Secrets of Alleged Oil Price Manipulation Exposed

[sabra]

Source: CNBC/NYT

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.

Oil Barrels

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.”

...

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.

Read more: http://www.cnbc.com/id/32690802

[Captain Hilts]

1. The national and global oil markets are NOT free markets. nt

[Hugin]

2. I knew it.

So, what are they going to do about it?

[FiveGoodMen]

3. First we have to elect politicians who will protect us rather than the corporations...

[create.peace]

5. my dh just told me this morning that 80% of campaign contibutions

for congressmen come from outside their districts....just thought that was relevant, and part of the problem.

[Prometheus Bound]

7. That's the second time I've seen the 'dh' abbreviation.

I've been trying to figure it out.

Where I live most people would say it means 'domestic helper'.

But then I guess it could mean 'dumb husband'? darling husband? designated hitter?

It's funny how the tone changes according to which words I put in its place. :)

[Hugin]

12. ...

"Dear Heart" or "Dear Husband" are usually the references I've seen attached to it.

But, you've got some good guesses there.

[create.peace]

14. for me it is delightful housemate, devoted helpmate, dear husband! in all seriousness...

plus he's a great cook, as i was burnt out on cooking for a big family, when i met him! (at 48)

[happydreams]

31. I thought it was for "dumb housewaiff", but I guess that is being redundant. nt

[defendandprotect]

20. And corporate-press gets 80% of the Campaign Finance BRIBERY . . .!!!

[defendandprotect]

21. Take back control over our natural resources -- alternative energy --

solar --

Interesting hearing the other day on C-span re energy which I was unable to watch --

[imdjh]

38. irrelevant to the discussion

[defendandprotect]

43. Nationalizing oil is "irrelevant" . . . ????

what planet are you living on?

:rofl:

[Enthusiast]

25. I would judge that to be significant. nt

[dotymed]

34. YES, WITHOUT PUBLICLY FINANCED ELECTIONS

Working Americans will stay in the poor house.There is no way,
even by bundling thousands of small contributions, that we can
compete with the money offered and accepted by corporations.
Public Finance can easily be enforced without any money paid
out by taxpayers. We simply limit the amount of advertising by
candidates. Then, we require that all networks donate so much
free air-time to each candidate. The airwaves belong to the
people and we sill have "public service"
requirements.
Have you ever noticed that no matter how poor a candidate is,
after he/she has been in office a short time, they are
wealthy? Hmmmmm?

[create.peace]

36. things that make you say, hmmmm.nt

[defendandprotect]

45. Absolutely . . . and citizens have to set the terms. . . how, when, where, how much . . .

including use of our towns and local areas for candidate appearances --

use of TV/radio, etal --

[Enthusiast]

52. Can you imagine the faux

outrage by these tea bagger types if we suggested adopting publicly financed elections. First they would muddy the water by claiming it would raise taxes by 200%. Then they would claim it is an assault on freedom of speech. And the media would focus on this manufactured outrage at the exclusion of intelligent discourse. It is an excellent formula for hijacking a democracy. Once one owns the media it is easily done.

[dotymed]

59. I AM NOT SURE I UNDERSTAND

"It is an excellent formula for hijacking a democracy.
Once one owns the media it is easily done."

Are you saying that "publicly financed elections"
are good for hijacking a democracy or our current "for
profit" system? We have already seen our "Democracy
hijacked" a few times (at least) under our present
system. Are you saying that "public financing" and
free air-time to all candidates, would be worse? Just asking
for clarification.

[Enthusiast]

24. Apparently you can forget that.

We tried it.

[FiveGoodMen]

29. That's exactly how it seems to me.

[defendandprotect]

46. Remember when the South would "never change" . . .??

After slavery, Segregation, Inc. went on another 100 years!

Remember when war in Vietnam seemed hopeless to stop?

How long did women fight to gain the right to vote?

PLEASE . . .!!!

:think:

AND, these thoughts from Howard Zinn . . .


"Don't despair - if you are right and you persist things will change.
The truth has a way of coming out --
Truth has a power greater than a hundred lies --
Devote a part of your life to making it a better place for your children -
all children."

