Surprise, even shock, are common reactions to what occurs on theNew York Mercantile Exchange on expiration day of a spot month gasfutures contract, but last Wednesday was especially traumatic forsome natural gas traders. Not because of price volatility, however.At about 1:50 p.m. EST, someone at the Teleport CommunicationsGroup, the telephone carrier that supports the lines on the tradingfloors of the Nymex, pulled the plug. All commodity trading,including of course gas futures, screeched to a halt, creating whatappeared to be a hair-raising state of panic. As it turned out,however, the event actually seemed to dilute what normally is themost volatile trading period of a monthly contract – the last hourof trading.

The incident would not have been that serious had it not beenexpiration day for the March contract. The dead phone lines leftfutures traders unable to close their positions. Cash traders wereleft exposed without the industry’s most useful hedging mechanism.To say the least, the experience was infuriating for many marketplayers.

“It was extraordinarily frustrating and nerve racking,” saidSusannah Hardesty, president of Energy Research &amp Trading. “Theuncertainty was the worst part of it. No one knew if Nymex wasgoing to be able to schedule a trading session.

“A lot of people wait until the last half hour [of trading on amonthly contract] to execute trades,” she noted. “Frequently that’swhen the real direction takes place. If you come into adirectionless market, you can wait all day and the final spring ormajor drop will come in the last half hour of trading. That’s likethe most important period. It couldn’t have happened at a worsetime.”

“If your organization lives and dies by the telephone, why use afly-by-night company?” asked one angry futures analyst. But TCGclearly is not a fly-by-night organization. It’s the nation’slargest competitive local exchange carrier, with networks in 47U.S. markets. “We checked them out before we signed on with them,”said a Nymex spokeswoman, adding, however, Nymex may soon sign offas a customer. TCG service went dead on many of its East Coastcustomers, she added. The problem was traced to a breakdown inequipment owned by Illuminet Inc., a privately-held company thatprovides signaling and other services to TCG and other networks.And it wasn’t the first time. Last October, a similar outageoccurred, though not on a spot-month expiration day.

“We are evaluating whether or not this carrier is sufficientlyreliable for the nature of our business but we really need moreinformation at this point,” said Nymex spokeswoman NachamaJacobovits. “We need to look at the problem and see whether there’ssomething that is not likely to repeat itself.”

The exchange did eventually schedule a trading period Wednesdayevening so brokers could execute their deals and liquidate theirpositions, but the phone lines to the trading floor remained downall day. It’s still not clear how many companies were able to reachtheir brokers. As it turned out, physical deliveries amounted to3,518 contracts, 818 greater than at the end of February, but stillnot an abnormally high number considering volume was more than60,000 contracts.

Nymex, however, also faced criticism for the relatively shorttrading period it scheduled. Traders normally would have hadanother hour and 20 minutes to complete near-month transactions,but, Nymex ended up scheduling a brief 20 minute trading sessionbetween 5:05 p.m. EST and 5:25 for the spot month with phones stillbeing down. Traders were allowed to get out of their positions inall other months between 5:23 and 5:25 p.m. EFP deals werescheduled for between 5:25 and 6:30 p.m. and the after-hours Accesstrading session was set for between 6:15 and 7 p.m.

“Unfortunately because of the phones not being available, wejust were not comfortable with a longer period [of trading]. Wegave people ample notice [about the trading period] so people hadtime to place orders with brokers. Some brokers were on cellphones, others were communicating with their back offices. We havebeen given every assurance that they will work to correct the phoneproblem by morning.”

It’s also unclear what impact on prices was caused by theoutage. The effect of the Nymex outage obviously could have beenmore serious, noted one observer, had it not been the expiration ofa shoulder month contract. If it was a December contract,volatility might have increased dramatically if brokers werecompelled to trade large lots of contracts rather than the five or10 they normally trade. As it turned out, the outage actuallyseemed to reduce volatility, which normally is high on theexpiration day of a contract.

Hardesty noted futures prices reached their high for the day,$2.318, in the last few minutes of the session when they wereexpected to fall, but they only moved up a few pennies. “Still thesettlement may have been skewed by those who actually were able tomake it to the floor,” she noted. The outage certainly reducedmarket confidence in the eventual settlement price.

Rocco Canonica

©Copyright 1998 Intelligence Press, Inc. All rights reserved. Thepreceding news report may not be republished or redistributed inwhole or in part without prior written consent of IntelligencePress,Inc.