Petty Settlement Reached by CFTC with Oil Price Manipulator

The CFTC settled a case late Thursday with a multinational liquidity provider for alleged oil and gasoline futures manipulation. While this settlement comes nearly five years too late, it may mark a turning point in the Obama administration’s general reluctance to take on Wall Street.

Late Thursday, the CFTC announced the $14 million settlement with Optiver over oil and gasoline futures manipulation in March 2007. The CFTC said that traders in Optiver’s Chicago office engaged in a trading scheme where they accumulated large positions in Trading at Settlement contracts in NYMEX light sweet crude, heating oil or gasoline contracts and then offset those positions by trading futures contracts shortly before and during the closing period for those contracts, a scheme known as “banging” or “marking” the close, according to the CFTC.

It has been no secret that the administration has been under significant pressure from the left and the right alike to initiate investigations into what many experts have been reporting are inconsistencies between the market price for oil and gasoline and market forces. Political instability in the Middle East, primarily surrounding Iran, has long been the straw man used by the mainstream media and those with ties to Wall Street to distract the public from oil speculators and their effect on oil prices.

While the $14 million cash portion of the settlement is a relatively insignificant sum to a firm the size of Optiver, the settlement also includes a provision forbidding current and former members of the firm from commodities trading for as long as four years, a substantial penalty. The trading ban almost assuredly is intended to send a message to individual traders and managers to watch their step.

The settlement prohibits van Kempen from trading commodities for two years, Randal Meijer, who was then Optiver’s head of trading, for four years and Christopher Dowson, Optiver’s head trader, for eight years. Dowson is the only defendant that Optiver still employs, according to the CFTC.

The investigation has been ongoing for more than three years. The CFTC claimed in response to questions from the media that the announcement of the settlement was timed to coincide with a speech by President Obama in which he called for investigations into oil speculation and more funding for investigators and staff. I am inclined to believe the administration in this regard. Investigations of this sort, once initiated, tend to take on a life of their own, and settlements are generally reached when both sides have sufficiently vetted each other and are satisfied that the agreement fairly represents either’s chances of success or failure on the merits.

Optiver may not be a household name, but it is well known in Chicago and Amsterdam.

According to the CFTC, Optiver reaped a $1 million profit in 2007 by “banging the close” in crude, gasoline and heating oil markets with a rapid-fire trading program nicknamed “the hammer.”

Optiver is a household name in Chicago’s and Amsterdam’s electronic trading communities, where it is known for high-speed market making and arbitrage strategies in options and other derivatives using super-fast computer algorithms.

Evidence in the CFTC case includes emails and phone recordings showing efforts by traders at Optiver’s Chicago branch to “move,” “whack” and “bully” oil prices in 2007.

High-frequency trading has come under scrutiny in commodity markets in 2011 following a series of violent and seemingly inexplicable price moves that many traders have blamed on its growth.

While I am far from satisfied that the CFTC and the Department of Justice–which has apparently been on sebatical since 2008–has done enough to protect world consumers from predatory commodities trading practices, this settlement and accompanying trading ban is certainly a step in the right direction. It didn’t include any of the usual cast of unscrupulous equity sucking characters as Goldman Sachs or Morgan Stanley, but perhaps further investigations are underway. I wouldn’t hold out hope in that regard, but perhaps this settlement will encourage the big boys to tread lightly.

As far as Optiver is concerned, I believe a recent company job announcement says it all:

For our Trading department we are looking for final-year students or recent graduates from a an analytically related field of study such as Finance, Economics, Econometrics, Financial Engineering, Engineering, Mathematics, Computer Science or Physics. A flair for numbers, a passion for finance and the markets, and a hugely competitive streak are also a must.  (emphasis added).

“A flair for numbers.” Well, that’s rich, but refreshingly honest.