Dutch oil traders accused of crude swindle

America's leading energy regulator has accused a Dutch oil trading firm and three of its employees - including British-born Christopher Dowson - of manipulating crude oil market for their own ends.

In the first lawsuit of its kind since the agency began investigating alleged manipulation of the market in December 2007, the US Commodities Futures Trading Commission (CFTC) has filed civil actions against Dutch-based Optiver Holdings and the three men, accusing them of making $1m in profit in just 11 days.

The CFTC alleges that the defendants were involved in scheme known as "banging the close" where a sizeable position is taken in the run-up to a market's close, which is then swiftly followed by offsetting that position before the close of trading in an attempt to manipulate prices.

The three employees named are Mr Dawson, head trader at Optiver, chief executive Bastiaan van Kempen and head of trading Randal Meijer.

All three worked largely out of the Chicago office. Charges have also been brought against Optive Holding's two operating subsidiaries in Chicago and Amsterdam.

The suit, filed in the US District Court in Manhattan yesterday, accuses the companies and the trio of manipulation and attempted manipulation of three different oil contracts - including the New York Mercantile Exchange's (NYMEX) main light sweet crude oil contract - during March 2007.

The suit accuses the defendants of engaging in 19 separate instances of attempted manipulation over 11 days in March 2007. It goes on to claim that on at least five of those days, the defendants were successful in creating artificial prices, sending prices lower on three occasions and higher on two.

In an email seized by investigators, Mr Dowson, 29, is claimed to have said he wanted to "bully the market" - which he and the other defendants allegedly did

M'friend, this particular form of manipulation was only even POSSIBLE because of the very curious rules of NYMEX for determining settlement prices for the day session in their Light Sweet Crude contract.

Ever heard of VWAP? If not, and meaning no offense, you haven't a clue in this discussion. Optiver broke NO -- exactly ZERO -- written rules, but yet, just as sure as sunrise, they did attempt (and succeeded for a little while) to game the NYMEX Crude contract.

There won't be a jury trial on this, of course. If, however, there were, and if the jury were populated by people who know about the realities of futures mkts, as opposed to the first 12 (or whatever number) of alleged humans not excluded in voir dire, the verdict of the jury -- I guarantee you this on my life -- would be ''not guilty''. Optiver, although (IMNNHO) a bunch of would-be crooks, actually broke exactly NO laws.

Which, of course, means that the idiots who write the laws, and the assorted exchanges who write the regs about trading futures, are, for all their experience, basically unimaginative and incompetent. The interesting thing (frankly, Optiver's gross attempt at manipulation just isn't that interesting) here is that NEITHER the NYMEX, nor CFTC, have implemented or even ASKED to be implemented any rules/regs to prohibit (as opposed to simple finger-wagging) this sort of manipulation.

Yes, it is somewhat better, in that it describes in a limited fashion the attempted manipulation, but this article DOES NOT DEFINE THE KEY TERMS OF MANIPULATION.

BTW, just so you know, the term 'TAS' that appears in that article means 'Trading At Settlement'. Because TAS trades occur BEFORE the actual settlement is made each day, this is a VERY complex subject...and, frankly, TAS has little to do with Optiver's manipulation.

So, I shall do it for them. The NYMEX settle the famous Light Sweet Crude contract based on the VWAP of the last two minutes in the day trading session.

VWAP is 'volume-weighed average price', and is a simple computation, specifically, the total DOLLAR amount of all contracts traded (in this case, from 2:28 to 2:30 pm Eastern Time) divided by the total volume during that period.

Clearly, if Trader X wants to game the mkt a bit at settlement, he/she/it can do so. Suppose Trader X is a bull on crude. Then, all Trader X need do, presumably already having a significant 'long' position in crude, is to buy a whole shjtload of crude in the last 2 minutes of day session trading.

The price will undoubtedly rise to some extent...and then Trader X can, if it suits the agenda, sell back some/all of the amount he/she/it bought DURING those last two minutes. The price will probably fall back somewhat, but Trader X simply does not care.

Why, you ask? A reasonable question. Here's why. Because futures positions are marked-to-market at the end of the DAY session, thus, the day session settlement price is the ONLY thing that matters when one receives one's overnight ''equity run''.

Under these circumstances, with Optiver or whomever buying bigtime near the close of the day session, the settlement price will be certainly somewhat higher than ''normal'', and Optiver will be the beneficiary on their equity run (and the shorts will have an equivalently artificially lower stated equity).

This is easily preventable, has been for decades, yet no exchange apparently can be bothered. Simply make a very unintrusive rule that NO trader can trade, during the last two minutes of the day session, more than 1/2 the contracts in a given mkt and month that he/she/it had previously traded during THAT day session.

Problem solved, and this form of manipulation goes into the dustbin of history.

The real 'fix' for this manipulation, of course, is for NYMEX (and other exchanges) to develop much improved means for setting the settlement price.

As Emeril Lagasse used to say, ''This ain't rocket science, folks.'' It is not very difficult to contrive superior means of setting the settlement price, it just isn't.

You can argue about the sincere intentions of regulators, but **exchanges** most certainly DO want to prevent manipulation. Two reasons: 1) they're all public companies now, and, as always, negative publicity hurts their share price and hence their pocketbooks, and 2) no exchange wants regulators sniffing around any more than the absolute minimum, because regulators almost always pick on someone at an exchange for a 'fall guy' if they suspect any impropriety at said exchange.

What exchanges need to do, of course, is to write their trading rules more carefully. The Optiver business wouldn't even have come into existence had the settlement rules been more carefully drawn.

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