News­flash: oil mar­kets are rigged:

The Econ­o­mist
Libor in a bar­rel
Oil mar­kets fall under the sus­pi­cion of price-fix­ing on a glob­al scale
May 18th 2013

IT IS a les­son of the past five years that bench­marks in unreg­u­lat­ed mar­kets can fall vic­tim to the incen­tives they cre­ate. Sub­prime mort­gages bun­dled into secu­ri­ties often won high scores from rat­ings agen­cies that stood to prof­it in a busy mar­ket. The Lon­don Inter­bank Offered Rate, LIBOR, was some­times under­es­ti­mat­ed by banks which were cast in a health­i­er light by low­er inter­est rates. Has some­thing sim­i­lar been going on in ener­gy?

That is the sus­pi­cion after a series of raids on May 14th by the Euro­pean Commission’s com­pe­ti­tion author­i­ties. The com­mis­sion declared that it feared oil com­pa­nies had “col­lud­ed” to dis­tort bench­mark prices for crude, oil prod­ucts and bio­fu­els. Roy­al Dutch Shell, BP, Norway’s Sta­toil and Italy’s ENI (which was not raid­ed) all said that they were co-oper­at­ing with the com­mis­sion. The com­pe­ti­tion author­i­ties also called on the Lon­don offices of Platts, a sub­sidiary of McGraw Hill, an Amer­i­can pub­lish­er and busi­ness-infor­ma­tion firm, which sets ref­er­ence prices for these com­modi­ties.

The vol­umes of oil and prod­ucts linked to these bench­mark prices are vast. Futures and deriv­a­tives mar­kets are also built on the price of the under­ly­ing phys­i­cal com­mod­i­ty. At least 200 bil­lion bar­rels a year, worth in the order of $20 tril­lion, are priced off the Brent bench­mark, the world’s biggest, accord­ing to Liz Boss­ley, chief exec­u­tive of Con­silience, an ener­gy-mar­kets con­sul­tan­cy. The com­mis­sion has said that even small price dis­tor­tions could have a “huge impact” on ener­gy prices. Sta­toil has said that the commission’s inter­est goes all the way back to 2002. If it is right, then the sums involved could be huge, too.

The author­i­ties are tight-lipped about their focus, but they seem to be exam­in­ing the integri­ty of bench­mark prices. Each day Platts’s reporters estab­lish a ref­er­ence price by fol­low­ing the val­ue of pub­lic bids and offers dur­ing a half-hour “win­dow” before a set time—4:30pm in Lon­don, for exam­ple. This “Mar­ket-on-Close” (MOC) method is based on the idea that using pub­lished, ver­i­fi­able deals to set the price is more reli­able than hav­ing reporters ring around their pals, who might be tempt­ed to talk their own books.

Platts keen­ly defends the MOC method. It points out that it ignores bids, offers and deals that are anom­alous or sus­pi­cious. “We are not aware of any evi­dence that our price assess­ments are not reflec­tive of mar­ket val­ue,” it says, before declar­ing that it stands behind its method.

...

It is a com­pli­cat­ed pic­ture and the EU’s com­pe­ti­tion author­i­ties are like­ly to take months or years before decid­ing whether they sus­pect any oil com­pa­nies of hav­ing com­mit­ted a crime. Mean­while, a reform of the oil mar­kets is unlike­ly to come any­time soon. Despite IOSCO’s fears of price dis­tor­tion, it backed away from rec­om­mend­ing changes—after fierce lob­by­ing from the indus­try.

So this glob­al price-fix­ing regime is sus­pect­ed to cen­ter around a McGraw Hill sub­sidiary since 2002 involv­ing numer­ous oth­er major ener­gy com­pa­nies. And it might take years before any­thing is done, if any­thing is to be done at all. OMG, What a total­ly “shock­ing” dis­cov­ery.

@Pterrafractyl–

As usu­al, great, great work!

It is more than a lit­tle inter­est­ing to re-read the points cov­ered in the broad­cast to which this com­ment was amend­ed.

THESE are scan­dals! These man­u­fac­tured non-scan­dals we’re see­ing are just what I pre­dict­ed, and what you have so valu­ably sup­ple­ment­ed in the NY Times arti­cle about the Morell/Petraeus tiff.