[defendandprotect]

44. Campaign Finance $$ is PRE-BRIBERY and PRE-OWNERSHIP . . .

Is there anyone who doesn't get that?

[Enthusiast]

51. It has become painfully obvious. nt

[No Elephants]

61. The SCOTUS?

[No Elephants]

60. Name five.

[jpak]

4. Let me guess - the "Free Marketers" will call these assholes "heros"

and defend them vigorously

:puke:

[create.peace]

6. futures trading of oil should not be allowed unless you are part of the 'pipeline' so to speak

if you aren't a purveyor physically, you shouldn't be buying it.

[DCKit]

9. It'd be interesting to see these guys take delivery of their orders at their CT mansions.

The lines of tanker trucks stretching from the docks in NJ to the tony suburbs of CT would cause quite a ruckus.

[create.peace]

13. love to see it!!!nt

[Enthusiast]

26. +1! nt

[laughingliberal]

8. SSDD

Would be surprised to see anything happen. After all they are big contributors to politicians and we are pawns to feed their coffers. Would warm my heart to ever hear the phrase, 'windfall profit tax,' again someday. Probably won't happen in my lifetime.

[Skink]

10. What can Diebold learn from this?

[Ghost Dog]

11. If you can jump a queue it is not an orderly queue.

I don't see why you'd need especially 'powerful computers' (media-speak) to do that: You'd just need privileged access.

[DCKit]

15. They have both access and the fastest computers.

This is the same scenario that Goldman Sachs has been using to game the stock market.

Somehow, they're able to intercept the other orders and act on them in time to skim a profit on nearly every trade. It's heinous.

[Tab]

33. Technically, what he means

(but it's understandable because the writers don't know what it means)

It's not a powerful computer. My laptop can do it. The point is that it is intercepted before it is inserted into the queue. Imagine a message you get before anyone else gets it. Now you can act on it before you send it on.

It's absolutely unfair, and if it's not technically illegal, it ought to be immediately.

[Ghost Dog]

49. That's it exactly, technically. Even in the case of messages being intercepted

before being formally inserted into the order queue, following the extra-inserted front-runner's order, there is still disorderly queuing going on, since those messages themselves should be properly and inviolably queued, to the highest degree of accuracy synchronised (atomic-clock) time-stamps allow.

Fact is, some players are being allowed to violate the integrity of those data streams.

Since I was involved in programming the London Stock Exchange's 'Big Bang' systems back in the 'eighties, I can see exactly how this could be done. What I can't understand (well, cynically, and given the effective coup d'etat that's taken place in Washington, yes I can) is how come these people are being allowed to get away with it.

Rotten to the core.

[DCKit]

53. While I understand your argument, they needed both to accomplish their goals.

Fast computers to run the software and interception of the orders allow them to skim off nearly every single trade.

Get back to me when you KNOW they weren't running it off a laptop.

What they've done has broken the trust in the U.S. markets.

[Tab]

54. I don't want to get stuck on this point

and I happen to have a hell of a fast laptop (being a developer, mine's decked out), but the point being is that you can have the fastest computer in the world, but if you can't get your fingers on it first, then it doesn't matter.

If you CAN get your fingers on it first, then the faster is all the better to hide your tracks, my dear.

[DCKit]

55. That was my point... ACCESS. They shouldn't have any better access than I do at home. n/t

[unc70]

57. Location is one of the keys to "honestly" being at the front of the queue

There is probably a lot more going on, but a significant factor might be the distance messages have to travel in the network. Take a simple example with a "market" located in Chicago and competing brokers, one in Chicago and the other NYC. An electronic "offer" message originating Chicago will take a small fraction of a second longer to reach the broker in NY than the one in Chicago. The "acceptance" from Chicago should always enter the queue first because of that tiny problem with the speed of light.

The NYC firm solve this problem by putting their trade execution computer in Chicago even if other trading functions might remain elsewhere. Since oil trades on several markets and with different currencies it gets much more complicated, but also likely various legal ways to game the market without much additional risk.

