Are the Exchanges Manipulating the Silver Market?

During the recent climb and collapse in Silver prices various commodity exchanges increased margin requirements repeatedly.  Supporters applauded the move and said exchanges should have acted sooner, while opponents cried market manipulation. As a result the overall margin issue has become somewhat politicized.  At MalHess  Analytics we don’t do politics, but we do like looking at numbers.

Futures margin requirements exist because the exchanges guarantee all trades so they want market participants to put up collateral against future losses. Logically, how much collateral is required should be based on the potential losses on the position. One way of measuring such is to look at market volatility along with the multiplier on the futures contract.

For example, during the April 25 24 hour trading session, Comex Silver had an over 4 pt high to low range. With a multiplier of $5000 per contract, someone who caught the high and the low could have lost or made over $20,000.  Using the then Comex initial margin requirement of $11,745, traders were theoretically risking losing twice their margin capital in one session. To put that into perspective using today’s mini S&P 500 futures contract, the Spoo would have to make an over 100 pt move in the span of one trading session to bust through as much margin capital.

To analyze the thinking behind the 7 different margin hikes at the Comex this year, we constructed a ratio of the recent dollar volatility over the prior month before the margin hike to the pre-hike initial margin requirement.  (Our dollar volatility was measured as the prior 21 day standard deviation of 1 day moves times the contract multiplier).

As the table below demonstrates, the amount of margin coverage has actually been falling, despite the various hikes, thanks to the exploding volatility in the Silver market. The numbers speak more towards the exchange trying to keep up with increasing volatility than an attempt to reign in the market.

Going forward, the bigger question is whether there is anything predictive about changes in margin requirements.