In Ted Butler's Archive

Dialing 911

Perhaps one of life’s greatest pleasures and passages occurs when children teach their parents to look at something in a different perspective. I experienced this event, just before Father’s Day no less, when my son Ross shared with me a thought of his.

He said, “Dad, what would you do if a neighbor had a heart attack?” I told him I’d call 911 and attend to the neighbor as best I could until the EMS people arrived. He asked the same about a fire breaking out, or if I observed someone breaking into a home nearby. With slight variations, I answered these emergencies also involved calling 911. Knowing that I have labeled the recent developments in silver as an emergency and a crime in progress, he then asked me, “Why isn’t there a 911 you can call in that case?”

We continued talking and it got me to thinking. One of the hallmarks of living in a civilized and lawful society is our assumption that when one dials 911 for a medical emergency, the EMS is going to arrive soon. Likewise for a fire or police emergency. We collectively pay significant taxes to maintain this safety infrastructure and dedicated men and women risk their lives daily to serve and protect us. If a 911 call is not responded to, there is, and should be, hell to pay by those responsible. If a false 911 call is made, the caller is, and should be, prosecuted in some way for abusing the system.

Taken further, we have institutionalized our response to all known threats to the general safety and well being of our citizens. That is why we maintain our armed forces and government institutions to deal with everything from terrorists to natural disasters. Of course, we can find fault and take corrective measures when these institutions fail to measure up in execution, but certainly not to the point of advocating a complete dismantling of the Air Force, or FEMA, or the FBI, or the local Fire Department.

The Commodity Futures Trading Commission (CFTC) is the police and fire department of the commodity futures market. They have an annual budget of over $100 million and are staffed with well over 500 employees. If you click on “about” on their web site ( the first thing you will read is the following –

The mission of the Commodity Futures Trading Commission (CFTC) is to protect market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity and financial futures and options, and to foster open, competitive, and financially sound futures and option markets.

Those are their words, not mine. I did not give them this mission, the US Congress did. I did not swear an oath to uphold the law and the Constitution, the CFTC did. I have not been charged with protecting the investing public from fraud, manipulation and abusive trading practices. The CFTC has been charged with, and has willfully accepted, that responsibility. Or al least, that is what they publicly proclaim.

Imagine that your city or county just commissioned a state of the art fire or police department, costing tens of millions of dollars annually and staffed by hundreds of public servants. But instead of protecting and serving the citizens, it quickly became apparent that they never responded to fire or police emergencies. The 911 calls were received and recorded, just never acted upon. Buildings burned down and victims of crime were ignored. How long would that be tolerated?

When you send a public warning to the chairman of the CFTC alleging a manipulation in a market, citing their own public data, that is their equivalent of a 911 call. Since the CFTC exists for this very purpose, it is reasonable to expect one of two things, namely, for them to act on the call or for them to chastise or punish you for making a false public allegation.

The emergency phase in the silver market has now probably come and gone. The concentrated shorts appear to have flushed all margined long traders from the market that were possible to be liquidated. The building has burned down. Still no response from the CFTC. Unfortunately, this is standard procedure for the CFTC. To my knowledge, in the history of the CFTC, they have never interrupted a manipulation in progress. Never put out a fire, never stopped a crime in progress.

I am coming to the opinion that the CFTC, just like a fire department that won’t respond to fire alarms, is doing more public harm than good by virtue of its very existence. It may be fostering the false security that someone is there to protect and that laws matter, when the opposite is true. By its inability or unwillingness to move against the manipulators, it is protecting them. If it were openly acknowledged that the CFTC was not there to protect the public, and was dismantled, the markets would adjust to that. At least we could save $100 million a year in taxes.

I still feel it is important to prod the CFTC on the concentrated short position in COMEX silver. Over the past couple of weeks, I have written to the chairmen of the CFTC and the NYMEX/COMEX, as have many of you. I know this issue will be resolved, one way or another. Either the CFTC will take measures to end the concentration by the largest short traders, or they will be forced to explain why it isn’t the problem it appears to be.

A friend of mine, Carl Loeb, has written the following letter that is self-explanatory. He has given me permission to reproduce it.

June 17, 2006

The Honorable Reuben Jeffery III


Commodity Futures Trading Commission

Mr. Richard Schaeffer



Re: Concentrated position in COMEX Silver Futures Market


It is my understanding that the purpose of a futures marketplace is to provide liquidity to producers and consumers who seek to lock in or protect prices, to hedge against loss and in general to enhance the functionality of markets in a free economic system. The purpose of the CFTC is to protect market users and the public from fraud, manipulation, and abusive trading practices in markets under your jurisdiction. Futures markets are designed to reflect market pricing, not to drive them.

Based on prior positions taken by the Commission, the existence of a very large concentrated trading position in any commodity has a high probability of being illegal, and a violation of Sections 6(c), 6(d) and 9(a)(2) of the Commodity Exchange Act, as amended due to the manipulative effect this position can have on pricing.

Such a concentrated position currently exists in the silver market in the largest 4 traders category of reporting. Further, the size of this concentrated position is so large by any rational metric, that its leverage to affect and drive prices is unquestionable based on the Commission’s own data.

The two graphs below illustrate how dominant this concentrated position in silver really is.

