Complaining of volatility and the potential for abuse, the Industrial Energy Consumers of America (IECA) has asked the Commodity Futures Trading Commission (CFTC), to “urgently review the rules governing how the NYMEX natural gas contact is traded and make necessary changes to protect consumers.”

“Volatility is a key indicator of a serious problem and the need for change and greater regulatory oversight,” according to Paul N. Cicio, executive director of the group. “The NYMEX natural gas contract may be the most volatile commodity contract traded in the world. In fact, it has been 45% more volatile than crude over the period of January 1, 2001 to August 19, 2003.” Average implied volatility for WTI crude during the period was 42%; NYMEX natural gas was 61%; Feed Cattle was 9% and the S&P 500 was 23%.

“Organizations with billions of dollars at their disposal pour money into markets that have the greatest potential to ‘move’ based on volume,” said Cicio. “Unlike crude oil, gas has virtually no waterborne import capability. Because physical demand can exceed supply, the natural gas contract is ripe for speculation and abuse of concentrated market power.”

The fact that NYMEX is primarily the province of speculators is bourne out by statistics that show 75% of the volume of trading is concentrated in the front two months, while only 25% takes place in the rest of the 70 month trading schedule. Outer month trading is more valuable to producers and consumers who genuinely need to hedge the product, while front month trading is primarily the realm of speculators. The prompt month claims 50% of trading and the second month has 25%.

The industrial group earlier this month addressed letters demanding changes to the chairman of the CFTC and to Neal Wolkoff, executive vice president and COO of NYMEX.

Cicio cited NYMEX Rule 9.26 that allows any one entity to hold 12,000 contracts, 5,000 of them in a single month.”The results are frightening in that a single entity can represent 10.3% of the September 2003 open interest if 5,000 contracts are held and 45.4% of the May 2004 contract.”

The challenge to NYMEX, a self-regulating organization (SRO) under the CFTC, comes at the same time an investigation is underway at another SRO giant, the New York Stock Exchange, which reports to the Securities and Exchange Commission. “The SEC is all over the New York Stock Exchange, but so far no one is paying attention to the enormously high volatility on NYMEX,” Cicio said.

The industrials recommend the CFTC:

IECA said the Access trading volume and liquidity are very low compared to the open outcry daily sessions. Because of the low volume it is of little use to producers or consumers from a hedging standpoint, and “price movement can occur with a minimal volume, often significantly changing the opening price for the next primary trading session.” For this reason it is mainly valuable for those hoping to change the price.

Fundamentals of supply and demand should set the price. But, “it appears that technical trading has too great an influence when the fundamentals are not showing a specific direction. As a result, technical trading moves the starting point of a correction to a price even further from reality based on any supply/demand balance.”

In 2002, IECA noted, prices increased 45% from March 1 2002 to April 2002 during a period of oversupply. “In response to IECA’s questions about why the market price does not follow the fundamental principals of supply and demand, NYMEX responded that the market was being driven by technical trading.”

A tighter trading range limit “will force speculators to move in and out of positions quicker,” the industrials said. Instituting trading halts, similar to those in the agricultural commodity markets, will slow the market down and work to moderate price changes.

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