A judge ruled that Canadian trader Brian Hunter was found to have manipulated the Natural Gas market on the NYMEX. The exchanges now should move in and ban him permanently from trading.
Bloomberg News said on its website, “Hunter knew that New York Mercantile Exchange natural gas prices could be manipulated and set out to do it, the administrative law judge, Carmen Cintron, said in an 80-page ruling issued on a commission docket today. The ruling is subject to review by the full commission.”
“It is found that Hunter intentionally manipulated the settlement price of the at-issue natural gas futures contracts,” Cintron wrote. “His trading was specifically designed to lower the NYMEX price in order to benefit his swap positions on other exchanges.”
Hunter was the head energy trader at Amaranth Advisors LLC, an investment advisory firm, when it ceased operations.
At its peak, Amaranth managed $9 billion in hedge fund assets, but lost $6 billion in natural gas due to highly leveraged trades Hunter amassed for the firm. Hunter reportedly leveraged his trades for Amaranth 8:1. To put that into perspective, at their most aggressive posture, most other traders will not exceed 3:1 leverage over their entire portfolios, never mind one position in their portfolio. [These trades put Amaranth under, but were not part of the recent ruling for market manipulation.]
What Hunter did to warrant the manipulation ruling was what locals refer to as banging the close. By flooding the NYMEX with Sell orders in Nat Gas in the last 10-15 minutes of trading (the Close), Hunter found that he could manipulate the price downward as there were no likely buyers for the type of size he was representing for sale.
Hunter concurrently held similar Nat Gas positions at the ICE that were much larger. Those positions are called look alikes, because they a not physically settled like their counterparts at the NYMEX are. After First Notice, those long contracts can be delivered against. This is true for any commodity.
Conversely, ICE contracts are settled financially, like the S&P 500 for example, so a trader does not have to worry about getting delivered against. Hunter was short his contracts, so he did not have to worry about delivery in this case. His goal, however, was to artificially depress NYMEX Nat Gas contracts so as to lower his larger ICE look alike Nat Gas contract position and burgeon his account balance. Herein is the manipulation.
Hunter was manipulating the price downward, so if anything, it may have benefited consumers. However, manipulation in any market manner is unlawful. He likely affected other traders who might have had to contribute higher amounts of margin (collateral) for their commodity accounts in order to maintain their positions.
Hunter’s attorney Matthew Menchel said, “The FERC should never have presided over this matter, which is outside its competence and jurisdiction. Its decision means nothing in our view, and the FERC will have to accept the consequences when we get to the DC Circuit, which the FERC has been trying to avoid for the last few years.”
I disagree. And arguing some technicality does not vitiate the finding that he deliberately manipulated the Nat Gas market. He has personal responsibility for all his actions at all times.
You have the letter of the law and the spirit of the law. Hunter’s behavior seems to have violated both in this case.