Markets require regulation to remain "free"

When regulators fail to police markets, manipulators engage in myriad schemes — pump-and-dump, jumping the queue, etc. — to rip off market participants.

How much of the incredible run-up in oil prices was caused by market manipulation? A new New York Times story on oil market manipulation makes one wonder. Even worse, it appears market “regulators” were aware of problems back in 2007 but failed to act decisively:

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.

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.”

In July 2008, the commission charged Optiver with manipulating the price of oil…

During a tense conference call in 2007, Thomas Lasala, the chief regulator for Nymex, made his doubts clear about Optiver’s trading strategies.

“The market seems to move in reaction to your orders,” he said, according to a transcript of the conversation. “And I don’t think that is a market-making strategy.”

Posted by James on Saturday, September 05, 2009