reportedly investigatingpotential manipulation of silver prices after those prices rose dramatically in recent weeks, and the Department of Justice will likely investigate as well.

Silver prices may have followed a pattern first observed in the prices of GameStop and other stocks, in which retail buyers encouraged each other on Reddit and other websites. As with GameStop, the retail interest in silver may derive at least in part from a desire to “punish” institutional traders who, the retail traders believe, are suppressing prices to benefit their short positions.

Any CFTC or DOJ investigation will likely include close scrutiny of communications by retail traders for potential “coordinated-trading” price manipulation. Ultimately, however, the authorities may be more inclined to focus upon institutional traders who traded silver in a manner intended to influence prices, and in particular on traders who sold in order to defend lower prices against the increased retail buying interest.

Was There Coordinated Trading?

In determining whether retail traders engaged in manipulation or attempted manipulation, the CFTC and DOJ will likely look to previous settlements based on “coordinated trading.” In the foreign exchange and ISDAfix settlements from 2014 to 2018, the authorities alleged that traders at various banks shared information about their positions in chat rooms and agreed to trade in a manner that would mutually benefit their positions.

Authorities will be interested in determining whether similar coordination occurred among retail silver traders. In order to prove manipulation, the authorities would need to show more than retail traders taking to social media as cheerleaders.

Rather, authorities would need to demonstrate that:

  1. the coordinating traders had the collective ability to influence market prices;
  2. the traders intended to create an artificial price (or, perhaps, that they traded with a reckless disregard for price integrity);
  3. an artificial price was created; and
  4. the coordinating traders caused the artificial price.

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