July 5, 2010
A few days ago I was driving past our local gas station and noticed that gas prices were 99 .9 cents a litre. A few hours later I drove by again and prices had suddenly shot up to 114 a litre. How could a 14 % increase be justified.
The explanation lies in the behaviour of a rogue trader for a London U.K. based brokerage firm, PVM oil that speculates in the future price of oil. Apparently this trader at 2 in the morning London time decided on his own without authorization from his firm to bet more than twenty times the norm on futures in oil.He had bought contracts for 9 million barrels of oil.
At this time of the night the only other traders operating were computer driven programs that upon learning of the rise in futures bets entered the market to bid up futures contracts further. The result globally was a spike in Brent North Sea prices. It took a number of hours until the company learned of these illegitimate bets and unwound them at a significant loss of more than 10 million $.
The market then dropped sharply as traders realised the sudden upturn was artificially induced. Oil which had risen above 73 $ a barrel from $71 fell back down to below $ 67.
Once again we have a classic illustration of the perils of improperly regulated trading and the necessity of tightening controls so as to prevent these kinds of shenanigans from harming our economies and billions of consumers. Markets are not rational but susceptible to a myriad of irrationalities and sometimes even fraudulent behaviour.
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