Amaranth dominated trading in the U. S. financial market in 2006. It frequently held 40 percent or more of the open interest in natural gas futures in a particular contract month. Its massive trading “moved prices and increased price volatility.” Staff Report, Excessive Speculation in the Natural Gas Market (2007) supra note 37, at 114, 119. The conclusions in this decision supported by the record in this case are consistent with the findings in the Senate Report.See Did Hedge Fund Attempt to Corner the Natural Gas Market for March 2007?, PULP Network, September 27, 2006.
The ALJ's decision contains an interesting description of the NYMEX markets.
In 2006, the pit was a busy, loud, crowded place, with people standing elbow to elbow, shoving each other, and even fist fighting on occasion.... The traders were in close proximity with emotions running high as trades were made.... Traders had to pay attention to the dynamics of the pit in real time in order to be successful. This meant they had to read each other’s faces and listen to the pit volume. They also had to monitor aggressive trading.... Additionally, they watched the order flow (trading orders coming from the phone clerks manning the phone banks in the perimeter of the pit).
Illustration from The Pit, by Frank Norris, 1903.
The ALJ found that Hunter had manipulated the daily settlement prices for NYMEX natural gas futures markets by making high volume trades strategically during key moments when the daily NYMEX settlement price was being established. The settlement price is the price to which many contracts are indexed. According to the ALJ's decision, Hunter made trades designed to move the NYMEX settlement price while simultaneously taking positions in other markets that would benefit from the manipulated prices.
The ALJ rejected Hunter's claim that speculation in the futures markets did not affect the price of physical natural gas sales. She found that NYMEX futures prices do affect the price of natural gas set in many contracts which are indexed to the NYMEX price, and "found that Hunter intentionally manipulated the settlement price of the at-issue natural gas futures contracts."
The natural gas prices also affect wholesale electricity prices, because many sellers of electricity in the spot markets incorporate the NYMEX market price of gas into their price demands.
It is encouraging that the wheels are turning at FERC, albeit slowly, to uncover and punish natural gas market manipulation of four years ago by Amaranth, now a bankrupt entity, as it did with Enron, long after it went bankrupt. But the problems in the poorly regulated wholesale natural gas and electricity markets coupled with blurred market oversight are probably larger than the gross manipulation of "rogue traders" who are pilloried only after egregious damage and harm to consumers is flagrant and obvious.