Commodities traders who buy and sell as much as $5.67 trillionof raw materials a year say the benchmark prices for everythingfrom oil to iron ore to gasoline are wrong as often as 27 percentof the time.

In a Bloomberg News survey conducted during the past eightweeks, 85 traders and analysts said they have little confidence inthe assessed prices of crude, metals and iron ore. Regulators,including European Union Competition Commissioner Joaquin Almunia,may examine commodities markets, having already increasedinvestigations of manipulation of benchmarks for interest rates,derivatives, foreign exchange and oil.

Five years after the global credit crisis prompted moreregulation of banks, benchmark prices for hundreds of commoditiesare determined through surveys of anonymous traders who may have astake in the outcome of the assessments. Unlike stock prices,available in real time at regulated exchanges for all investors tosee, many raw materials that go into food, clothing and power arebought and sold in private.

“There will be growing pressure for more regulation,” DavidWilson, director of metals research and strategy at Citigroup Inc.in London, said by phone Sept. 3. “Commodities markets havetraditionally been a backwater that only specialists would havebeen involved with. Clearly these markets haven't changed with thetimes.”

While prices for stocks, bonds and currencies are set by actualtrades on exchanges, benchmarks for coal, iron ore, fertilizer, gasand some metals are determined by journalists. They establish theprices by collating data on available bids, offers and trades aswell as phone and e-mail surveys. Those assessments are often usedto determine payments in long-term contracts between buyers andsellers.

Bloomberg surveyed analysts and traders of energy, metals, ironore, carbon and power. They were granted anonymity so they wouldgive their unguarded opinions to the question: “How many times outof 100 instances do you estimate the assessed benchmark price forthe main commodity you trade is unrepresentative of the truelevel?”

The mean answer was 27 and the median was 20. Crude benchmarkswere the least representative in markets where more than fiverespondents gave answers, followed by oil products, metals and ironore. Agricultural commodities had the greatest accuracy, accordingto the survey. About 270 people were contacted. Most of those whodeclined to give answers said they couldn't quantify how frequentlyprices were inaccurate.

Clear Concern

“The survey shows there is clearly a concern that others couldbe using these price-making mechanisms to bias the price up or downdepending on their interests,” Shaun Ledgerwood, a senior antitrustconsultant at the Brattle Group who formerly worked at the U.S.Federal Energy Regulatory Commission, said by phone Sept. 30.“However, from the traders' perspective, no other mechanismprovides as reliable a source of information.”

The responses represent a fraction of the thousands ofcommodities and energy traders in the world. The 10 largestinvestment banks employ almost 2,300 people across trading,structuring, sales and research publishing, according to CoalitionDevelopment Ltd., a London-based research company.

The system of price benchmarks in the oil market “isn't broken,”Ian Taylor, president and chief executive of Vitol Group, theworld's largest independent oil trader, said in an interview at theOil & Money conference in London Oct. 1. Some prices are hardto assess because there aren't enough trades, he said.

“We occasionally don't like the price quotations but we don'tthink it's fair to say you can't trust them,” Taylor said. “There'sa logical reason that they are what they are, and you can't saythey're demonstrably wrong.”

Published benchmarks provide more transparency than would existwithout them, and there are no alternatives, Ehsan Ul-Haq, a seniormarket consultant at Walton-on-Thames, England-based KBC EnergyEconomics who has almost 20 years of experience in the oilindustry, said by phone Oct. 1.

Assessments in spot markets contrast with exchange-listedfutures ranging from crude oil to corn, which trade almost aroundthe clock and are publicly disclosed. More than 2,000 commoditycontracts trade on bourses worldwide, according to data compiled byBloomberg based on listings by the CME Group Inc. andIntercontinentalExchange Inc.

$5.67 Trillion

Ensuring the accuracy of benchmarks has gained urgency as theglobal commodities market surged. World trade in agricultural,mining products and fuels swelled to $5.67 trillion in 2011 from$1.34 trillion a decade earlier, according to the World TradeOrganization in Geneva.

