January 27, 2010
For Public Interest.
Why is the natural gas futures contract being sold down along with other energy producers, when the physical natural gas market fundamentals have become very strong, surplus gas in storage is gone, the weather forecast for February/March projected to be worst in 15 years and demand is up significantly?
One might surmise that the hedge funds and financial traders are positioning natural gas for the "risk trade" by knocking the prices down substantially, flooding the market with artificial sell orders to widen the spread they want to achieve on the risk trade. The problem is, this is illegal.
If this is true, the hedge funds and financial traders will start buying NG futures and energy producers back shortly, when market buy pressure orders outweighs the short sell orders on market open and close due to fundamentals. In other words, real investors show up with size buy orders, which as a ratio, are 3-4 times the artificial sell orders.
Then, the short sellers cover, lock in their spreads on the long side of the trade and ride the futures contract, swaps market, and energy producers up.
Mr. Miller believes the CFTC as well as the NY District Attorney's office will be looking hard at this situation, given prior manipulation by hedge funds, and a move to increase the scope of their authority to reign in the OTC markets under their authority as well. The NY District Attorney has already made clear his position on recapturing any profits gained from wrongdoing by the hedge funds and banks, should this be the case.
Given current public outrage and anger at hedge funds and financial institutions, it would in Mr. Miller's opinion be suicide for anyone to try and manipulate the natural gas market, but as the market has seen all too many times, this is often the case and there are always casualties, primarily investors.
Judge: Amaranth's Brian Hunter Manipulated Nat Gas
January 27 2010 | 4:00 am PST
According to several media reports today, Brian Hunter was found to have manipulated the Natural Gas market on the NYMEX. Hunter was the head energy trader at Amaranth when it blew up.
Bloomberg reported, "Hunter knew that New York Mercantile Exchange natural gas prices could be manipulated and set out to do it, the administrative law judge, Carmen Cintron, said in an 80-page ruling issued on a commission docket today. The ruling is subject to review by the full commission."
"It is found that Hunter intentionally manipulated the settlement price of the at-issue natural gas futures contracts," Cintron wrote. "His trading was specifically designed to lower the NYMEX price in order to benefit his swap positions on other exchanges."
What Hunter was doing was what locals call banging the close. By flooding the NYMEX with Sell orders in Nat Gas in the last 10-15 minutes of trading (the Close), Hunter found that he could manipulate the price downward as there were no likely buyers for the type of size he was representing for sale.
Hunter concurrently held similar Nat Gas positions at the ICE that were much larger. Those positions are called look alikes, because they a not physically settled like their counterparts at the NYMEX are. After First Notice, those long contracts can be delivered against. This is true for any commodity.
Conversely, ICE contracts are settled financially, like the S&P 500 for example, so a trader does not have to worry about getting delivered against. Hunter was short his contracts, so he did not have to worry about delivery in this case. His goal, however, was to artificially depress NYMEX Nat Gas contracts so as to lower his larger ICE look alike Nat Gas contract position and burgeon his account balance.
Herein is the manipulation.