CFTC To Examine Phone Records of Gas Futures Traders
The Commodity Futures Trading Commission (CFTC) has subpoenaed the phone records of Nymex gas futures traders to look for any signs of collusion or market manipulation over the last few weeks. The investigation apparently is not targeting individuals, but will instead examine the activities in the entire gas futures trading pit over a period of time when gas prices rose sharply.
"Most of the floor brokers tape their phone calls but not all. But there is a master tape in the building and that's the tape that the CFTC is monitoring," said futures broker Ed Kennedy. "It's voluminous; it's every phone in the building. It's going to take them a long time to go through all those tapes. It's not a targeted investigation at a specific broker.
"The CFTC has to surveil the futures industry," he noted. "That's what makes the futures industry so much better than the over-the-counter industry. They've been asked by a U.S. senator to have an investigation, and being an arm of the government, they're doing it."
Another broker said, however, that it is unusual for the CFTC to subpoena phone records. "They didn't even do that earlier this summer when there was a high profile look into the gasoline price spikes," he said.
Sources close to the ongoing CFTC review of the gas market said last week that so far the agency has not found any "abnormal concentration" of gas futures contracts in the hands of traders that would signal the latest price run-up was the product of manipulation. The CFTC keeps close tabs on the concentration level through the daily reports its gets on individual traders who have more than 175 gas futures contracts.
"This was a price move, not a spike," the source noted. "It would be difficult to conceive of a manipulation sustained over that period of time [nearly a month]...It seems very difficult to imagine. It's one thing to get the market out of line for 60 seconds. But it's another thing to get it out of line for 30 days."
Gas futures prices soared after Thanksgiving from $4.92 on Nov. 26, 2003 to a recent high of $7.63 in last Friday's after hours Access trading session. The massive run-up prompted calls for an investigation late last month by Salt Lake City-based Huntsman Chemical, which said the soaring market was the result of "greed and, very possibly, dishonesty."
Sen. Orrin Hatch, R-UT, chairman of the Senate Judiciary Committee, responded by promising hearings on the issue. And then earlier this month, Sen. Joseph Lieberman (D-CT) called for an investigation into the matter by the Federal Energy Regulatory Commission and the CFTC (see Daily GPI, Dec. 15; Dec. 22).
In a recent letter to Nymex Chairman Vincent Viola, New York Public Service Commission Chairman William Flynn also called for a closer look behind the scenes of the soaring market. There doesn't appear to be "any readily identifiable reason why the price run-up should have occurred," Flynn told Viola. "Storage inventories are at above-average levels and weather in the Northeast during November and December has not been extreme."
Nymex has pointed to the decline in the number of energy marketers as a possible reason. Gas futures volume was down 22% last year and market liquidity suffered as a result.
Nymex spokeswoman Nachamah Jacobovits wouldn't comment on the CFTC investigation but she said the exchange has been scrutinizing the market with a "fine-toothed comb," ensuring that everyone is in compliance with the rules.
"Nobody likes high prices, but that doesn't mean that they aren't valid prices," said Jacobovits.
Kennedy doubts investigators will find anything. "I'm going to tell you right now, they may find a couple of small guys, but I don't think there was any collusion between any of the majors in the gas industry and the people on the floor.
"I think this price action we've seen is to be expected," he said. "Every morning after I wake up the sun comes up. It doesn't come up because I wake up first. Correlation is not always causality. What have the temperatures been like? It's been cold. You also have a lack of liquidity in the market. That's not manipulation. We've lost a lot of the major players from the 1990s and the early 2000s. You've lost Enron, Dynegy, Williams, and on and on. The market hates a vacuum and will tend to fill it in, but it takes time," he added.
Apparently, few observers remember the near record short position of non-commercial traders in the market just prior to the price run-un in December, said IFR Pegasus futures analyst Tim Evans. Speculative funds held a net short position of 52,684 contracts on Nov. 18, 2003, which was not far from the record net short position of 62,643 contracts set on Jan. 22, 2002. As storage rose last summer and prices fell, speculators went net short. They evidently didn't see winter coming until it was already upon them in mid-December and then they had to exit their record number of short positions in a hurry, which drove prices higher.
"We had a bit of cold in early December and that exposed this vulnernerability and that drove prices sharply higher," said Evans. "This wasn't market manipulation any more than a train wreck was manipulation. This was a train wreck waiting to happen, and it did happen. And now there are people with enough influence politically to cry foul and get this investigation launched.
"They may find some minor compliance issues; somebody who got a bad fill or a broker trading ahead of his own customers during a fast market in which the price was just soaring. They may find some minor infractions, but I don't think they will find wholesale disregard for the rules," said Evans. "We already had Enron and all the natural gas pricing scandals and lawsuits. Brokers are looking to avoid that kind of embarrassment, not court that kind of embarrassment."
Evans also noted that there's a rather large group of gas market observers that believes there's a gas supply problem that will be rearing its ugly head shortly. A few weeks of severe cold can put a serious dent in the gas storage surplus, he said.