Faux Pas

That Time a Drunk Trader Played Havoc With the Oil Futures Market

That time a drunk trader played havoc with the oil futures market

It was 7:45 a.m. on June 30, 2009. Stephen Perkins had a hangover. All he wanted to do was go back to sleep. Actually, he wished desperately that he was sleeping — that this was all a nightmare, and that any second he would wake up and realize he was imagining it all.

When he heard the loud ringing sound, his first thoughts were that his prayers had been answered. Could that be an alarm clock, waking him up from this horrifying dream? When he confirmed that it was, instead, the sound of an insistent telephone, his hopes sank. He knew why his phone was ringing, and if he was right, his nightmare was only just beginning.

Stephen was a broker for London-based PVM Oil Futures. The person on the other end of the phone was a clerk from the company, demanding to know why Stephen had purchased 7 million barrels of crude oil during the night in transactions totaling over half a billion dollars.

Stephen hurried into the office, trying to think up an escape plan on the way. Indeed, ever since he woke up that morning and his fragmented memories started to remind him of prior night’s activities, he had been frantically trying to figure out how to get himself out of this mess. He sent a text message to his boss at 6:30 a.m., telling him he wasn’t feeling well. That much of his story was certainly true.

“Mr. Perkins poses an extreme risk to the market when drunk.”

Conclusion of an FCA regulator

Stephen went to a company-sponsored golf event the prior day. His drinking prowess was far greater than his golfing ability, however. Before the outing was over, he blacked out.

There are plenty of good reasons why people should stay away from drinking alcohol. It dulls the senses, impairs judgment, and causes people to do truly stupid things. In his defense, there’s no indication that Stephen drove while intoxicated, vomited over powerful corporate leaders, or called up ex-girlfriends in the middle of the night like so many people do while under the influence. Instead, he assumed the alcohol had sharpened his trading instincts, so he sat down and started playing in the oil futures market.

Stephen’s employers were waiting at the door when he arrived, still hoping to hear a good explanation for the night’s trading activities. Stephen blurted out his cover story. It was a lie, and it wasn’t even a very good one. He explained that he had been trading at a client’s side in the night. Company leadership demanded to know the name of the client. When Stephen couldn’t answer their questions, his story began to fall apart and the horror of his actions unfolded to everyone.

Where do we start with all the things that went wrong with this drunken trading spree?

In the first place, oil brokers are supposed to trade on behalf of their clients, acting on the instructions of the client and using the client’s money to fund the transaction. Stephen’s deals were done with the company’s money — $520 million of the company’s money.

Secondly, traders operate on the basic economic principle of supply and demand. The greater the demand, the greater the price. Stephen’s frantic trading definitely caught the attention of the market. He purchased 7.13 million barrels of oil over a 2.5-hour period. This represented 69 percent of all of the oil trading that took place that day and drove the trading volume to 10 times its usual levels. This highly-unusual demand sent prices skyward from $71.40 a barrel to $73. This represented an 8-month high in oil future prices. Sudden price increases of this magnitude are typically reserved for major geopolitical crises. This was the first time an inebriated trader caused such havoc on his own.

An oil future is, basically, a contract, in which the owner of the future promises to purchase oil at a certain price on a future date. The trader is betting that on that date, the actual price of oil will be greater than the amount he or she agreed to pay. If it is, the trader makes money. If the price of oil is less than the amount paid for the future, the trader loses money.

Stephen’s actions drove the price of futures up, so by the time he finished his purchases, he — well, his employer, that is — was promising to pay $73 per barrel for oil at a specified point in the future. This trading activity was an unnatural fluctuation on the market, however. Once it stopped, the price of oil returned to its pre-drunken-trading-spending-spree levels.

When it was all sorted out, PVM Oil Futures lost $9.7 million. This was not insubstantial for a company that typically showed an annual profit of $12 million.

Stephen, as you might have guessed, was not destined for greatness at PVM Oil Futures. He was still feeling his hangover as he was handed his pink slip. He also faced sanctions from the Financial Conduct Authority (FCA) to the tune of a £72,000 ($98,600) fine and a 5-year ban from participating in any regulated market activity.

An investigation by the FSA deemed him “not fit and proper.” With the British flair for understatement, the regulator who delivered the final report said, “Mr. Perkins poses an extreme risk to the market when drunk.”

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