BTW–although I haven’t been able to find the ref­er­ence on the inter­net, the big action in the short-sell­ing run­ning up to the 9/11 attacks was in the Stan­dard & Poors’ 500 put options.

Stan­dard & Poors is a sub­sidiary of McGraw Hill.

I saw that in either “Bar­ron’s” or “Investors’ Busi­ness Dai­ly.”

Best,

Dave

@Dave:
Regard­ing the anom­alous trad­ing activ­i­ty before 9/11, it’s worth point­ing out that there was actu­al­ly a study con­cuct­ed by some aca­d­e­mics where they con­duct­ed a sta­tis­ti­cal test that looked a the his­to­ry of “S&P 500 put” trad­ing activ­i­ty (which spiked Sep­tem­ber 10th, 2001 along with air­line stock puts) and attempt­ed to ask the ques­tion “what are the odds that the anom­alous S&P 500 put trad­ing activ­i­ty on Sep­tem­ber 10th was just ran­dom ‘noise’ con­sis­tent with the nor­mal flux­u­a­tion in day-to-day trad­ing vol­umes vs a non-ran­dom trad­ing pat­tern indica­tive of some­thing tru­ly unusu­al tak­ing place”? They reject­ed the null hypoth­e­sis so the find­ings point towards insid­er knowl­edge of the attacks lead­ing the anom­alous trad­ing activ­i­ty). The paper is a nice resource on the entire top­ic of pre‑9/11 insid­er trad­ing actions. The con­clu­sion was sim­i­lar to a study pub­lished in 2004 that also found sta­tis­ti­cal evi­dence of very unusu­al trad­ing activ­i­ties in the month lead­ing up to 9/11.

It’s also worth recall that stud­ies like the above two that con­clude some­thing was sta­tis­ti­cal­ly “anom­alous” in the finan­cial mar­kets are in com­i­cal­ly stark con­trast to the 9/11 Com­mis­sion Report’s find­ings on these mat­ters:

Nation­al Review Online
Was There Anoth­er 9/11 Attack on Wall Street?
Were the hijack­ers also insid­er traders?
Alexan­der Rose
July 26, 2004, 7:00 a.m.

Were the Sep­tem­ber 11 hijack­ers insid­er traders as well as mur­der­ers? The 9/11 Com­mis­sion’s report has belat­ed­ly put paid to the rumor that Osama bin Laden and his accom­plices spec­u­lat­ed in the stocks and options of vul­ner­a­ble com­pa­nies in the weeks before the attacks. The poten­tial prof­its gar­nered from such manip­u­la­tion would have been in the mil­lions.

Truth to tell, if one looked at the trad­ing fig­ures — espe­cial­ly with the ben­e­fit of hind­sight — for ear­ly Sep­tem­ber, there was a lot to be sus­pi­cious about.

Trad­ing in AMR — the tick­er for Amer­i­can Air­lines’ par­ent — rang alarm bells, espe­cial­ly in regard to fre­net­ic put-option activ­i­ty before Sep­tem­ber 11. A put, in brief, is a con­tract to sell a cer­tain num­ber of shares at a pre­vi­ous­ly agreed upon “strike” price some­time in the future. The price of the put depends on a num­ber of fac­tors, not least of which is the price of the under­ly­ing secu­ri­ty. Cau­tious investors buy puts as insur­ance if they believe a stock they hold might fall, while spec­u­la­tors exploit their high volatil­i­ty and rel­a­tive­ly low cost to lever­age prof­its if the stock does dive. (A call option is the same, but in reverse, and is ori­ent­ed towards the bull­ish).

Some 4,516 put con­tracts — which could be poten­tial­ly lever­aged into con­trol­ling more than 450,000 shares of AMR — trad­ed hands the after­noon before the attacks (com­pared to 748 calls). Thus, about 85 per­cent of the day’s options activ­i­ty involved puts — a mas­sive imbal­ance rarely seen. When the mar­kets opened for the first time after Sep­tem­ber 11, AMR plum­met­ed by 39 per­cent, which would work out to be $4 mil­lion prof­it for the hold­er or hold­ers of those puts (assum­ing the “insid­ers” had bought 4,000 of the con­tracts). Put it this way, on Sep­tem­ber 10, 2001, some­body, some­where, was very, very bear­ish about AMR’s near-term prospects.

