Over the course of a few hours on April 20, a guy called Cuddles and eight ofhis pals from the freewheeling world of London’s commodities markets rode oil’scrash to a $660 million profit.
Among the many previously unthinkable moments of 2020, one of the strangestoccurred on April 20, when the price of crude oil fell below zero. West TexasIntermediate futures, the most popular instrument used to trade the commodity,had started the day at $18 a barrel. That was already low, but prices kepttumbling until, at 2:08 p.m. New York time, they went negative.
Amazingly, that meant anyone selling oil had to pay someone else to take it offtheir hands. Then the crude market collapsed completely, falling almost $40 in 20 minutes, to close at –$38. It was the lowest pricefor oil in the 138-year history of the New York Mercantile Exchange—and in alllikelihood the lowest price in the millennia since humans first began burningthe stuff for heat and light.
Watching this spectacle unfold were traders, energy executives, and freightcompany employees—whose livelihoods are tied to oil’s fluctuations. Regulatorswith the Commodity Futures Trading Commission in Washington stared at theirmonitors, stunned. “The screen was just going nuts,” Tom Kloza, an analyst atthe research firm OPIS Ltd., told Institutional Investor. The experience, hesaid, was like watching a film by surrealist director Federico Fellini: “You’reable to appreciate it, but no one really knows what’s going on.”
Within 24 hours the insanity was over, oil cost money again, and it wastempting to see what happened as a blip. But WTI futures, in which buyers and sellersagree on a price to trade at some upcoming date, sit at the heart of the $3trillion-a-year oil and gas industry. WTI is one of the main components thatdetermines the global price of oil—whether that oil is being sold by a MiddleEastern kingdom or a fracking conglomerate in Alberta. It affects what airlinespay for jet fuel and what manufacturers pay for petroleum-based chemicals.
Beyond the physical commodity itself, billions of dollars’ worth of financialproducts are also pegged to WTI in a specific and idiosyncratic way. Theirvalue is determined by the WTI price at 2:30 p.m. four working days before the25th of every month. That crucial “settlement” for the May WTI contract was onApril 20.
The sudden price drop that day, which wiped out some investors who’d bet on an oil recovery, was explained as the result of a confluence of macroeconomic factors. The pandemic, and resulting economic shutdowns, had decimated demand for oil, and space to store it was rapidly running out. It seemed to be a simple case of “fundamental supply and demand,”said CFTC Chairman Heath Tarbert in an April 21 interview with CNBC. Terry Duffy, chief executive officer of CME Group Inc., which owns the New York exchange, known as Nymex, saw it in similar terms. “The market worked the way the market was supposed to work,” he told the network. “To perfection.”
Perhaps to industry veterans like Duffy, it all made sense, but to anyone who has ever paid to fill up a car or home oil tank, a negative price was difficult to comprehend. Moreover, there had been a torrent of selling starting two hours or so before the settlement, leading to questions about whether someone had deliberately set out to push prices down. Harold Hamm, chairman of oil producer Continental Resources Inc., published a letter demanding an investigation into what he described as “failed systems” and “possible market manipulation.”
After all, the May contract was back at $10 on April 21 and the outlook had barely changed. “Going into April there was chit chat about zero or evennegative prices, but nobody was talking about –$40,” says Dave Ernsberger,global head of pricing and market insight at S&
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Global Platts, which provides benchmarks for buyers andsellers. “So what’s the real story here?”U.S. authorities and investigators from Nymex trawled through trading data forinsights into who exactly was driving the action on April 20. According topeople familiar with their thinking, they were shocked to discover that thefirm that appeared to have had the biggest impact on prices that afternoonwasn’t a Wall Street bank or a big oil company, but a tiny outfit called Vega Capital London Ltd. A group of nine independent tradersaffiliated with Vega and operating out of their homes in Essex, the county justnortheast of London, had made $660 million among them in just a few hours. Nowthe authorities must decide whether anyone at Vega breached market rules byjoining forces to push down prices—or if they simply pulled off one of thegreatest trades in history. A lawyer for a number of the Vega tradersvehemently denies wrongdoing by his clients and says they each traded based on“blaring” market signals.
