- The New York Times – Response to Volatility in Silver Takes Hold
On April 25, half a dozen officials from the CME Group, which runs many of the nation’s commodities exchanges, met via videophone to discuss the eye-popping rise in the price of silver, which had doubled in just six months to about $47 a troy ounce. They didn’t realize it, but they were about to take the first step toward popping a bubble in global commodities prices. Worried about the speculative run-up and the increased volatility of the silver market, the officials concluded that it was time to raise the amount of money that buyers and sellers had to put down as collateral to guarantee their trades. The first increase in so-called margin requirements took hold the next day, effectively making it more expensive for speculators and other kinds of traders to play in the market. But the price kept going up, reaching nearly $50 a troy ounce on April 28. Over the next week or so, the exchange decided to raise collateral requirements even higher, in four more steps that would kick in every couple of days. … CME says it makes margin changes regularly. Silver margins were raised five times and lowered once in 2010, for example. Corn margins were raised 36 percent in one day last October.
Comment
Typically futures margins are moved in deliberate ways and with great care. The concern is moving margins can have a huge impact on prices.
However, as the chart above shows, this was not the case with silver in the last two weeks. Even though prices and volatility did not materially change, the CME (which now owns the Comex where silver is traded) announced five margin hikes over a nine day period. The New York Times story above says four hikes, but the last hike announced last Wednesday May 4, was actually two margin hikes at once, one for Wednesday, May 4 and another for today, Monday, May 9. In checking with old-timers in the market, and looking at some margin records, we cannot find an instance where two margin hikes were announced at the same time, or five margin hikes over a nine day period when prices and volatility were little changed.
Before this episode, veteran futures traders would tell you that hiking margins five times in nine days would cause havoc in that market. Isn’t that exactly what happened last week with silver? Why did the CME act in this manner? The New York Times story above only makes passing mention of it.
We are not arguing against margin hikes once speculation rises in a market. However, hiking five times in nine days gives the impression of irrational decision making. This type of uncertainty makes any market ripe for a correction.