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The 117-year-old London Silver Fix has come to an end, and the London Gold Fix may soon be set to follow.

Behind the institution's demise is research from The University of Western Australia Business School, which has shown fixing participants could exploit price sensitive information for trading profits.

These findings have led to international regulatory investigations, multimillion-dollar fines and dozens of class action lawsuits against the fixing member banks.

These banks have met each day in London for private gold and silver auctions, which set the benchmark price of these commodities for the wider market. During this process - conducted over a closed teleconference call which can last from several minutes to over an hour - the participating banks have access to sensitive market information, allowing them to accurately forecast the new commodity prices.

Research by the UWA Business School's Andrew Caminschi and Winthrop Professor Richard Heaney found a clear pattern of increased trading volumes during the price fixing period - and accompanying this, an increase in the number of trades that accurately predicted the new trading price.

"Fixing participants are able to trade on the price sensitive fixing result ahead of its public release, and market trade records showed this was indeed taking place," Caminschi said.

"Information trickles down from the five banks, through to their clients and finally to the broader market. In a world where trading advantage is measured in milliseconds, that has significant value."

The UWA Business School researchers examined, for example, the daily 3.00pm fixing of the gold price. Just one minute after the teleconference begins, they found trading volume surges to almost 50 per cent above the average for the 20-minute period before the fixing process. In contrast, the trading increase in the minute after the fix price is published was not found to be significant.

"Intuitively, we expect trading volumes to spike following the introduction of information to the market," Caminschi said. "What we observe in our analysis is a clustering of trades well before the public announcement of the fix price, usually right at the start of the fixing."

Financial news service Bloomberg covered Caminschi and Heaney's research in November last year. Since then, regulators have fined Barclays US$44 million in relation to manipulation of the gold fixing benchmark and Deutsche Bank has resigned from both gold and silver fixings.

On 15 August - with no banks willing to take Deutsche Bank's seat on the silver fixing - the London Silver Fix was scrapped and replaced with an auditable electronic auction. The new benchmark -LBMA Silver Price- provides all market participants with real-time data freely available through various market data systems.

Caminschi and Heaney-who analysed some of the most widely traded gold and silver derivatives over an extended period-welcomed the end of the London Silver Fix. Caminschi predicts that like the London Silver Fix, gold fixings will also become electronic by the end of the year.

"The manipulation of commodity benchmark prices affects a broad range of stakeholders - from the miners and metal refiners, to royalty owners such as Indigenous land owners, private lease holders and governments," Caminschi said. "As such, the industry transition from highly concentrated pricing clubs, such as the London Fixing, to its more transparent successor, the LBMA Silver Price, is welcome news."

‘Fixing a Leaky Fixing: Short-Term Market Reactions to the London P.M. Gold Price Fixing' by Andrew Caminschi and Richard Heaney was published in the Journal of Futures Markets in September 2013.

‘Any Silver Linings?: Public market impacts of the London Silver Fixing' by Andrew Caminschi is currently a working paper available on the Social Science Research Network.

Media references

Karen Della Torre (UWA Business School)                                      (+61 8) 6488 8538
Verity Chia (UWA Business School)                                              (+61 8) 6488 1346