ILLUSTRATION: SOPHY HOLLINGTON FOR BLOOMBERG BUSINESSWEEK
Paul Commins started his trading career buying and selling oil in the rowdypits of London’s International Petroleum Exchange, where, according to a formercolleague, he was affectionately known as “Cuddles.” He had the kind of broadcockney accent that wouldn’t be out of place in a Guy Ritchie movie andstruggled to pronounce his r’s. As a result, his three-digit badge, whicheveryone wore at the IPE, contained the letters “F-W-E”—pronounced “fwee,” thesound that would come out of his mouth when he tried to say “three.”
Opened in 1980, the IPE was riotous—400 traders and brokers in colorful jacketsscreaming at one another and using hand signals to strike deals that were thensealed on scraps of paper. They mostly came from working-class backgrounds,often from Essex, known for its brash culture and ostentatious displays ofwealth. (The stereotypical Essex male is a soccer-loving “geezer” with a pintin his hand and an expensive “motor.”)
The pits rewarded quick thinking and a tolerance for risk, and Commins—akaCuddles, aka FWE—thrived there. After a few years filling orders for corporateclients at Trafalgar Commodities, he became a “local”—one of the elite tradersin red jackets who wagered their own funds. A former colleague describes him asamong the top three in the gas and oil pit where he operated.
The pits were collegial and freewheeling, a place of ethical and regulatorygray areas. If a local overheard news about a big trade that some oil major hadin the works, he might try to jump ahead of it, a prohibited but pervasivepractice known as front-running. The cavernous trading floor had cameras, butthere were blind spots where people went to share information. A formerexecutive struggles to remember a single meeting of the exchange’s compliancecommittee.
One trick involved an instrument called Trade at Settlement, or TAS, anagreement to buy or sell a future at wherever the price ends up at the closingbell. The contract was aimed at investment funds, whose mandate it was to trackthe price of oil over the long term. But some traders figured out that theycould take the other side of these TAS trades, then work together at the end ofthe day to push the closing price as low as possible so they could pocket aprofit. The practice, while officially against the rules, was so common andeffective it had a nickname: “Grab a Grand.”
“It was blatant, what was going on,” according to former IPE Director ChrisCook, who says he learned of the practice after leaving the exchange. There’sno evidence Commins or his colleagues were involved in this practice.
In the IPE’s heyday, the best traders could make tens or even hundreds ofthousands of pounds in a day and still hit the pub by 5:30 p.m. But the rise ofelectronic trading made them obsolete. The IPE pits closed in 2005, forcingCommins, then 36, and hundreds like him to either learn to trade using acomputer or give up and do something else. Many struggled to make the transitionand quit. Others joined banks or brokers.
Former locals who wanted to continue working for themselves banded together atso-called arcades or prop shops, trading firms where they were given a desk,some office support, and fast connections to markets in exchange for a monthlyfee, a small commission on every trade, and, in some cases, a cut of anyprofits they made. The biggest prop firms, known as “the five families,” werebased in London and had dozens of traders on their books, many of whom had comefrom the pits. But a half-hour’s train ride away, in the small Essex town ofLoughton, Commins started a collective of his own.
His group was a mix of seasoned traders and novices in their 20s, usually thesons of Commins’s pals or his children’s peers. Among them were Dog (real name:Chris Roase), a veteran pit trader; Elliot Pickering, a skinny, awkward-lookingkid who still lived with his mum and drove a Rolls-Royce convertible; andAristos Demetriou, who went by “Ari” and was among the group’s biggest earners.Ari’s quick success had sparked a wild rumor circulated among London’scommodity traders that he’d gotten his break while working in a supermarketparking lot, pushing shopping carts, where he spotted Dog driving in and askedhow he could afford such a fancy motor.
