Article Dedicated to the Naive Ones Here Who Think Oil Prices Aren't Manipulated

Discussion in 'Economics' started by ByLoSellHi, Sep 3, 2009.

  1. Not just oil, either. The biggest scam of this era...

    Inquiry Stokes Unease Over Trading Firms That Shape Markets

    Stephen Obie, acting director of enforcement for the U.S. Commodities Futures Trading Commission refers to charts during a news conference in Washington, D.C., on July 24, 2008.

    Published: September 3, 2009

    LONDON — Its superfast, supersecret oil trading software was called the Hammer.

    And if the Commodity Futures Trading Commission is right, the name fit well with an intricate scheme that allowed commodity traders in Chicago working for Optiver, a little-known company based in Amsterdam, to put their orders first in line and subtly manipulate the price of oil to the company’s advantage.

    Transcripts and taped conversations of actions that took place in 2007, included in the commission’s case, reveal the secretive workings of high-frequency trading, a fast-growing Wall Street business that is suddenly drawing scrutiny in Washington. Critics say this high-speed form of computerized trading, which is used in a wide range of financial markets, enables its practitioners to profit at other investors’ expense.

    Traders in the Chicago office of Optiver openly talked among themselves of “whacking” and “bullying up” the price of oil. But when called to account by officials of the New York Mercantile Exchange, they described their actions as just “providing liquidity.”

    In July 2008, the commission charged Optiver with manipulating the price of oil; negotiations over a settlement continue.

    In the cutthroat world of high-frequency trading, success is a function of speed, secrecy and often a bit of intrigue. Few have been more adroit at these arts than Optiver.

    Optiver describes itself as one of the world’s leading liquidity providers, a trading firm that uses its own capital to make markets. It seeks to profit on razor-thin price differences — which can be as small as half a penny — by buying and selling stocks, bonds, futures, options and derivatives. (Derivatives represent about 65 percent of its business, equities 25 percent, and commodities and others make up the remaining 10 percent.)

    But the extent to which market making (providing liquidity to markets that need it) and proprietary trading (the pursuit of pure profit with a firm’s own money) can properly coexist has become a thorny question for regulators. They are grappling with an exploding business that makes up as much as half the overall trading in the United States and a growing share in Europe as well.

    Tanno Massar, a public relations executive working for the company, said that Optiver had no comment on the case. As for Optiver’s trading conduct, Mr. Massar said that the company was committed to transparent markets and that there was no inherent conflict between pursuing profits and making markets — a view that top Optiver officials had long been trying to convey to regulators when their oil trades were being investigated.

    But their pleadings fell on deaf ears. During a tense conference call in 2007, Thomas Lasala, the chief regulator for Nymex, made his doubts clear about Optiver’s trading strategies.

    “The market seems to move in reaction to your orders,” he said, according to a transcript of the conversation. “And I don’t think that is a market-making strategy.”

    It could well be that Optiver’s cowboy trading tactics are unique to the company. But as concern grows over the effect that high-octane computerized trading is having on markets worldwide, Optiver’s conduct in the oil futures market raises questions as to whether the relentless competition of this business is forcing companies to engage in similar practices.

    “These are proprietary trading shops that are masquerading as market makers,” said Tim Quast of Modern IR, a consulting firm that advises corporations on market structure issues.

    The Securities and Exchange Commission has opened up an investigation into high-speed-trading practices, in particular the ability of some of the most powerful computers to jump to the head of the trading queue and — in a fraction of a millisecond — capture the evanescent trading spread before the rest of the market does.

    The spread of high-frequency trading in Europe has lagged behind the United States. But it is now experiencing rapid growth, spurred by arbitrage opportunities that have attracted large American firms like Getco and Madison Tyler.

    Amsterdam, as much as if not more than London, has been the breeding ground for local firms seeking the same advantages. Companies like Optiver, All Options, Tibra and others have assumed influential positions in Europe, moving from their original expertise in trading options to the full gamut of stocks, bonds and derivatives as well.

    Called low-latency trading, this blend of speed and opportunism is the essence of Optiver’s business model.

    It deploys a sophisticated software system called F1 that can process information and make a trade in 0.5 milliseconds — using complex algorithms that let its computers think like a trader. And the company is so careful about preserving its secrets that when some traders and engineers left for a rival operation recently, Optiver hired private investigators and subsequently sued the former employees on charges of making off with intellectual property.

    Founded in 1986 by an options trader named Johann Kaemingk, Optiver has grown far beyond its roots in Amsterdam to trade on exchanges all over the world. It employs 600 people and, judging from the many positions advertised on its Web site, it is still in a hiring mode.

