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Excellent piece HiD.

People tend to forget that Peak Oil is not so much about the amount of recoverable oil - that is a function of price, and the trade-offs in relation to Energy used to get at it.

But Peak Oil as a peak in the level of production is a mathematical fact, and I believe that "economic growth" is now running up against this level.

The showdown is therefore between the global reserve currency ie deficit-based Fëd IOU's aka Dollars and the value of oil.

Because Oil is not priced in Dollars: Dollars are priced in Oil.

The absolute level of oil price is down to supply and demand, and since spare capacity is low and can only get lower as growth continues it really is not something Suppliers can do much about other than count their money.

The true cartel is the unholy alliance of intermediary oil traders and "Wall Street Refiners" who, among other things, own the major exchanges. Particularly ICE.

These guys manipulate the spot and benchmark derivatives markets systemically. Volatility is, I believe, far higher than that warranted by events. You only have to look at who is making the money from trading energy to see who the culprits are.

"Unacceptable Market Manipulation" is a US felony: that implies that there is a such a thing as "acceptable" market manipulation, and I guess that is exactly the level to which oil trading has sunk (or maybe it never rose above it)

Chris Cook

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Sep 7th, 2006 at 04:59:24 AM EST
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wall street and the rest of your unholy alliance do not have a desire for high prices though.  the money is in the volatility.  So half the time we rammed the price down, not up.

I also only think dollars are priced in oil to the extent Saudi wishes them to be.  And even then not 100%.  Our economy is not that levered to oil any more.  And they hold far less of our junk paper than China/Japan/China/Korea.  Perhaps dollars are priced in toasters and TVs????

As for "acceptable" market manipulation.  It's an ugly grey area.  Always made me queasy to do business just to make Platts notice.  But in thin markets with no trade at times, what else can you do to prove a point?  If you think the market should be lower based on your view of fundamentals, and have both physical and derivative bets on backing that view, do you have an obligation to stay out of the market to remain pure?  Or do you force the market to trade to establish a "real" price level?  the posturing and game playing got pretty childish when the number of players got so few that everyone pretty much knew what the others were up to.  Not fun at all.

I found the idea that people let 22 year old journalism grads working for Platts/Argus set 90% of the oil price to be a crime as well.  I tried to get the industry to do more fixed price biz.  Then smart players did well compared to the crooks at certain trading houses of the Dutch/Swiss variety.  

the crap on the IPE was pretty ugly though.  However, if Statoil, Esso, Shell etc wished to stop it they had the power to do so.  Just stop selling the crude off the settles and instead use fixed prices or monthly averages.

by HiD on Thu Sep 7th, 2006 at 05:22:42 AM EST
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I've never undestood what the laws about "market manipulation" where standing for. Any buy or sell influence price, if liquidity is not there and you move the market with your trade volume, so what?

Markets set a price for a thing, but also a price to pay to set the price to whatever you want, it's builtin with the idea of a market.

Any idea?

by Laurent GUERBY on Thu Sep 7th, 2006 at 06:58:37 AM EST
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some classics I think are clearly into the black

  1. doing a trade through a broker at $100/unit when the market was $98 yesterday.  Undoing the trade or doing an offsetting trade in private to make up the difference.  Move the print without it costing anything.

  2.  Lying full stop re a trade.  This is the sort of thing the Enron types are doing time for (or at least paying fines).  More common than I'd like to think.

  3.  offering through the bid in such size that the buyer cannot absorb it physically but insisting on all or nothing.  Easily done in barge lot markets.

  4.  Refusing a buyer claiming credit issues etc where none really exist.  The brokers usually find a "sleeve" to bust this up.  IE put BP in the middle knowing both parties will trade with BP.

trying to remember the rest of the V..../MR playbook.

  1.  Loudly offering through one specific broker all over the market (to force the price down) but not picking up any other phone to trade.  And hiding from the one broker until after the time of day the market prices are determined by Platts/Argus.  Pet brokers know where they make their money and will protect their best customers.

  2. Selling early in the day before the bulk of the market is at their desks in order to set an artificially low price.  Then try to jawbone Platts into reflecting a low ball trade in the range.  Perhaps merely in the grey here.  Platts doesn't have to be stupid.  

  3.  Not actually performing when the time comes.  Hard to prove damages if a small lot slips a few days, but the deal could have been done in a narrow date range to influence the print on Platts.  And perhaps paying damages on a small lot in order to make 10X on a larger one is a profitable scam.