More aggressive tactics are always possible and but more problematic. Since they execute trades both for their clients and on their own accounts, it would be those client transactions that would require special care and attention to the fine print of the exchange(s) rules. Suppose as a market maker they are matching client orders/trades against their own book/holdings but were somewhat slow about publishing those trades to the market (maybe not reporting them at all). I am just speculating at this point about markets in general but without really knowing anything about the details in this case.

[scentopine]

16. The SEC has opened up an investigation... LOL

I can just imagine the harsh interrogation techniques over golf, deep sea fishing and a series of $400 diners.

[Enthusiast]

27. Now now,

remember, they caught Martha Stuart.

[rucky]

32. Waterhazarding. Extraordinary Opera Rendition.

Country Clubbing.

It's horrific

[dotymed]

35. WASN'T BERNIE MADOFF THE HEAD OF THE S.E.C. ?

I thought he held that position for about 20 years. Classless
Society? lol...and the rethugs are convinced against their own
interests every time...."NO TAXES FOR THE WEALTHY"
and they earn minimum wage. DON'T LET THE GOVT. TOUCH MY
MEDICARE....LOL

[BumRushDaShow]

37. Actually the NASDAQ

The first all-electronic (computerized) stock exchange. Surprise surprise.

[Plucketeer]

17. My GI's right again!

It told me we were getting screwed all along.

[benld74]

18. Hell they couldn't catch Maddoff, and their investigating these guys?

[Greyhound]

19. Is this the "event" that will convince the indefatigably deluded to acknowledge that

their fantasies of markets and coincidences are, in fact, just fantasies?

"Freedom is what they call whatever is left after you've lost your liberty."

[Initech]

22. I think it's safe to say we know who the real criminals in this country are.

[Texasbacksass]

23. Did anybody really think the schemers would stop after Madoff got his

If ya did wake the hell up!

People work harder trying to find ways to be "the crook that gets away with it" than anything else!

[bemildred]

28. Secret my ass.

Anybody with a brain knows the markets are rigged. They got guys who are extremely well paid spending all of their time figuring out new ways to rig the markets.

[edc]

30. Oligarchs and

monopolists don't do free markets. Why would they?

[Kingofalldems]

39. Republicans posing as blue dog Democrats have always claimed

here on DU that oil companies would never manipulate prices. And insinuate DU is filled with conspiracy buffs. Now we know the truth.

[DCKit]

56. Y'all are crazy. It's because of peak blue-chips.

Nothing to see here, move along.

[Canuckistanian]

40. Isn't Goldman Sachs a pioneer in "high frequency trading"?

I seem to remember something about that.

[Selatius]

67. They front-load their electronic trades, from the accusations I've heard.

They got a program or series of programs set up that somehow lets them see what the other guys are doing, and the program presumably orders the computers to do the trades to take advantage of that. Sort of like waiting in line and seeing what kinds of bets other players are playing before they get to the bookie window. If you know what they're about to do, you have an advantage.

[depakid]

41. "The Securities and Exchange Commission has opened up an investigation"

:rofl:

Sure they have....

[Historic NY]

42. Its still being manipulated, the administration has done nothing to quell it either.

[defendandprotect]

47. Gas prices are up a lot again and recently I heard that when gas was at $4

people living on the margins were having to begin to not pay their mortgages --

And, the "stimulus" everyone got certainly didn't make up for that year and more

of losses and a lot of people getting into a hole like that!

[unc70]

48. This barely qualifies as "news", a LOL gain of $1million, just clueless kids with big egos

One of the participants was proud of his new speed boat!!! Give me a break!!! Almost any trader of other-people's-money knows how to use that information to make a little personal "side bet" to make enough for a new car, boat, etc. in a single day. Only someone new to the "game" would be boasting about it, so the question of interest is why did the NYT do the article?

While such activities certainly depend on "insider" info, you must examine closely the particular exchange/market and the details of the transactions to ascertain if they be legal, illegal, or condoned as common practice by insiders/market makers, routine ignored unless it starts affecting the rich and powerful.

