Crude Oil's Quick Fall Leaves Trail of Queries
By JERRY A. DICOLO and CAROLYN CUI
A plunge in crude-oil prices rippled through financial markets, leaving traders confused and regulators seeking answers
Oil prices dropped more than $3 in less than a minute late in the trading day on Monday, just as trading volume spiked. The move also dragged down prices of gold, copper and even the euro.
"Traders were looking like deer in the headlights," said Peter Donovan, a floor trader at Vantage Trading on the New York Mercantile Exchange. "I called four different desks, and they all said, 'we don't know.' "
The move came at about 1:54 p.m. EDT. West Texas Intermediate crude for October delivery plummeted to $94.83 a barrel on the Nymex, from more than $98. Some 12,500 contracts changed hands in a minute, compared with less than 500 a minute previously.
The move sparked talk of an erroneous trade—called a "fat-finger" error in industry parlance—or a computer algorithm gone awry. Traders and regulators have been on alert in recent months after a series of technology glitches roiled financial markets. Commodity Futures Trading Commission member Bart Chilton said the CFTC is seeking more information. "Superfast price moves, like we saw in oil, put us on high alert," Mr. Chilton said in an email.
Still, the slide didn't have the usual hallmarks of a fat-finger error, said Eric Hunsader of Nanex, which studies market data. For one, while the steepest part of the slide occurred over one minute, the overall decline was longer.
Nymex owner CME Group Inc. CME -0.54%said it saw no technical trading issues.
West Texas Intermediate, or WTI, prices pared some losses to settle down $2.38, or 2.4%, at $96.62 a barrel. Brent crude also slumped, settling down $2.87, or 2.5%, to $113.79.
Some analysts blamed the price plunge on trading around the expiration of the October WTI option contracts on Monday. Traders often use options to hedge, or offset, their risks in the market.
As of Friday, about 11,000 contracts of call options with a strike price of $100 remained outstanding, "a big exposure" for the last day, said Stephen Schork, editor of the Schork Report, an energy newsletter. A call is the right, but not the obligation, to buy a contract.
Prices got close to $100 earlier in the day but lost steam. As the October options expired, some traders may have closed positions to keep their books in balance. Volume was low because of the Jewish holidays, he said. "It created a vacuum and it just sucked prices down," Mr. Schork said. |