The traders were all independent, each with his own brokerage accounts and taxreturns. But trading records and people who worked alongside them indicate theyfrequently operated in a similar fashion, buying or selling in the same directionat key moments. Away from the markets, some members of the group did everythingtogether—play golf, watch their soccer team, West Ham United, and take theirfamilies to the beachside town of Marbella in Spain (where the catchphrase forthe body-conscious was “no carbs before Marbs”). Several bought properties inthe same neighborhood, an affluent village called Theydon Bois that combinesthe bucolic charm of the English countryside with a short tube journey intocentral London. After work they frequented a bar popular with the cast of TheOnly Way Is Essex, a kind of cockney-inflected, blingier version of JerseyShore.
For a long time, Commins and much of his crew traded as an off-site offshootof [url=https://www.bloomberg.com/quote/0985618D
N]Tower Trading Group[/url], one of the five families. But when two Towermanagers, Adrian “Britney” Spires and Tommy Gaunt, left to start their ownoutfit in 2016, Commins and about 20 other Tower traders joined them. Under theumbrella of the new firm, Vega Capital London, he continued adding to hisstable, offering slots to young men with ties to his social group. One wasConnor Younger, the son of a building contractor pal, who a few years earlierhad been posting on social media about the adolescent pleasures of rap musicand chasing girls.It’s not clear what commercial arrangement Commins had with the traders hescouted or with Vega Capital, which has dozens of individuals on its roster whohave nothing to do with the Essex crew. But there were financial connectionsamong them. Commins and Demetriou co-owned a firm called PC & ADDevelopments, while Commins, Demetriou, and Pickering have all been directorsof an entity called PAT Developments Ltd. The companies, which don’t have websites,are listed as being involved in real estate.
At the start of 2020 the big industrial economies were healthy, investors wereoptimistic, and West Texas Intermediate was trading at about $60 a barrel.Prices began to fall in February after the first reports of the coronavirus.That accelerated as the outbreak turned into a pandemic. By the end of March,WTI futures were at $20, the lowest they’d been since after Sept. 11. Then,after tense negotiations, the big oil producers—led by Russia, Saudi Arabia, andthe U.S.—agreed to
reduce production by 10% to try to stabilize prices.
The cut wasn’t nearly enough. All oil futures were down, including Brent crude,which is based on oil found in Europe’s North Sea, but there was a particularproblem with WTI. Unlike with Brent, which allows buyers and sellers to settlewhat they owe one another in cash, anyone holding an expiring WTI contract atthe end of a month is obliged to take possession of 1,000 barrels of light,sweet crude in Cushing, Okla. (Despite being tiny and landlocked, Cushing is known as “the Pipeline Crossroadsof the World.” It became a center for refining and distribution afterwildcatters struck oil there a century ago.)
Normally, speculators can get around this by selling out before the expirationdate and buying the following month’s contract, a process known as “rolling.”But low prices in March and early April had attracted a rush of amateurinvestors into products tracking oil, including a large Chinese fund calledCrude Oil Treasure, which advertised with the tagline “Crude oil is cheaperthan water.” These funds would all have to roll over contracts worth billionsof dollars—and, thanks to the virus, buyers would be hard to find.
Meanwhile, storage tanks in Cushing were filling up fast. With so little spaceavailable, the cost of keeping oil threatened to exceed any potential profitfrom selling it. That combined with an abundance of frantic sellers to cripplean already fearful market. On April 3, Nymex issued an unprecedented warningthat prices could go negative.
The crucial settlement day for the May WTI contract, April 20, was a Monday. InEssex, some of the Vega traders logged on before sunrise to take advantage ofthe big session. Britain was in lockdown, and the lights from their front roomsand studies dotted the still-dark village. Central to their strategy would bethe TAS contracts that had once been popular in the pits, according to severalpeople familiar with the matter.
Here’s how it works: Imagine a trader sees that WTI isat $10 and predicts it’s going to end the day at $5. To capitalize, he buys50,000 barrels in the TAS market, agreeing to purchase oil at wherever theprice ends up by 2:30 p.m. At the same time, he starts selling regular WTIfutures: 10,000 barrels for $10 and then, if the market is falling aspredicted, 10,000 more at $9, and again at $8. As the settlement windowapproaches, the trader accelerates his selling, offloading a further 10,000contracts at $7, then another chunk at $6, helping push the price lower until,sure enough, it settles at $5. By now he is “flat,” meaning he’s sold as manybarrels as he’s bought and isn’t obliged to take delivery of any actual oil.
