Another Trading Scandal?

It seems at least mildly ironic that the news of BP's alleged propane market manipulation should break only a few days before Ken Lay died. You might see this as an instance of, "The evil men do lives after them..." or as something that's simply part and parcel of energy trading, and of commodities trading in general. I take the latter view. Enron didn't invent market manipulation, and the lore of trading is replete with stories about this or that trader or company that managed to "corner" the market in some commodity, for some short period. Rather than citing this as justification for the regulation of over-the-counter trades, which typically involve transactions too esoteric or illiquid for the formal exchanges to bother with, I regard it as just one more example of personal greed, and one that our current laws are perfectly adequate to sort out.

I'm frankly a little surprised to see BP in the cross-hairs on this. Despite the descriptions of BP's more aggressive trading style, the major oil companies generally keep a tight rein on their traders, because of their aversion to adverse publicity and the recognition that their size attracts much higher levels of regulatory scrutiny than smaller firms enjoy. It is instructive to see how quickly BP responded here, and to note the titles of the individuals who've been fired or suspended. They did not shoot mere minions here, but rather some highly-compensated, senior business unit executives.

The other interesting aspect of this story is the participants' choice of the mid-continent propane market. While it's certainly not as large as the WTI market, it's not an itty bitty market, either. These guys would have been running a sizeable risk of getting stuck with some seriously over-priced product (or holding the high price end of a derivative on a market that could go south, with no one to bail them out.) The experience apparently cost them $10 million, an outcome consistent with most previous attempts to corner markets.

From my perspective of a decade of hands-on trading experience in a variety of physical, futures, and over-the-counter energy commodities, I'd conclude that you can't have thousands of bright, highly-motivated individuals chasing commodity trades literally 24/7--interrupting meals, sleep and even dates to work on deals--without this kind of thing happening occasionally. (Note the distinction between that and an operation that routinely and systematically exploited regulatory loopholes.) The economic and societal benefits of energy trading far outweigh the cost of the occasional trading scandal, by making US energy markets the most efficient in the world and genuinely reducing the costs consumers and businesses pay for energy products.