    Given the vicious competition that exists in the industry, Optiver and other companies have become creative in attracting the smartest people in finance. The dress code is aggressively casual. The company provides free breakfasts, lunches and Friday afternoon drinks, as well as chair massages.

    And in one recruiting Web video (no longer online), an Optiver trader sitting before four giant trading screens is seen ogling two skimpily clad women as they sit on his thighs.

    To enjoy these professional fruits, applicants need to subject themselves to three math-based tests to test facility with numbers and the ability to think clearly under pressure. For one of the tests, 80 questions must be answered in under 8 minutes. Sample questions include 0.034 times 0.2, or, if you have a cube made of 10 by 10 smaller cubes, how many are facing the outside?

    Few of the applicants even get an interview: 80 to 90 percent of people who take the test fail it. People who have worked at Optiver say the average age is young — under 30 — as the company has a policy of not hiring traders from rival institutions, preferring recent university graduates who can more easily embrace the firm’s culture.

    According to the Commodity Futures Trading Commission, which would not comment on the case, Optiver made about $1 million on its oil trading gambit.

    While $1 million may not seem like a lot, recorded conversations reveal the extent to which the firm’s trading practices broadly have enriched its employees.

    In one exchange, Christopher Dowson, head of trading in Optiver’s Chicago office and the mastermind behind the oil strategy, bragged to another employee about how he had bought a new speed boat with his share of the returns.

    “With these profits, might have to get a bigger one,” he said.

    And in another, Mr. Dowson acknowledges that Optiver was so aggressive in conducting its proprietary trades in some smaller stocks that their activities “were as big as the volume traded on the day.”

    It is precisely this — high-powered computers and the swagger of those who operate them — that is causing worries over high-frequency trading’s increasing sway.

    “The markets used to be about capital formation,” said Mr. Quast, the consultant. “Now 80 percent of trading is driven by some form of statistical arbitrage. We are buying into a statistical house of cards that could unravel very quickly.”
  2. I think., that Optiver and al will soon get some hardcore competition and they will not discuss anymore their speedboats purchases but their bankruptcy proceedings...
  3. What do you mean by that?

  4. If there truly is gold in them thar hills, the 49ers are going to come in droves.
  5. This is more bullshit fear mongering and sensationalism. How many times do we have to dredge up this stupid Optiver story about a $1mm take in a market that trades billions?

    For those who don't have have a clue, Optiver is accused of gaming market on close orders (they're called TAS by NYMEX) by contracting to buy 10,000 CL's on the bell, and then selling the crap out of it into the close. The goal is obviously to build a short average at a higher price, beat the price up in the last few seconds of trading, and use the TAS/MOC order to cover profitably at the "beat up" closing price.

    Anyone in professional trading knows this is commonly done in stocks by those executing large MOC orders ala index rebalancing.

    At best this causes a few wild swings into the crude pit close - the net price effect is zero, these guys are not taking positions. It has zero to do with crude's wild runup, and can hardly be called "manipulation" IMO, it's just trading.
  6. I personally think that those who blame all oil price movements on manipulation are the naive ones -- too naive or too scared to think that there might be something else to it, something having to do with the fundamentals.
  7. The oil market is a total fraud. You only need to look at what happened between 07-08 and what's happening now: this market moves on the basis of what equities are doing . If this isn't a fraud , I dont' know what that is . Make your guess as to how much speculation there is in this market , 70 %, 80% ...

    Fundamentals mean nothing in this market, I know because I trade USO and I don't give a DAMN about fundamentals. Fundamentals are the story told by the crooked oil traders that appear on CNBC.

    Recentyl I have been thinking that if we want to stop the insanity in all these markets , we need to shut down all the electronic exchanges and all the long only funds and go back to the old way of trading.
  8. That's not the case at all. Look at intraday/minute timeframes & you can see a lot of manipulation going on. Some of these theives operating on exchanges under the guise of "market-makers" are really prop-shops able to manipulate prices to their advantage as somebody in the article states.

  9. [​IMG]
  10. Sorry, but that chart serves a very limited purpose. I'ts very difficult to store meaningful amounts of oil. Therefore, demand almost always equals supply. If supply goes down, how are you going to plot "demand" if real demand has to closely match supply? You can't stock oil like other commodities.

    Prices, as a result can be distorted by over/under production of a negligible amount of crude & makes it susceptible to market manipulation by speculators & others with big pockets.
    #10     Sep 12, 2009