Deriv­a­tives trad­ing in UAL (Unit­ed Air­li­nes’s par­ent) on the Chica­go Board Options Exchange (CBOE) on Sep­tem­ber 6 (and into the next day) exhib­it­ed iden­ti­cal char­ac­ter­is­tics: 4,744 puts on UAL, com­pared to just 396 calls. By Sep­tem­ber 10, short inter­est (essen­tial­ly, a wager that a stock­’s price will fall) in UAL jumped by 40 per­cent over its lev­el of a month pre­vi­ous­ly. As for AMR, its short inter­est increased by 20 per­cent.

The deep­er we delve into the murky world of futures the dark­er the pic­ture appar­ent­ly becomes (a few excitable souls still believe the CIA and Bush — you know, because they knew the attacks were com­ing — were behind the short­ing). One hedge-fund man­ag­er whis­pered to the New York Times that he’d heard that major short-sell­ing had been hap­pen­ing in eSpeed (ESPD), the elec­tron­ic bond-trad­ing net­work con­trolled by Can­tor Fitzger­ald (whose offices were high up in 1 World Trade Cen­ter). There was prob­a­bly some­thing to this rumor. Between August 7 and Fri­day, Sep­tem­ber 7, ESPD fell by $5.85 (or 42 per­cent) to $7.95.

Or what about the zeal­ous buy­ing of 17,955 short-term S&P 500 index puts at 1,050 points — the “strike price,” essen­tial­ly — on Mon­day, Sep­tem­ber 10, 2001? Those investors were gam­bling that the S&P, which closed at 1,092.54 at 4pm that day, would fall by at least 42 points by Sep­tem­ber 21, when the options were sched­uled to expire. With­out such a sig­nif­i­cant decline, the options would be worth­less. (Hey, options trad­ing is high­ly risky, but poten­tial­ly very prof­itable). More eerie stuff turned up in Britain and Ger­many. In Lon­don, inves­ti­ga­tors detect­ed what seemed to be huge bets on a decline in air­line stocks, while in the lat­ter, the price of Munich Re, a rein­sur­ance com­pa­ny that would be hit by claims result­ing from the attacks, plum­met­ed amid a surge of puts-buy­ing.

So, to repeat, were Osama and his accom­plices involved in insid­er trad­ing? Part of the answer is tucked away in a foot­note on page 499 of the 9/11 Com­mis­sion Report. The com­mis­sion­ers, bas­ing their find­ings upon exhaus­tive research of mil­lions of trans­ac­tions by the Secu­ri­ties and Exchange Com­mis­sion, note that “some unusu­al trad­ing did in fact occur, but each such trade proved to have an innocu­ous expla­na­tion.” More­over, “the trad­ing had no con­nec­tion with 9/11.” So what hap­pened? “A sin­gle U.S.-based insti­tu­tion­al investor with no con­ceiv­able ties to al Qae­da pur­chased 95 per­cent of the UAL puts on Sep­tem­ber 6.” This same insti­tu­tion, as part of a com­plex trad­ing strat­e­gy, also pur­chased 115,000 shares of AMR on Sep­tem­ber 10. But what about the spike in AMR puts trad­ing on Sep­tem­ber 10? It turns out that a “U.S.-based options trad­ing newslet­ter, faxed to its sub­scribers on Sun­day, Sep­tem­ber 9...recommended these trades.” Read­ers jumped in head­first come Mon­day morn­ing, only to strike it trag­i­cal­ly lucky the next day.

...

The rest of the above 2004 arti­cle gives an overview of the 9/11 Com­mis­sion’s find­ings that claim that every sin­gle one of the above anom­alies had an innocu­ous expla­na­tion. See the foot­note 130 in Chap­ter 5 of the 9/11 Com­mis­sion report. That foot­note give some exam­ple expla­na­tions for somue of those trades although no exam­ple is giv­en that explains the S&P 500 puts. Pre­sum­ably we should just take the 9/11 Com­mis­sion at its word:

The Guardian
9/11 — the big cov­er-up?