The International Organization of Securities Commissions, theMadrid-based group representing regulators from more than 100countries, set tougher guidelines for publishing benchmarks in aJuly 17 report, including making prices based on “observable” dealswhere possible.

Banks, traders and benchmark publishers could be fined forfailing to follow rules aimed at reducing the potential forrate-rigging, according to EU rules proposed Sept. 18. While priceswould have to be based on real transaction data, those underpinningthe commodity markets may be allowed special treatment because oftheir “sector-specific characteristics,” the plans show.

Regulators say they aren't convinced of the integrity ofcommodity assessments. The EU's probes will probably spread to rawmaterials, Almunia, a vice president of the European Commission,said on the EU assembly's website May 28.

“We have started with the financial sector, now we are in theenergy sector, and probably in the raw materials or in other caseswe will need to pay attention also,” he said.

Almunia's comments came after antitrust authorities opened aprobe into manipulation of oil prices. EU investigators searchedthe offices of Platts, the unit of New York-based McGraw HillFinancial Inc. that assesses the price of Dated Brent, thebenchmark for more than half of the world's crude. Authorities alsoraided BP Plc, Royal Dutch Shell Plc and Statoil ASA, and soughtinformation from Vitol Group, Gunvor Group Ltd. and GlencoreXstrata Plc.

Spokesmen for BP, Shell, Statoil, Gunvor and Glencore declinedto comment, as did a spokeswoman for Vitol.

The Federal Trade Commission is investigating oil prices,mirroring Europe's inquiry, two people familiar with the mattersaid in June. The FTC is looking at the impact that possiblemanipulation of the benchmark could have on physical and derivativeoil markets in the U.S., a person who asked not to be named becausethe matter is confidential said in July.

$600 Trillion

Regulators around the world have tried to make the financialsystem safer and more transparent in the five years since thecollapse of Lehman Brothers Holdings Inc. As they examine marketsthat remain opaque, they uncovered attempts to rig the Londoninterbank offered rate, or Libor, referenced in contracts valued atabout $600 trillion. Royal Bank of Scotland Group Plc, UBS AG andBarclays Plc were fined a total of about $2.5 billion since June2012.

Those probes are continuing. Last month, U.S. prosecutorscharged three former ICAP Plc employees with manipulating Libor,and the London-based interdealer broker was fined $88 million in afive-year international probe of rigging of benchmark interestrates.

Authorities are also investigating manipulation of ISDAfix, abenchmark in the $379 trillion market for interest-rate swaps.Almunia said Oct. 7 on the EU's website that he is examiningpossible irregularities in currency rates following a Swiss probeinto whether banks colluded to manipulate the $5.3 trillion-a-dayforeign exchange market.

Libor and ISDAfix are part of a suite of financial benchmarksthat underpin about $1 quadrillion of assets and trades, almost 14times global economic output in 2012.

Royal Bank of Scotland passed a currency trader's instantmessage records to U.K. regulators after concluding thecommunications may have been inappropriate, according to two peoplefamiliar with the matter. RBS uncovered the chats after opening aninternal probe following a Bloomberg News report in June thattraders at some of the world's biggest banks may have sought tomanipulate benchmark foreign exchange rates.

RBS, Deutsche Bank and Citigroup are among firms reviewinge-mails, instant messages and phone records of theirforeign-exchange employees for evidence of potential manipulation,according to three people with knowledge of those probes. Spokesmenat all the firms declined to comment.

May Backfire

Requiring that commodity-price benchmarks be set by observabledeals may backfire should traders decide it's safer to avoidparticipating in assessments, said Clare Hatcher, a consultant atLondon-based law firm Clyde & Co.

Methods for pricing commodities evolved over as long as 130years and gained acceptance in part by providing more informationto the market than was previously available.

For crude oil and refined fuels, Platts publishes the names ofcompanies, prices, delivery ports and other transaction details. Itassesses prices through bids, offers and transactions made byphone, instant message or online during prescribed times, known asthe market-on-close process, which subscribers to the service cansee.

