23 January 2014

Gaming the London Fix ... Seat Price

While goldbugs are focused on whether the London Fix is gamed, the industry is watching an equally interesting and delicate game around Deutsche Bank's London Fix Seat.

If you thought that the gold market was opaque, well a seat on the London Fix would have to be a totally dark market. This creates a problem for both buyer and seller as:
  1. there are no public prices for a seat
  2. neither seller or buyer want to be seen as too desperate by approaching the other party directly
  3. the buyer doesn't know how profitable a seat could be, as Fix volumes are not published
Given the above, it is not unreasonable to expect the seller and potential buyers to play some of their signalling/negotiating game via the media. However, to be fair the "sources" mentioned in various media reports could also be legitimate bystanders just speculating, we just don't know. Either way, no need for that to spoil the fun of looking at the various comments made in the media (here and here and here) over the past few days to see how the London Fix Seat price game is playing out.

In favour of the seller
  • the last time a seat was sold in 2004, it cost around 1 million pounds ($1.6 million) [anchoring high]
  • Gold traders say the benchmark still has value, helping them to hedge risk [you make money being a fix member]
  • a seat at the table is prestigious; to say that they're a fixing member carries a certain kudos [the seat carries a premium above the profit made as a market maker]
  • there could be quite a few contenders; Deutsche said it had already begun talks with other banks to sell its role [lots of buyers]
  • a logical possibility would be for another of the London Bullion Market Association's market-making members ... not currently involved in fixing - Credit Suisse, Goldman Sachs, JPMorgan, Merrill Lynch, Mitsui Precious Metals and UBS [lots of serious buyers]
  • a candidate is more likely to emerge among the Asian banks ... as these look to raise their profile in the London market ... Bank of China and Industrial and Commercial Bank of China (ICBC) are already members of the LBMA. ICBC is also about to complete the acquisition of the London commodity arm of Standard Bank [even more buyers]
  • bidders ... may also include other parties with an interest in the gold market such as refiners [a lot more buyers than you think, better rush]
  • The bank said it would ... resign its seat if it fails to do so [but if I can't find a buyer I'll walk away, I'm not desperate]
In favour of the buyer
  • Market participants said the role as a rate setter would be worth around £200,000 and had more value as a mark of status [anchoring low]
  • it's a tough sale at the moment, there's nothing really in it for the banks [there's not that much money in market making]
  • who, after the Libor scandal, will want it; increased scrutiny, with regulators pushing for new rules on commodity benchmarks after the Libor scandal, threatens to outweigh that benefit; if regulators are going to say 'well the fix doesn't work as it is, and we have to find another way of doing it', nobody is going to want to buy that seat [lots of regulatory risk]
  • it is a very old-style, archaic system and it is amazing that such a way of doing business has survived the modern day and age [Fix is old school and will probably fade away so not worth that much in the future]
  • any interested party ... would have to weigh the price carefully against shareholder value [I'm not desperate, won't overpay]
So we have a £200,000 to £1,000,000 price range with good points made on both sides. I think there is a good chance a Chinese bank will buy a seat for the prestige as it gives them the ability to differentiate themselves from their domestic competitors - Deutsche can be expect to work the status benefits point hard to new players in the bullion market or those looking to step up.

On the negative side, Deutsche Bank's biggest problem is the risk that regulators turn the fix from, as Paul Tustain says, a place where "financial trading principals [win] what traders call 'order-flow' from customers, principals (who sell gold to you)" where you can make money working your book, into a place where the holder of a Fix Seat is just an "agents (who buy gold for you)" and who can only earn the $0.20 per ounce Fix fee spread.


  1. Bron, are we really talking about the upside vs downside in terms of a paltry million dollars these days?

    Things must be really bad down under. Kidding aside, have you looked at the average GS banker pay this year, or how much a round trip business flight across the pond costs now?

    I applaud your efforts to post more regularly this year, but can you please stick to concrete market insights you have from your unique perspective, and not speculate about small things, like the goldbugs usually do? Thanks.

  2. Wasn't the Titanic a British flagged vessel? I believe you could buy a seat cheap after it hit the iceberg. DB has abandoned its seat for one on a continental lifeboat.

    Why would a physical gold market priced in Euros sit in London?

  3. Bron,

    I like your increased commenting. As always, there is lots of educational stuff.

    As for the first "anon" saying "please stick to concrete insights", this is nonsense, for in reality very little is "concrete".

    eg. if we meet in a pub, and you talk to me about your house, this is NOT "concrete". Why? Because your house may have burnt down while you are at the pub, so unless you are 100% certain that your house is still standing - while you speak - best not to speak about it aye, as its only speculation.

    Cheers. You have given a lot of interesting tidbits about the fix. Keep up the good work.

  4. Not all articles need to be serious, but I would say that a Chinese bank getting a seat on the Fix is far from a "small thing" in context of LME & Chase building purchases

  5. lol...just saw your comments at turdland and the antagonistic barbs thrown your way confirms the close minded mentality over there.

    don't expect an open mind from a small crowd of angry, semi-cultish self righteous adults who are so emotionally invested in fear and doom that they'll attack anyone with a differing viewpoint.
    the people dogging you right now the most over there are part of the problem.

    ya gotta laugh, because turds can't be taken seriously.

  6. Agree with those happy for this post, it could be a bigger deal than people think. I personally know very little about the mechanics of "fixing" but whenever you have a few powerful people setting the daily price, all of whom likely have arms who have some sort of derivative hedge or cash contract that relies on the fix price, the *opportunity* for manipulation exists. This is not the infinite short selling kieep the price mumbo jumbo you hear a lot of, but, if it occurs, is the scalping a few pennies to dollars here and there that adds up big when you are talking huge amounts of contracts.

    Dark markets indeed!

  7. Theirs been a total breakdown of the financial system. Its financial services companies that rule the world. I believe much of the worlds financial stocks are fake at some point in time this whole corrupt system will come crashing down. A gold standard will then be renewed.