Even the chair of the 9/11 Com­mis­sion now admits that the offi­cial evi­dence they were giv­en was ‘far from the truth’

Peter Tatchell
Wednes­day 12 Sep­tem­ber 2007 05.30 EDT

Six years after 9/11, the Amer­i­can pub­lic have still not been pro­vid­ed with a full and truth­ful account of the sin­gle great­est ter­ror attack in US his­to­ry.

What they got was a turkey. The 9/11 Com­mis­sion was ham­strung by offi­cial obstruc­tion. It nev­er man­aged to ascer­tain the whole truth of what hap­pened on Sep­tem­ber 11 2001.

The chair and vice chair of the 9/11 Com­mis­sion, respec­tive­ly Thomas Kean and Lee Hamil­ton, assert in their book, With­out Prece­dent, that they were “set up to fail” and were starved of funds to do a prop­er inves­ti­ga­tion. They also con­firm that they were denied access to the truth and mis­led by senior offi­cials in the Pen­ta­gon and the fed­er­al avi­a­tion author­i­ty; and that this obstruc­tion and decep­tion led them to con­tem­plate slap­ping offi­cials with crim­i­nal charges.

Despite the many pub­lic state­ments by 9/11 com­mis­sion­ers and staff mem­bers acknowl­edg­ing they were repeat­ed­ly lied to, not a sin­gle per­son has ever been charged, tried, or even rep­ri­mand­ed, for lying to the 9/11 Com­mis­sion.

From the out­set, the com­mis­sion seemed to be hob­bled. It did not start work until over a year after the attacks. Even then, its terms of ref­er­ence were sus­pi­cious­ly nar­row, its pow­ers of inves­ti­ga­tion curi­ous­ly lim­it­ed and its time-frame for pro­duc­ing a report unhelp­ful­ly short — bare­ly a year to sift through mil­lions of pages of evi­dence and to inter­view hun­dreds of key wit­ness­es.

The final report did not exam­ine key evi­dence, and neglect­ed seri­ous anom­alies in the var­i­ous accounts of what hap­pened. The com­mis­sion­ers admit their report was incom­plete and flawed, and that many ques­tions about the ter­ror attacks remain unan­swered. Nev­er­the­less, the 9/11 Com­mis­sion was swift­ly closed down on August 21 2004.

...

When you put aside all of the spec­u­la­tion about the caus­es of the anom­alous trades and just focus on the fact that even the the chair­man and vice-chair­man of the 9/11 Com­mis­sion said they were “set up to fail” and that the inves­ti­ga­tion was “far from the truth” it the fact that we can’t real­ly treat any of the com­mis­sion’s find­ings on these mat­ters as much more than speculation(to be gen­er­ous).

McGraw Hill, as the pub­lish­er of the S&P 500 index, would­n’t have had any direct role in those S&P 500 put trans­ac­tions. But McGraw Hill, along with the rest of the media giants, has done a pret­ty good col­lec­tive job of for­get­ting to remind the US pub­lic of the fact that the 9/11 Com­mis­sion­ers, them­selves, raised seri­ous doubts about the com­mis­sion’s own find­ings.

@Pterrafractyl–

The McGraw fam­i­ly, not the com­pa­ny as a whole, are the enti­ty wor­thy of scruti­ny in the 9/11 short sell­ing.

The key con­cept here is “net­work­ing.” Know­ing what was wait­ing in the wings, inter­ests could be informed and “place their bets,” so to speak.

Nev­er for­get that the Bush fam­i­ly and Bin Laden fam­i­ly have been busi­ness asso­ciates for decades.

As Ernest Back­es not­ed, Fran­cois Genoud–heir to the col­lect­ed lit­er­ary works and polit­i­cal last will and tes­ta­ment of Adolf Hitler, Joseph Goebbels and Mar­tin Bormann–was a finan­cial advis­er to the Bin Laden fam­i­ly.

The Bush/McGraw fam­i­ly asso­ci­a­tions can­not be dis­count­ed, though the firm as a whole would not nec­es­sar­i­ly have been involved.

The fact that this has been almost entire­ly obscured by the major media voic­es is very telling.

Best,

Dave