The process began in 1992 and is used for selected products,such as Dated Brent crude, that have industry-agreedspecifications. More than 60 percent of the world's internationallytraded crude oil was priced against Dated Brent as of May 2011,according to a report by Platts at the time.

Before market-related pricing systems were adopted in the late1980s, oil prices were set by large multinational companies andlater by the Organization of Petroleum Exporting Countries,according to the Oxford Institute for Energy Studies.

In other markets, such as coal and iron ore, transaction detailsare published when buyers and sellers agree to provide them. Plattsreporters discuss bids, offers and deals with participants todetermine daily prices. In the absence of verified deals, reportersuse information such as bids and offers and related prices in othermarkets. Judgment is used to exclude data that don't follow Plattsprocedures or are considered out of line.

“In all of Platts' data-collection processes for itsassessments, our aim is to bring transparency to price discovery bypublishing as much detailed and meaningful information aspossible,” Kathleen Tanzy, a New York-based spokeswoman for thecompany, said in an e-mailed statement Oct. 4. “In our oil and oilproducts assessments, the degree of transparency ourmarket-on-close price assessment process provides is unparalleled,identifying all data by company name.”

Private Negotiations

Sugar, coffee and cocoa are determined in private negotiations,with prices set at a certain amount above or below exchange-tradedfutures. In these spot markets for prompt deliveries, reporterscall traders and brokers and then publish the values in newsarticles.

In Platts's experience, there is always someone who doesn'tagree with a price assessment, perhaps because the market movedagainst his or her position, Tanzy said. Platts assessments reflectmarket value as determined between buyer and seller in the openmarket and reported to Platts, she said in a previous e-mail.

Platts gave the EU a presentation outlining its market-on-closeassessment, Tanzy said, declining to provide details of themeeting.

The company is an independent party with no financial stake inwhether prices rise or fall, Jorge Montepeque, global director ofmarket reporting, said in a July interview.

Argus Media Ltd., a competitor of Platts, hasn't been involvedin the EU investigation and won't speculate about scrutiny of oilor other markets, Seana Lanigan, a spokeswoman for the London-basedcompany , said in a July 26 e-mail. Argus is implementing theprinciples for oil-price reporting recommended by IOSCO, shesaid.

“In 40 years we've never had any serious complaints or legalaction about our price assessments,” Adrian Binks, chairman andchief executive of Argus, said by phone Oct. 4. An external reviewof Argus's process will be published in the next month, hesaid.

Bloomberg LP, the parent of Bloomberg News, competes withPlatts, Argus and other assessment companies in providing marketnews and information.

Spot Gold

Even for gold, with its pricing system that has lasted more than90 years, it would be “naive to discount the possibility of pricemanipulation,” said Mark O'Byrne, director at brokerage GoldCoreLtd. in Dublin. In the spot market, transactions between banks arereported by participants directly to news organizations. Pricesused by mining companies for hedging are published by London GoldMarket Fixing Ltd. Five banks carry out fixings every morning andafternoon to set benchmark prices.

The China Iron & Steel Association, representing iron-orebuyers from the world's largest importing nation, said in May itwas skeptical about Platts prices because of the unknown size ofthe deal samples.

Metal Bulletin Ltd. will probably hire an outside auditor toreview its process for pricing iron ore and steel, London-basedManaging Director Raju Daswani said June 6. Published benchmarksprovide more transparency than would exist without them, Daswanisaid by e-mail Oct. 4.

CRU Group, a competitor, said June 5 it hired a third party toreview how it collects steel prices. The results will be publishedto data providers, Glenn Cooney, head of operations, said by e-mailOct. 4.

“You can't regulate a handshake, a one-off contract betweenproducers, shippers and consumers,” Andrey Kryuchenkov, aLondon-based analyst at VTB Capital, a unit of Russia'ssecond-largest lender, said in an e-mailed response to questionsSept. 4. “How do you define manipulation? When an Australian minershakes a hand with a giant smelter in China and they agree on aterm price?”

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