  4.  Agreements not to compete or to collude.  I've had major players suggest this to me over lunch.  "we can keep it off the phone lines".  no thanks.

  5.  Bribe the reporter.  Perhaps just ugly rumors.  I've no proof whatsoever and no suspicions about anyone I ever worked with.

  6. Threaten the reporter.  I've seen one shaking in her shoes at a party.  

If I wrack my brain I could probably think of a few more scams.  It's a little harder on exchanges.  The deals actually do get done, but even then players working in collusion can undo losing trades off exchange later.

but I agree with your basic thrust.  If I'm offering and there are no bids until I've moved the market 5%, tough rocks for the longs.  Buy my oil or STFU.

Good thing it's been 10+ years and my memory is so foggy.....

by HiD on Thu Sep 7th, 2006 at 07:26:13 AM EST
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The information based cheats are another story (insider trading, spam to raise stocks, ...). The issue is that it's very hard to prove so everyone (the rich) play.

An exchange is place where the one without information give plenty of money to the one with information, this is not going to change  :).

Other schemes you suggest seem to be based on the corrupt brokers / specialists operating in some US exchanges, and they no longer exist when you've removed the fat dinosaurs (they are disappearing slowly), in real electronic exchanges with no recurrent "upstairs" shadow deals.

Some electronic books are not fully open (hidden sizes, ...) but that's not a real issue.

Then the obvious question (related to your "open" and no one here yet) is why are we setting for continuous time trading from open to close?

In particular I like the way the day closing prices are fixed in some market: everyone has five minutes to put all their buy and sell orders in the book (with no execution), then the price is set to the level that maximise volume and all relevant trades are done at this level. Doing that something like four times a day would be largely enough. If there's a news too close to the five minute, the exchange can delay by 30 minutes or one hour and that's it.

by Laurent GUERBY on Thu Sep 7th, 2006 at 02:43:26 PM EST
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In particular I like the way the day closing prices are fixed in some market: everyone has five minutes to put all their buy and sell orders in the book (with no execution), then the price is set to the level that maximise volume and all relevant trades are done at this level. Doing that something like four times a day would be largely enough. If there's a news too close to the five minute, the exchange can delay by 30 minutes or one hour and that's it.
Most exchanges have opening and closing auctions, I suppose to avoid orders piling up the way they do on e-bay.

Nothing is 'mere'. — Richard P. Feynman
by Migeru (migeru at eurotrib dot com) on Thu Sep 7th, 2006 at 04:00:09 PM EST
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I don't think the ebay second price auctions for one item (one seller, N buyer) are comparable to closing price for markets as described (N sellers, M buyers)

ebay of course could create a formal market for sufficiently similar items :)

by Laurent GUERBY on Fri Sep 8th, 2006 at 03:16:23 PM EST
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closing prices can be done relatively fairly.  But still can be manipulated up or down slightly as players absorb a loss on the exchange if they are levered 5X on some off exchange derivative.  that's what so offends Chris Cook.

but then, no one is forced to do derivatives that price off of the close.  

by HiD on Thu Sep 7th, 2006 at 06:11:37 PM EST
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The trader that sold you the derivative will have hedge orders in the book too, they should cancel this kind of thing.

And asianing rules indeed :).

by Laurent GUERBY on Fri Sep 8th, 2006 at 03:11:11 PM EST
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Why have opening and closing times at all?  It seems anachronistic not to trade 24/7.
by StephenAus on Thu Sep 7th, 2006 at 11:47:55 PM EST
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Nothin dumb in your question, we're just discussing the options and 24x7x365 is one of them :).

There are many plausible reasons to think 24x7x365 would be bad, for example if you're a person doing your own trading, you can't be awake 24x7x365, so you de facto create intermediate layers of professionals.

To me, as discussed here (assuming you want open capital markets), low frequency (a few times a day or even once every few day, weeks, ...) auctions would encourage people to place long-timed buy and sell orders based on their evaluation of the company traded, rather than short term trends and fluctuations.

Note that in practice traders on currency markets for big banks ("FX" traders) do roll their books from continent to continent each with its own trading team and do nearly 24x5 trading.

Some companies also have their stocks listed on multiple exchanges on different continents (it's called "ADR"), so you kind of have 24x5 trading. Some companies are rolling back those multiple listings (it increase compliance costs and the benefit isn't great any more in the internet age).

by Laurent GUERBY on Fri Sep 8th, 2006 at 03:08:41 PM EST
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