Which I also said in spades to the Norwegians in early December last year (in a paper written at the request of one of their Consuls - General). They seem to have taken notice of this paper if recent press reports of comments by their outgoing exchange CEO are to be believed. They SHOULD take notice because they have been the biggest losers from the Brent complex for years.
But the last thing that is needed here is a new "Exchange": intermediary exchanges and clearing houses are obsolescent. What is needed is a global market network and "clearing union" which is not in the hands of intermediaries and which has pricing nodes (here I am an admirer of the London Bullion fix pricing methodology, possibly coupled with Baltic Exchange style broker panels)which are based upon the underlying market.
And there has to BE an underlying market before you can start trading derivatives, where my caustic friend had a point.
That is the sort of thing in our feasibility study and there was also a lot concerning the necessarily neutral legal and financial structure which such a market network should take. "For Profit" exchanges are a bit of a joke at the expense of the "customers" formerly known as "members".
Anyone interested can find much of the analysis on www.opencapital.net/markets.htm
The bottom line is that intermediaries are coining it at the expense of producers and consumers: J K Galbraith called such a situation (when losers don't knowthey are losing) a "Bezzle".
Which is spot on. A recent article in the FT quoted a Mr de Vitry of Barclays Capital as saying that intermediaries' profits from commodity markets are set to double in the next three years - from £13 billion!
Best Regards
Chris Cook "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
Having been one of those "intermediaries <that> are coining it at the expense of producers and consumers", I can assure you that setting up new networks and methodologies with broker panels etc isn't the way to trim those profits. You have to change the motivations and risk profile of the participants and their management. They don't lack tools, they lack courage or a motivation to show any.
The producing nations are well aware that middlemen hurt them. That's why the smarter ones essentially put traders under water to get access to the oil. We regularly overpaid for term business from Venz/Algerian/Italian export refiners just to have a foothold in the market. The end consumer is the real mark in the game most of the time. And he/she will never have a voice sicne their usage is so small relatively.
As to middlemen coining it. One of the main reasons for this is that there are so few middlemen of any size left. The shakeout in the 90s left very few players. The risks are therefore larger (hard to lay off your bets) but the rewards for providing the liquidity the customers demand grow as well. Or the other model of simply providing a flow service to hedge fund types (and trading off the info flow with the other hand) can be followed.
I rather doubt you'll find a way to design a system that can turn what the oil market needs into what the hedge fund players want as well as MS, JAron/GS, Rest of Wall Streeters can. I bailed out over 10 years ago. Even then the complexity of the models for the derivs the customers wanted (or could be sold) were such that few really understood the whole picture. Complex derivs were where the profits were coming from, not so much matching bid/ask. That and just calling the market well.
If you do read this, I'd be curious to know just how you feel the Norwegians were shafted by the Brent Complex system. I focuses on products not crude, which may be why I am more skeptical of these bourses. Products are a lot more complicated to handle in my experience.
I had chapter and verse on particular games going on in respect of pricing against IPE's Brent settlement prices which were being manipulated, and blew the whistle on it.
Unfortunately I alleged "Systematic" manipulation not "Systemic". And, because no-one was doing it most of the time - but most were doing it some of the time, I got slagged off.
Everyone was coining it, particularly the Exchange itself which was no longer (as it was in my day) a "Mutual" but was now "For profit" with a great interest in the 10,000 contracts a day being bought and sold in these games.
The locals actually called it "grab a grand" because the big boys were quite happy to give away $50k on the settlement to them because they made ten times that on derivatives or physicals priced against it.
After it all died down of course, they quietly changed the rules....but I certainly could not be seen to be correct.
I believe that the relationship between one of the biggest oil majors and one of the biggest investment banks would not stand close examination and that they play (or used to until hedge funds took away their pricing power)a "Grand Old Duke of York" game. ie march the price up and down the hill - and compensate each other informally OTC or otherwise for any losses. Hedgers lose, because volatility is over-priced on their options or alternatively they lose more (or gain less) on their hedges than they should.
I believe that there is a way of restructuring the market which can work, but it requires new tools and a bit of lateral thinking. Which is what I have spent the last few years doing....
IPE settles were indeed a joke. (I used to sit at the elbows of a couple of the bigger players on Brent) But I wouldn't be sure they were always manipulated the same direction such that they would constantly hurt a 100% same side hedger. If your analysis is in print somewhere I'd love to read it.
very very accurate. Also done extensively with Platts/Argus based derivatives. I could tell you some interesting things but I'm not sure about the statue of limitations.
Again, all the "real" players have to do is fix their own prices a significant percentage of the time. It's the abdication of pricing to a market settle or a journalist that shafts them (in my opinion). There's no gun held to Statoil's head forcing them to price off of settles. Just sell on an EFP and sell the futures rateably or when they feel lucky.
It will be interesting to see if you can structure a more honest market. The problems I see though are:
1) Top brass fear corruption. The like forcing their people to sell off of some marker system to avoid the ease of shaving a cent off a fixed price sale and have it re-appear in cash down the pub. And the peons like it because they can pretend to be traders while arguing over the last cent or so relative to Brent, when in reality their job isn't that hard or stressful.
Top brass also fears accountability. If their team can't match the settle, the stock holders have a legitimate right to ask "why not sack all of you and just term up the sales to XYZ trading house".
As for direct collusion re marching prices up and down, I never saw that between majors and Wall Streeters (I worked for both). But I'm 10 yrs+ gone and wouldn't doubt it much from one oil particular major or the crude traders at one particular IBank back in my day. The same players are still around today, just at different desks..
I had Dutch trading house traders ask me out to lunch and suggest precisely that sort of tactic and carving up markets to keep aquisition costs down. The voice brokers would hint that party A and party B were undoing their published deals in secret, but they liked the money too so you could never get them on record. European markets were a real swamp. There was no honest business with ENEL before 1995 and the revelations re Elf were no surprise. IIRC, the German govt owned a piece of one of their sleazier trading houses. When the regulator's political parties are part of the scam, it's hard to get an honest playing field.
The collusion on cutting brokerage commissions was real as well. Some of those guys are lucky not to have seen the inside of courtrooms instead of just getting fired and participating in a manpower shuffle with higher salaries at the end of the day.
