Academic

Rogue Broker Causes Oil Price Spike

By Kim Krawiec

The Financial Times is reporting that Tuesday?s spike in oil prices to their highest level this year was caused by a rogue broker who placed a large bet in the Brent oil market, triggering almost $10m (?7m) of losses for PVM Oil Associates, the world?s largest over-the-counter oil brokerage. During one hour, prices rose from $71 to $73.5, while futures contracts for more than 16 million barrels were traded (as compared to the average of 500,000 barrels for that time of the day).

According to the FT:  ?Oil traders in London and New York said the ?unauthorised trading? explained the exceptional spike in business activity and prices in the early hours of Tuesday that some initially thought must have been caused by a geopolitical event. . . .Traders said the broker implicated had allegedly accounted for at least half of the unusual activity, with the rest the result of others chasing the rally.?  PVM began unwinding the trades when they opened for business on Tuesday, limiting their losses.

The losses are small compared to rogue trader losses reported during the past year or so.  Consider, for example, Jerome Kerviel, who lost over $7 billion at Société Générale in January 2008; MF Global ($141.5m); Caisse d?Epargne ( EUR 600m); Crédit Agricole (EUR 250m); Credit Suisse (CHF 2.86bn); Merrill Lynch (USD 18m); and Morgan Stanley (USD 120m).  (See here for a discussion of these and other rogue trading losses).

Nonetheless, the incident is newsworthy for several reasons.  First, the large size of the positions impacted oil prices considerably, as shown in this FT interactive chart:

Second, this is the second episode of rogue trading in the oil market in just a few months. In May, an oil trader at Morgan Stanley was banned from the industry for two years for a series of unauthorized oil futures trades made under the influence of alcohol after he returned from a three-and-a-half hour lunch. He then concealed his $10 million loss through further trades using another trader's accounts.

Third, CFTC officials claim they were not informed of the incident for several hours, despite an agreement with the Financial Services Authority, the UK regulator, to spontaneously exchange such information.  

Full post as published by The Faculty Lounge on July 04, 2009 (boomark / email).