The news that Barclays has been fined for manipulation of the gold benchmark is another nail in the coffin of trader autonomy and of voluntary data-based benchmarks. It also highlights the risks for speculators operating in the unregulated derivatives market when the ‘house’ is in charge of fixing the price.

Q: So who got stung this time?

A: Barclays was fined £26 million because one of its traders tried to hold the market down just when the benchmark was going to be fixed.

Q: Why did he want to fix the benchmark?

A: A customer had bought an exotic digital derivative, one which pays a fixed amount on a certain date if the gold price was above a certain level. If the price was below that level the bank would not have to pay the customer US$3.9 million.

Q: So the fix got ‘fixed’? How did one trader do that?

A: The fix is arranged via an auction process in which a chair from one of four banks – Barclays, HSBC, Scotiabank, and Société Générale – takes a price close to that seen on the market at the time and then asks whether the four banks (after consultation with clients) are ‘buyers’ or ‘sellers’ based on that price.

When supply meets demand at a given price, or the prices are close enough that the buying and selling can be balanced out with a little give and take. The trader in question posted several trades with the Barclays rep on the panel, so it became a net seller. This pushed the price down and so the bank did not have to pay out on the derivative contract.

Q: Hmm… another benchmark suspiciously easily rigged?

A: Yes. A lone gunman. It would be complete speculation to ask whether this had ever been done before, but in this instance it certainly didn’t escape the notice of the client, who complained to the bank, which then mounted an investigation.

Deutsche Bank was a fifth member of the panel until the start of 2014 when it gave up its role. BaFin, the German regulator has been investigating Deutsche Bank’s role in the precious metals market since December 2013.

Q: Still, Barclays caught its guy didn’t it?

A: Well, he misled the bank’s investigation according to UK regulator the Financial Conduct Authority (FCA) and he tried to mislead the regulator’s own investigation as well, it reports. It found that “Barclays failed to adequately manage the inherent conflict of interest that existed from Barclays participating in the Gold Fixing and contributing to the price fixed during the Gold Fixing, while at the same time also selling to customers options products that referenced, and were dependent on, the price of gold fixed in the Gold Fixing.”

By failing to tackle these issues an increased risk of “inappropriate conduct by Barclays' traders participating in the Gold Fixing” was created, the FCA said.