Oil crosses $100 but nets a $600 loss.
January 4th, 2008 by Grant in: Energy, InvestingLast Wednesday crude oil ($wtic: chart) crossed the magic $100 per barrel threshold for the first time ever. But now it appears that the event was an attempt to gain 15 minutes of fame.
Evidently, a single trader bid up the price of crude by buying a 1,000 barrel contract off the floor for $100 per barrel, then turned around and sold it for $99.60 per barrel, a $600 loss (crude crossed the magic $100 line again the next day, but let’s face it, there are no points for second place!).
Most trading in energy futures has shifted away from the trading floor and takes place on electronic platforms where this type of transaction is more difficult to place.
The NYMEX (New York Mercantile Exchange), along with the Chicago Mercantile Exchange is one of the last bastions of “open outcry”, where traders use hand signals, yell, scream and pull hair to trade securities.
Supporters of electronic trading claim that it is faster, cheaper, more efficient for users, and less prone to manipulation by market makers. The declining liquidity on the NYMEX floor has led to speculation that the exchange will soon shut down the trading floor to cut costs, and move to a purely electronic trading platform.
I still haven’t come to a conclusion as to whether a purely electronic form of trading will be good for the markets.
What say you?
Tags: crude oil | electronic trading | MERC | NYMEX | trading
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January 5th, 2008 at 1:13 pm
Grant-
Good question. While the open outcry model was very human and interactive, that also meant that those in the pits could quite often take advantage of customers and the general public with collusion and advance trading. Conversely, while electronic trading does eliminate that, it does seem to provide an advantage to the institutional black box traders who can place huge market orders in nanoseconds, beating smaller players to the punch.
Coincidentally I am on the board of advisors of a company that is in final product development stage of a radical, game changing trading product that, according to experienced open outcry traders, will give them their edge back. As that product comes to market I will be glad to introduce you to one or more of the senior executives and provide an product test drive.
David