Saturday, July 04, 2009

Unauthorized Trading Causes a Spike in Oil Price

Sources: BBC, Can Rogue Trading Move a Market?; Reuters, Oil Brokerage PVM Names Rogue Trader Behind Oil Spike; AFP, Oil Prices Drop Further as 'Rogue' Trader Probed; BBC, Rogue Trades Cost Oil Broke $10m

Early Tuesday morning, the price of Brent North Sea Crude spiked to $73.50 a barrel when a London trader purchased the equivalent of 9 million barrels of the oil. Steve Perkins, a crude futures trader at the PVM Oil Futures brokerage, conducted this unauthorized trade, which is now under investigation by PVM as well as the Financial Services Authority. When PVM discovered the unauthorized trading, which was unusual as it took place at a time when most London traders are asleep, it unwound the futures positions at a cost of nearly $10 million.

The trade caused a spike of nearly $2 in the oil price, but this quickly reversed, and contracts for 16 million barrels of oil changed hands in a very short period of time. The early hour and relatively low levels of trading meant that one large trade could greatly affect the price of oil, but that the price could also drop quickly. The drop in price was what accounted for PVM's loss in such a short time when it sold the contracts – by Friday morning, the price had fallen to a little over $66 a barrel, due largely to loss in confidence in a U.S. recovery after the release of poor employment numbers.

Brokers at PVM are authorized to link up large banks and hedge funds as trade counterparties, but they are not allowed to take positions in the crude markets directly. Perkins' motivations are unclear, but PVM—the world's largest independent broker—is conducting a full investigation. Though technology makes it more and more difficult for brokers to engage in this sort of unauthorized speculation, enough money changes hands regularly at a large firm like PVM that it may not be picked up on immediately. In this case, the lost was relatively small, unlike rogue trading at Societé Generale or Barings.

This incident may prompt renewed calls for regulation in the area of oil speculation, which has been a priority for many since last year. Regulation would focus on the OTC and futures markets. The US, for example, would like to reduce the amount with which a single broker can legally speculate, and the UK would be likely to follow any U.S. regulatory changes. There is some disagreement on just how much speculation can really affect markets over the long-term, but activity like this is undoubtably cause for some concern.

1) Do you think that an isolated incident like this should be enough to prompt regulatory changes over oil speculation as a whole, or do you think that the market is best left alone?
2) As technology advances, how do you think speculators who want to engage in rogue trading will react? Will technology ever make unauthorized trading impossible, or will more regulatory loopholes simply open up along with financial innovation?

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