The US Commodity Futures Trading Commission has charged Dutch-based proprietary trading fund Optiver Holding, two of its subsidiaries and three employees with manipulation of three oil and
The US Commodity Futures Trading Commission has charged Dutch-based proprietary trading fund Optiver Holding, two of its subsidiaries and three employees with manipulation of three oil and petroleum product contracts on the New York Mercantile Exchange.
The CFTC filed the civil enforcement action in the United States District Court for the Southern District of New York against Optiver Holding, Chicago-based Optiver US and Optiver VOF, another Dutch company, as well as head trader Christopher Dowson, head of trading Randal Meijer, and chief executive Bastiaan van Kempen.
The complaint charges all defendants with 19 separate instances of attempted manipulation involving the Light Sweet Crude Oil, New York Harbor Heating Oil, and New York Harbor Gasoline futures contracts on Nymex for 11 days in March 2007, and charges Optiver and van Kempen with concealing the manipulative scheme and making false statements in response to an inquiry from Nymex.
The complaint further alleges that in at least five of those 19 attempts, the defendants successfully manipulated certain contracts, in three instances forcing futures prices lower and in two instances higher. The complaint alleges that the defendants achieved a profit of about USD1m from their manipulation.
The CFTC alleges that the defendants employed a manipulative scheme commonly known as ‘banging’ or ‘marking” the close. ‘Banging the close’ refers to the practice of acquiring a substantial position leading up to the closing period, followed by offsetting the position before the end of the close of trading for the purpose of attempting to manipulate prices.
‘These charges go to the heart of the CFTC’s core mission of detecting and rooting out illegal manipulation of the markets,’ says the commission’s acting chairman Walt Lukken. ‘The CFTC’s Enforcement Division aggressively pursues and punishes manipulative activity to bring offenders to justice and deter others from attempting to harm the markets. Although this alleged energy trading scheme lasted only several days in March 2007, even short-term distortions of prices will not be tolerated.’
Acting enforcement director Stephen Jay Obie adds: ‘The men and women of the Division of Enforcement are working tirelessly to pursue every investigative lead involving potential wrongdoing in the commodities markets, including our nation’s energy markets. We use every resource available to uncover wrongdoing and to make sure that violators of the Commodity Exchange Act are tracked down and brought to justice.’
The manipulative trading scheme involved three futures contracts listed for trading on the Nymex, the Light Sweet Crude Oil futures contract (also known as West Texas Intermediate), the New York Harbor Heating Oil futures contract, and the New York Harbor Reformulated Gasoline Blendstock futures contract.
The settlement price for the Crude Oil, New York Harbor Gasoline, and Heating Oil contracts is derived by calculating the volume-weighted average prices (VWAP) of futures trades conducted during the closing period for the contracts, from 2:28 to 2:30 p.m.
The defendants’ manipulative scheme involved the Trading at Settlement contracts in Crude Oil, Heating Oil, and New York Gasoline contracts. These are futures contracts where the parties determine at the initiation of the contract that the price will be the day’s settlement price plus or minus an agreed differential. A Trading at Settlement contract that has been bought or sold can be offset by trading a futures contract in the opposite direction.
The manipulative scheme, in Dowson’s words, to ‘bully the market’, involved trading a significant volume of futures contracts in Crude Oil, Heating Oil, and New York Harbor Gasoline in the opposite direction of the associated TAS position, before and during the close of the contracts.
The defendants’ goal in trading the large volume of futures was to improperly influence and affect the price of futures contracts and, according to Meijer, was ‘built on the idea that we can control the VWAP’.
According to the complaint, the scheme ultimately permitted the defendants to profit regardless of the direction of the market move, provided that Optiver’s futures trading in the close and before the close was in the opposite direction of the TAS position it had accumulated during the trading day.