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Fixing a leaking Fixing: Short term market reactions to the London PM Gold Fixing. 2013.

by on February 19, 2014

This 2013 paper provides an interesting and timely analysis of the efficiency of the London PM Fixing as a method of setting the gold price. The importance of this measure to the gold market can’t be understated as it the gold traded on this OTC market represents the bulk (by some estimates 90%) of gold trading. The Fixing happens twice daily as a telephone call between the Market Making banks and is a complex form of a Walrasian Auction. This post will first explain the auction, and then discuss the results and conclusions of the study.

The auction begins with the chairing bank putting forward a price. Each bank has one trader who then relays the quantity of gold their bank will buy or sell at that price. This quantity that they offer to buy or sell is the sum of all the buy and sells orders from the banks individual traders and of all their client’s orders. So the one buy order from the Bank of X is the sum of a large number of orders from both buyers and sellers, rather than one homogenous perspective. Additionally if the bank’s individual buy and sell orders at that price are equal they don’t contribute a buy or sell order to the fix even though a lot of buying or selling might have taken place internally between the banks customers.
If the buy and sell orders from the market making banks do not sum o zero (with a small margin for error) the chairing bank increases or decreases the price as appropriate until the price reaches an equilibrium. This means that an individual customer or trader buying and selling gold through the fix must know the price is up or down to put in their next order. But the fixings price does not appear to the public until the price is agreed.
The authors of this paper assess whether traders and the market making banks customers knowledge of the direction of the fixings price allows them to profit buy trading simultaneously gold derivatives, such as gold futures on COMEX or gold ETF’s  such as the GLD. They find that profits are possible and that there is evidence of higher volumes of trading in gold derivatives while the fixing takes place.
The authors point out two things, that their findings area might be a cause for concern in light of recent revelations such as the LIBOR scandal but also that fixing the fixings only requires making the call more transparent so that the whole market can see its evolution. This highlight a two differences between this and the LIBOR scandal. The problem highlighted is an inefficiency, where some traders have better information which they can exploit for profit, and  LIBOR where individuals were rigging the market in their favour. Also the fixings is a traded value where LIBOR the answer to a question, and does not necessarily reflect actual traded values.

Data: 1 Minute interval data for the GLD and COMEX, giving price (High, low, open, close) and volume. Daily PM fixings price and publication times. Full period from 1/12007 – 31/12 /12 with a shorter sample for the publication of the PM from 18/8/11 -31/1/12

Methodology: Relative Volatility and Adjusted and Unadjusted returns. Event study.

Citation: Caminschi, Andrew, and Richard Heaney. “Fixing a leaky fixing: Short‐term market reactions to the London PM gold price fixing.” Journal of Futures Markets (2013).

Abstract: This article investigates the impact of the London PM gold price fixing on two exchange‐traded gold instruments: the GC gold futures contract and the GLD exchange ‐traded fund. We find significantly elevated levels of trade volume and price volatility immediately following the fixing’s start, well before the conclusion of the fixing and the publication of its results. Similarly, we find statistically significant return advantages in the 4 minutes following the start of the fixing for informed traders. We find no significant impacts or returns following the publication of the fixing results. Trades in the opening minutes of the fixing are significantly predictive of the price direction of the fixings, in some cases exceeding 90%. Combined, these findings support the following conclusions: that the London PM gold price fixing does have material impact on the exchange traded gold instruments, information from the fixing is leaking into markets prior the fixing results being published, and there exist economic returns for trading on these information leaks.

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From → Empirical, Gold

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