Some traders are crying foul with regards to the Chicago Mercantile Exchange's (CME) electronic Globex trading system following last Thursday morning's knee-jerk spike in front-month natural gas futures of nearly 75 cents. Some traders complained that their orders were not filled following the Energy Information Administration's (EIA) storage report release at 10:30 a.m. EDT, which sparked the run-up in prices. The trading exchange said Friday that no glitches were reported on the system.
At last Wednesday's settlement the May contract was over the April contract by 7.5 cents. On Thursday, the market took the EIA's 30 Bcf withdrawal report as bullish, which launched futures values higher. Prior to the release of the EIA inventory number, April futures were trading around $3.680 and the May contract was at about $3.750, about a 7-cent difference. Immediately following the report's release April futures shot to a high of $4.424 and May futures put in a high of $4.754.
A number of traders said the electronic Globex system malfunctioned and filled many April-May spread traders way out of the 7- to 7.5-cent range. "Guys had orders electronically above the market that the market traded through and did not get filled. They were all violated. Globex told the traders they were not filled," said John Woods, senior trader at Integrity Energy in New York.
CME spokeswoman Mary Haffenberg said it was business as usual on Thursday. "We have had a number of inquiries and we are kind of scratching our heads here. We've received a number of calls questioning the large jump [in natural gas futures]. Well, what did you think would happen when that kind of [storage] number came out at 10:30 a.m. People have also been asking if we had any trade busts Thursday. We have not busted any trades...not even one. All trades stood." She added that there was no glitch that she is aware of.
"First of all, I thought it was virtually impossible to get violated electronically, unless there is a malfunction," said Steve Blair, a broker with Rafferty Technical Research in New York. "That said, I don't really understand what Thursday's price explosion was all about. I can only guess. The storage number came out and the market shot nearly 75 cents higher instantly. I had customers calling me all over the place wanting to know what happened.
"No matter how you look at that 30 Bcf draw, it was incredibly bearish," Blair said. "The year-on-year overhang went from 271 Bcf to 326 Bcf. The only thing I can think of is perhaps there were people who were getting short ahead of the storage report expecting a much smaller number, which would lead the market even lower. When the number came out, the market moved up and maybe some of these shorts decided to start covering. They basically started buying in a vacuum that was devoid of any selling. That is the only way you can explain the market's 75-cent increase and 40-cent decrease in a matter of two minutes. Something strange did happen. You don't see moves of this magnitude just because a storage report hits, especially a mild one like we saw on Thursday."
Another trader described the chaos on Thursday. "When the market rallied, traders with orders at higher prices [that normally would have been executed] never got filled, and other traders got filled [April-May spreads] at as much as a 27-cent differential, or about 20 cents away from where the market was trading," said a New York floor trader.
"Some traders got lucky on those orders and some got unlucky. I was told the market actually shut down for 10 seconds, and when the market reopened traders found their spread trades matched up at disjointed spread values," the floor trader added. "Some spread orders filled at as much as 31 cents, May over April. That's a huge range for the April-May spread. It was unbelievable. I had orders in at 7.7 cents and others had orders in at 8 and 8.5 cents, but they never got filled. It's not supposed to happen that way. I called up Chicago [Globex] and they told me and others you are not getting filled."
Other traders noted that large spikes such as Thursday's 75-cent blow-up could be attributed to the migration from floor trading to the on-line arena. "A fair amount of buying came in and ran into no selling," said Ed Kennedy, a broker with Hencorp Becstone Futures LC in Miami. "We traded up at that $4.424 for a while, with about 3,500 contracts trading in that minute. This is what happens when you're trading on a computer. You don't have the locals to absorb these aberrations. We've seen it before and we will see it again. We call it gaps in the order flow."
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