A single dealer playing in the global oil market in the early hours of the morning in London last week has rekindled fears about rogue traders and about the inadequacy of supervision in financial markets.
The British media has been full of stories about the latest trading, which may have contributed to oil prices rising to an eight month high early Tuesday (London time), around 11 am Sydney time, of just over $US73 a barrel.
The trader was named as Steve Perkins, employed by PVM Oil Associates, a private company described as the world’s largest oil brokerage. It has disclosed losses of $US10 million by the unauthorised dealings of Mr Perkins in the early hours of Tuesday.
This is how the FT described the dealings in a story at the weekend:
“Mr Perkins traded in the Brent futures market from his home using an internet-based access to the exchange at about 02.00 in the morning, one of the most illiquid times of the trading day. He amassed a huge position in Brent futures that pushed prices to $US73.5 a barrel, the highest price so far this year.
“The story of what triggered almost $10m (€7m, £6m) of losses on the Brent oil market on Tuesday is still being pieced together, but one thing is clear: Steven Noel Perkins, the broker accused by bosses at PVM Oil Associates of “unauthorised trading”, made his trade at a very unusual time.
“Trading from his UK home at about 2am on Tuesday, it was the most illiquid time of day in the Brent futures market – a gap left between New York and Singapore hours, in which only a handful of Tokyo-based traders are active.
“Traders say that at that time liquidity is very thin and much of the volume is automatically generated by computers, following prefixed trading orders. One trader said that Mr Perkins was, in effect, trading against the machines.
“With a few keystrokes, using a home computer equipped with remote access to the InterContinental Exchange Europe, the marketplace for Brent oil, he bought oil futures equal to about 9m barrels, propelling prices to $73.50 a barrel, the highest of the year.
“With computer trading chasing the rally, contracts for more than 16 million barrels changed hands in one hour, far more than the usual half a million barrels for that time of the day.”
The FT also pointed out that Mr Perkins’ firm sent a trading report to clients on Tuesday morning, around 8 am — 6 hours after the unauthorised trading happened — in which the firm said: “There’s some serious upside momentum building”, adding that “the upshot of all this is that higher numbers are likely, and we are already approaching recent highs on the crudes, which are the initial targets for this next leg higher”.
The firm said the rogue trading wasn’t discovered until 10.10 am on Tuesday.
“PVM’s office in Singapore – which would have been expected to keep an eye on company trades at that time in the Asian day – did not notice the irregular activity, according to people familiar with the investigation, as it focuses on the over-the-counter Dubai market, the oil benchmark in Asia, rather than the futures market for Brent, the European benchmark, where the unauthorised trading took place,” the FT reported.
The problem is that he was allowed to trade from home at odd hours, without any supervision or reporting limits. But no one picked up what was an anomaly: a big buy order at a quiet time in the market in a volatile commodity which in effect spiked the market. And no one in the firm noticed for at least six hours…
What? Another betting shop with scant rules? Why am I not surprised?