Until I do a bit of research and talk next week with some friends in that corner of the business, I won't really know what this is all about and will refrain from speculating in public; I would like to give DU a little background perspective that some might see as cynical. I will try to keep things simple enough not to require any prior or special knowledge.

In today's world, it could actually be the case that someone could gain a short-lived advantage by finding a way to avoid most of the propagation delays in delivering market data and thus respond to "trades" quicker than can competitors. If you are connected directly to the exchange's computer systems with the highest-speed link and are located as close as possible to the exchange's systems, you will have a small time advantage over someone thousands of miles away who must endure the delays from one or more "hops" through communication routers or even satellites.

It is also possible that a system could be exploiting some idiosyncrasies in how messages are processed by some other system. For example, does scanning for the next transaction in a list start after the "most recent" element, or is there a situation where it predictably starts elsewhere. This is a lot like knowing the "tell" of a poker player, a tiny advantage with a huge impact. In the transaction processing scenario, the vulnerable behavior might involve the exchange system itself or one or more systems used by other traders. I can imagine situations where the systems of other traders have been subverted using techniques similar to those of criminal botnets, trojans, and worms. Why screw with personal credit cards to steal hundreds/thousands when you can screw with trading systems and steal millions?

This could be little more than a new way to play the "spread" as previously practiced by NYSE market makers or those at NASDAQ.

I will post more when I check things out.

[Ghost Dog]

50. "propagation delays in delivering market data"

providing opportunities for the interception techniques described. Yes.

Doesn't explain how come such interception is permitted in the first place.

Off the top of my head: To properly order the queue, a). make sure all orders carry synchronised time-stamps placed at origin of order; b). hold all orders in a holding-pool for a number of seconds (to allow time for typical communications delays), then sort from the pool in order of time-stamps before placing in the execution queue. And c). of course, permit no interference with, no violation of the integrity of this process, on pain of very serious legal consequences.

[acsmith]

63. it is nothing to do with trade ordering

the "high-frequency" name is a misnomer. "Front running" is probably the correct name for it.

[acsmith]

62. i think you are making it a little complicated...

...this company are payed by the exchange to create liquidity. that means that if someone comes to the market they make sure there is a counter party for the requested trade. they are called market makers. for each trade executed like this they are paid by the exchange (in this case the CME). this is to the advantage of the exchange (increased liquidity gives people more confidence in the exchange) and for the company (they get paid for being a counter-party on both sides of the market which in principle over time evens out). this is all perfectly legal, although slightly against the idea of free and open markets (whoever said a free and open market had to be liquid).

BUT, to do this the company is given privileged access to orders which are placed in the exchange's system BEFORE the orders become public. this gives the market maker the ability to not only to be a counter party but to front-run the trades they see coming.

[unc70]

66. No, it is more complicated -- beating other market makers

They were apparently using small overs to probe the price points on the other side, sometimes canceling transactions. Much like how we used to how years ago we would use bid/ask tracking to expose the order books of MMs or specilists.

They are alleged to have done a lot more.

The more-general problem becomes limited by the speed of light and with many characteristics shared with quantum
phsics.

[hunter]

58. Some kind of small transaction tax would get rid of all this bullshit.

It would turn all the gamers into casino suckers, with the "house" taking a cut, and it would not adversely impact those who actually invest in the economy for longer terms.

We'd have to do it by international treaty, but you could put teeth into it by trade restrictions and taxes against nations that allow these parasitic games.

[Elmore Furth]

64. Am I too cynical to suspect that most of these markets take suckers for a ride?

High frequency trading has long been accused of giving the big guys an unfair advantage. Like they need more advantages. According to the following article, high-frequency traders generated $21 billion in 2008. Nice money, if you can steal it.

http://www.nytimes.com/2009/07/24/business/24trading.html?_r=1&hp


Mike McDermott: Listen, here's the thing. If you can't spot the sucker in the first half hour at the table, then you ARE the sucker.
Rounders (1998)

"The best way to make a small fortune in commodities is start with a large fortune."
Anon.

[unc70]

65. Not cynical enough.

Spotting a sucker at the table means that you are just A sucker, not THE sucker.