Monday's sudden dive in oil prices appears more and more unusual with hindsight, and poses questions for traders, regulators and exchanges alike about just who or what caused such a major turnaround in the market.
Explanations range from a "fat finger" trading error or a high-frequency computer trading program run amok to a concentration of stop-loss orders being triggered or a single large trade by a hedge fund selling up to 10 million barrels of crude in a single clip, though no one appears to know for certain. The veil of secrecy surrounding derivatives trading also makes it hard to reconstruct the sequence of events that led to the plunge in Brent futures shortly before 2 p.m. EDT (18:00 GMT).
Only market regulators and the exchanges themselves have access to the detailed trading data, including the identities of buyers and sellers, that would make it possible to describe the chain of events in full.
In recent years, the only sudden move that has been properly explained was the flash crash in U.S. equity markets on May 6, 2010. And that was only possible because the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) set up a detailed enquiry that took more than four months to publish its conclusions. ("Findings regarding the market events of May 6, 2010: Report of the staffs of the CFTC and the SEC to the Joint Advisory Committee on Emerging Regulatory Issues," Sep 30, 2010.)
CURIOUSER AND CURIOUSER
The CFTC is looking into Monday's oil price drop and is collaborating with Britain's Financial Services Authority (FSA) which regulates the London-based Brent market.
CME Group, which operates one of the two principal oil markets, has described the drop as a "coordinated selloff" not caused by any technical failures. Intercontinental Exchange (ICE), which runs the main Brent contract, has declined to comment on whether it saw any unusually big orders placed during the period. It did, however, say: "Following rumors regarding the Strategic Petroleum Reserve (SPR), volume was widely distributed and oil prices declined over a period of time. Circuit breakers were not triggered and markets were orderly."
In the absence of a study like the one into equity prices in 2010, the trigger for the drop in oil prices may never be known with any certainty.
That should concern oil market participants because the September 17 price drop had characteristics of both a flash crash and a more significant and long-lived turning point. Trading that day was far from normal. Charts 1 and 2 show trading activity on the day and two days later on Wednesday September 19, another day on which prices fell heavily. The vertical scales are identical to make comparisons easier. The total price range on both days was similar: $5.52 on the Monday and $5.58 on the Wednesday. But in other respects the trading action could not have been more different.
On Monday, the plunge in prices and surge in trading volume was concentrated in 20 minutes between 17:50 and 18:10 GMT, with an extraordinary 10,000 contracts traded in the space of 60 seconds at 17:55 GMT. On Wednesday, by contrast, prices slid steadily throughout most of the day, with volume never exceeding 5,000 contracts a minute, and no obvious discontinuity in pricing.
Although something unusual clearly occurred just before 18:00 GMT on September 17, such aberrations may be becoming more frequent as computer-driven trading accounts for a rising share of turnover and market-making. It is tempting to write off the events of September 17 as merely a flash crash. But they also appear to have coincided with, and perhaps caused, a much bigger turning point in the oil markets. After rising steadily by almost $25.70 per barrel or 28 percent from June 28 ($91.35) to September 17 ($117.02), the ICE November Brent futures contract has fallen $9.75 (8.4 percent) in the space of three days, in what appears to be a decisive turning point.