As can be seen from this first graph, the entire open interest of the crude oil futures market only represents 12 days worth of annual global production. As a result, a concentrated position in this market, though potentially illegal, is unlikely to be able to create as much mischief as one in the corn market, where total open interest represents 97 days of annualized production. However, for silver, the amount of the metal represented by the number of open interest contracts is an astonishing 320 days of production. There have been times recently when this has represented over 100% of the total annual production, so the current situation is not even particularly extreme, even though today the open interest of the silver market represents a greater percentage of annual production than any other major futures market.

This position is so large, so dominant, and held by so few hands, that it is implausible to assert that the leverage this huge position bestows on the holders can have no effect on market pricing, and is not in probable violation of the Commodity Exchange Act.

An individual regulatory violation may be seen as the “tip of the iceberg”, suggesting that many more problems exist below the surface.

In the silver market, the ice berg is inverted; in other words, 90% of it is floating above water, in full view of the CFTC and the Exchange in the form of an obscenely powerful concentrated net short position. It is baffling why, and how the CFTC and the Exchange has allowed this position to become established in the first place, and why they have not yet acted to rectify the situation. The following graph shows how out-sized this net short position is relative to other commodities:

Each of these markets currently have a commercial net short position. However, the concentrated net short position for the 4 largest traders in crude oil represents only a single day of production, and only 15 days for corn. For silver, the concentrated net short position would require the delivery of the next 102 days of global silver production to settle. Given current world inventories of silver, does anyone think it would be possible to deliver this amount of silver at settlement? CFTC data reports this concentrated position as held by the “Largest 4 Traders” who would therefore average around 45 million ounces short each. However, since the next 4 largest traders only average around 10 million ounces short each, it appears highly likely that this position is held not by 4 large traders, but by one or two whose position dwarfs all others and stands as the reciprocal to long positions held by thousands of traders.

The Commission has identified, and has dealt with, concentrated positions in other markets before. For example, in its “Order Instituting Proceedings Pursuant to Sections 6(c) and 6(d) of the Commodity Exchange Act” filed against Sumitomo Corporation for attempting to manipulate the copper market in 1995 and 1996 the Commission noted “that in the wake of accumulating large losses from speculative trading, the principal copper trader for Sumitomo engaged in a scheme, in conjunction with an entity operating in the United States, with the intent of manipulating the price of copper. .. Sumitomo, acting through its agent or agents, established and maintained large and dominating futures positions in copper metal on the London Metals Exchange (“LME”)…….. Through these actions, Sumitomo manipulated upward the price of copper and copper futures in violation of Sections 6(c), 6(d) and 9(a)(2) of the Act.” (

If one substitutes “Silver” for “Copper”, “low” for “high” and “downward” for “upward”, one can imagine using this language in a future order against whatever individual or small group of investors is currently manipulating the price of silver through the mechanism of an out-sized short position. It is worth noting that in 1995 and 1996, Sumitomo’s total accumulated long position was approximately 10% of total global production of copper, which was deemed egregious and a threat to global futures markets. Today, the net short position of the 4 largest traders in silver represents over twice that level of concentration. If this position does not meet the criteria of “large and dominating” attributed to the Sumitomo copper position, I don’t know what would.

At the time, the Sumitomo case was considered a threat to the banking system and when testifying to Congress on September 18, 1996, then Chairman Born reassured the House Banking Committee by stating that “The CFTC has long conducted market surveillance using large trader position reports and financial and other information available to the Commission. The CFTC requires reports from any futures trader whose positions exceed a specified threshold whether those positions are held for a customer or are proprietary in nature. We use this information to monitor for potential disruptive or manipulative market activity. ……. Thus, a market participant trading on a U.S. futures exchange would not have been able to amass huge positions as Sumitomo Corporation did without the Commission knowing about it and having an opportunity to take, or to urge the relevant exchange to take, appropriate steps to address any concerns raised by such positions.” (

In other words, Chairman Born took the position that the Sumitomo scheme occurred because a concentrated position was accumulated on the London Metals Exchange beyond the visibility of U.S. regulators, but Congress needn’t worry because if a similar case occurred under U.S. purview, the CFTC would have prevented it. It has occurred in silver. It has not been prevented.

It is my sincere hope that by bringing this situation to the attention of the Commission, Chairman Jeffery will avoid future testimony before Congress explaining how this impossible situation in silver was allowed to first develop, then fester, then disrupt and possibly threaten the integrity of the Futures markets in the U.S. when it finally unravels, as all manipulations eventually do.

To borrow language from Chairman Born before Congress, it is time for the CFTC to exercise its ” affirmative obligation to prevent disorderly markets” and to “to take, or to urge the relevant exchange to take appropriate steps to address any concerns raised by such (concentrated) positions.”



Carl F. Loeb

cc: Honorable Michael G. Oxley, Chairman, House Committee on Financial Services Honorable James A. Leach, Ranking Majority MemberHonorable Barney Frank, Ranking Minority Member

Honorable Richard H. Baker, Chairman, Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises

Honorable Jim Ryun, Vice-Chairman

Honorable Paul E. Kanjorski, Ranking Member

Honorable Rick Larsen

Honorable Richard C. Shelby, Chairman, Senate Committee on Banking, Housing and Urban Affairs

Honorable Paul S. Sarbanes, Ranking Member

Honorable Chuck Hagel, Chairman, Senate Subcommittee on Securities and Investment

Honorable Christopher J. Dodd, Ranking Member

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