Can rogue trading move a market?

By Simon Atkinson
Business reporter, BBC News

Oil prices are still nowhere near the peak of $147 a barrel seen last July

Oil-producing nations have long been adamant that there is a plentiful supply of oil.

So when there have been sharp, unexpected spikes in oil prices, those Opec countries have consistently blamed speculators.

Critics have questioned whether individuals or investment groups could really be able to manipulate the price of a globally-traded commodity so directly.

But the latest act of so-called rogue trading seems to have done just that - if only for a short period.

Unauthorised

On Tuesday morning, the price of Brent crude rose about $2 a barrel in the space of an hour, hitting $73.50 a barrel before reversing sharply in volatile trade.

In that time, contracts for 16 million barrels of oil changed hands - 32 times the normal level - equivalent to double the daily production of Saudi Arabia.

If ever there was a time that an individual had the clout to move prices significantly, then this was it Nick McGregor Oil analyst, Redmayne Bentley

And about half of those trades were made seemingly by one trader, working at a London firm, PVM Oil Futures.

The trades, the company has since said, were unauthorised and were made by a trader, believed to be Steve Perkins, who has since been suspended.

The trades were spotted easily - not least because they were made at about 2am - a time when there is usually very low levels of trading, because most of London is asleep.

But because of there being such thin trade, the volume of the deals had an exaggerated impact in moving the oil price.

"If ever there was a time that an individual had the clout to move prices significantly, then this was it," said Nick McGregor, an oil analyst at Redmayne Bentley.

He added that it was unusual for one dealer to be able to have such influence on prices "until you consider at what time they chose to do this".

Volatility

Many analysts believe there is no evidence that speculators do, in fact, shape markets and that instead the drivers are fundamentals - things like economic data and issues of supply and demand.

"At best, there may be some volatility when you have, for example, large hedge funds taking a certain position, but they are not the main driver of commodity prices," said Amrita Sen, a commodities analyst at Barclays Capital.

"There's no direct correlation between investment levels and current prices.

"Most of the data shows, quite clearly, that investment flows have been moving in almost the opposite direction as price movements."

She added that while oil had been a popular investment earlier this year, when crude prices were close to $30, much of this had been from pension funds and other investors who were not speculators - but instead looking to find greater diversification as they "rejigged" their portfolios in light of the economic downturn.

Regulation needed?

Unauthorised trades are getting harder to carry out because of improving technology which identifies suspicious deals, said Mr McGregor.

But brokerages such as PVM place orders on behalf of large banks and hedge funds, and regularly make significant-sized trades on behalf of those clients.

Not all lose money in unauthorised trading

This makes it hard to detect at the time of a trade whether it is, in fact, suspicious.

With losses crystallised at $10m (£6.1m), the sums involved at PVM are relatively small.

This is especially the case when rogue trading at French bank, Societe Generale, is thought to have cost it 4.9bn euros ($6.9bn; £4.2bn at current rates ) while Nick Leeson's infamous rogue trading at Barings cost £827m and brought the bank to its knees.

However, such unauthorised dealings do not always lose money.

Last month, a former Morgan Stanley oil trader was banned by the City watchdog, the Financial Services Authority, for trying to conceal some short positions on oil futures that he ran up without permission - while under the influence of alcohol.

However the firm did manage to close those positions and still make a profit.

And when it was only a matter of companies making losses, Mr McGregor questioned whether regulation was really necessary.

"Regulation is fine if it's to prevent a false market, one that is unfair to other participants and investors," he said.

"But if firms can afford these losses, and the firm is giving [its traders] limits that allow them to do these things, maybe we should just let firms learn from their experiences."