Apr 23

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.

Apr 18

Obama attempts to Overcome Institutional Insolence on Oil Prices?

Yesterday President Obama stood at the White House with Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler, Treasury Secretary Timothy Geithner, Attorney General Eric Holder, Federal Trade Commission (FTC) Chairman Jon Leibowitz, and proclaimed that he will be putting “more cops on the beat” to investigate Wall Street oil price speculation and potential wrongdoing. I have written on this subject before here, here, and here. While I have little confidence that anything will come of this third call by the President for the Department of Justice, the FBI, and the CFTC to investigate oil futures speculation and other speculation in the commodity derivatives markets, he is at least taking his act public this time.

“We can’t afford a situation where speculators artificially manipulate markets by buying up oil, creating the perception of a shortage, and driving prices higher, only to flip the oil for a quick profit,”

Many argue that the President can not do much at all to influence oil prices. Many simply buy the Wall Street rhetoric hook, line and sinker, and even go so far as to turn sheer conjecture into fancy charts in order to confuse the public. I disagree. First, there is no greater motivator than personal freedom, and under current law Eric Holder can punish those found to have run afoul of the law by sending them to federal prison. Moreover, while the fines currently permitted are small change, the embarrassment that would accompany fines has consequences. I do not have any explanation for the extraordinary impotence and insolence at the Department of Justice under Eric Holder. The entire soap opera could just as easily be an elaborate act wherein the President calls for investigations of this thing or the other thing, and subsequently sends Eric Holder privately on his way with instructions to do nothing.

I find it extraordinarily difficult to believe that if Eric Holder made the decision to call in the FBI and begin interviewing the big Wall Street players in the commodity futures derivatives markets and put a few of them in prison, that the oil prices wouldn’t drop in an instant. I envision FBI agents and federal regulators walking through hallways at Goldman Sachs, owner of the Goldman Sachs Gold Index, and other large firms carrying lawfully issued subpoenas and search warrants. I have a hunch that some of the more egregious activities would stop immediately if people realized they might actually be sent to prison. Exxon Mobil, the Saudi Oil Minister, among others, are on record as believing that the current price of oil has no basis in the realities of supply and demand nor the potential disruption in delivery that could ensue following a conflict with Iran. Holder’s behavior with regard to oil futures speculation is not dissimilar from his approach to both the larger mortgage and financial instrument fraud which caused the recession, and his utter infecundity with regard to prosecuting those responsible for the BP oil spill. It is as if the entire Department of Justice loathes prosecuting anyone, for anything, at any time.

What is particularly troublesome about Obama’s footing on oil prices is that it is not Republicans who are obfuscating efforts to initiate investigations, make arrests, and prosecute those responsible. It is his own administration and administration officials who stand in his way. It is cerytainly true that Republicans, Mitch McConnell in particular that are placing the blame at Obama’s feet, but the President has the tools to demonstrate through concrete actions that he takes Wall Street fraud and price manipulation seriously. One man, let alone the President of the United States, can alone control the world price of oil, but one man can use the tools available to him to take action. Some time ago CBS’s 60 Minutes ran a piece in which it interviewed the chief prosecutor at the Department of Justice concerning the lack of criminal prosecutions stemming from the financial collapse. His response was a contemptuous “just wait.” Well, the American people have been patiently waiting for nearly four years for the administration to show that it will prosecute wrongdoing perpetrated by the golden boys of Wall Street. My guess is that the wait will continue.

Ian Masters interviewed Michael Greenberger, the former Director of Trading and Markets at the Commodity Futures Trading Commission, on this subject yesterday. It’s worth a listen.

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Apr 06

Avoiding the Cause of Oil Spike

The fight over oil prices among the top two presidential candidates is afoot. The Obama campaign has just released a new campaign add in which he touts his administration’s accomplishments in increasing domestic oil supply and raised fuel efficiency standards for automobiles. Romney has been fighting back, claiming that Obama and his henchman, including the Secretary of Energy, have colluded with tree huggers and failed alternative energy manufacturers like Solyndra to purposefully drive up the price of oil.

This spectacle would be politically entertaining if it were not for one glaring omission: derivative futures speculators on Wall Street account for a plurality of the recent spike in the price of oil. This didn’t come from some left wing progressive algae farmer, it came from the fucking Federal Reserve. If Obama were to even intimate that CFTC and DOJ investigations of illegal futures trading were coming down the pike, the price of oil would decline quickly as speculators take profits in hopes of avoiding regulatory action. Romney has also failed to go after Wall Street on this matter. One can be left only to conclude that neither party has an interest in having the backs of hard working Americans as they struggle to purchase gasoline and heating oil and find enough left over for food and other necessities.

Mar 14

No Excuse for Tied Hands on Oil Speculation

Anyone who drives or owns a business has noticed the recent surge in oil and gasoline prices recently. We have also heard that the price is dependent upon nothing more than good old Econ. 101 supply and demand. This is simply not the case, and there is absolutely no reason that the Obama administration has not initiated investigations at the Department of Justice and the Commodities Futures Trading Commission.

Oil futures speculation has contributed at least 40% to the recent run up in oil prices. Moreover, Wall Street firms trading in oil futures with no intent to ever take delivery of one drop of oil works to distort the market. Wall Street is not a family farmer attempting to lock in a price for his or her soybeans, or a pig farmer seeking to hedge against a drop in pork belly prices. Wall Street’s involvement in any commodities futures market does nothing to serve the people who produce commodities nor the public at large. As of today, Wall Street controls more than thirty times the amount of oil being produced and 80% of the oil futures market. In other words, a group of investors who do not use or produce oil are driving the global price. Supply of oil worldwide is at near record levels, and demand is falling
. There can be no other explanation but oil speculation for the recent price spike.

The public does not bear the responsibility to force the administration’s hand to enforce the law. Even in the case that the administration fears taking action due to tepid interest by the public in such an investigation, numerous groups have petitioned the government seeking action on this front. Trade groups across the spectrum have begged Obama to take action, from large trucking conglomerates, to food retailers, to major airlines, to large-scale shippers, to mom and pops. One is left with no other explanation but that Wall Street has more power than not only the public, but also major corporations. The list is long and varied. Essentially, Wall Street can do as it damn well pleases.

Take for example the Wall Street reform Act, Dodd-Frank. The law required that the Commodity Futures Trading Commission impose strict limits on the amount of oil that Wall Street speculators could trade in the energy futures market by January 17, 2012. It has not yet done so, and by all accounts the CFTC is facing no pressure from the administration to do so. In essence, the CFTC itself is breaking the law.

It is certainly not our position that fossil fuels represent the future of energy, in fact we believe the opposite. This is about a fair market, whether it be for oil or for something more obscure. Price manipulation and price fixing hurts every consumer, and if the administration can prosecute  a company for raising the price of milk in three small states, oil should be somewhere on its list of priorities.

It is time for this administration to act, and act boldly. Can Wall Street really be so powerful as to prevent a sitting president from taking action that will quite obviously help his reelection chances? That is a frightening proposition indeed.