The trader’s bet has come off. His profit is $150,000, the difference betweenwhat he sold oil for (50,000 barrels at prices ranging from $10 to $6, for atotal of $400,000) and what he bought it for in TAS contracts (50,000 barrelsat $5 a barrel, or $250,000). All of this is perfectly legal, providing thetrader doesn’t deliberately try to push the closing price down to an artificiallevel to maximize his profits, which constitutes market manipulation under U.S.law. Manipulation can result in civil penalties such as fines or bans, or evencriminal charges carrying a potential prison sentence of up to 10 years. It’salso illegal in the U.S. to place trades during or before the settlement with “intentional or reckless disregard” for the impact.
Commins’s traders had historically been able to make big money in a few hourson settlement days trading in the same direction, according to people whowatched them work. But the strategy was risky. If an even bigger player showedup at the end of the session and made the opposite bet, it could push themarket in the other direction. There were days they lost millions of dollarsamong them, recalls one trader who knows them. “They had balls of steel,” saysanother. “It was quite unbelievable to see.”
As China’s Crude Oil Treasure fund and others sold WTI contracts in the TASmarket on April 20, the Essex traders bought them, according to peoplefamiliar with their trading, committing to buy large quantities of oil atwhatever the settlement price turned out to be. Between 11 p.m. U.K. time onApril 19, when the market opened, and 5 p.m. (noon in New York) the followingday, the price dropped from around $18 to $10 a barrel. As it fell, Commins andhis friends sold batches of regular WTI contracts, just like in the exampleabove, as well as calendar spreads, another financial instrumentthat allows traders to bet on the future price of oil. All they needed wasfor prices to keep falling, the further the better. As the day wore on,however, they became nervous. In text messages described to Bloomberg Businessweek,they exchanged details of their individual trades and questioned whether theywere taking on too much risk.
With a little more than two hours to go until the settlement, trading activityacross the futures market spiked, driving the price from $10 to $5, then allthe way to zero. The shift into negative prices occurred at 2:08 p.m., at which point any remainingstragglers still brave enough to be buying oil in the hope of a rebound got outof the market. Over the next 22 minutes, under the weight of ongoing selling byVega and others, the May contract plummeted. Nymex calculates the settlementprice by taking a weighted average of trades occurring from 2:28 p.m. to 2:30p.m. The final “print,” as settlement prices are known, came in at –$37.63. In the last half-hour the nine VegaCapital traders were, as a group, by far the biggest sellers of both WTIfutures and spreads, according to trading data described to Businessweek—aremarkable situation in a market normally dominated by the likes of [url=https://www.bloomberg.com/quote/BP%2F
N]BP[/url], [url=https://www.bloomberg.com/quote/GLENN]Glencore[/url], and JPMorgan Chase.In a mockery of the norms of commerce, the Vega crew had ended up being paidboth for the futures they’d sold when oil was positive during the day and forthose they bought via TAS. That, combined with theprofit from the spread trades, resulted in a total take of $660 million for thenine biggest earners, according to the trading data. Demetriou, who’s31; Pickering, 25; and Younger, 22, pocketed in excess of $100 million each,while Roase made about $90 million. Commins took home $30 million or so. Evenhis son, George, who’s in his early 20s with little apparent tradingexperience, made $8 million.
Elsewhere, investors around the world counted their losses. China’s Treasurefund informed its customers that everything they’d put in was now gone. “It didn’t occur to us” oil could gonegative, A’Xiang Chen, a 26-year-old investor from Shenzhen, told Bloomberg News. Syed Shah, a day trader in the Torontosuburbs who’d started buying crude futures when the price fell to $3 a barrel,wound up owing $9 million. Interactive Brokers, America’s largest onlinetrading service, lost $104 million because its software wasn’t equipped tohandle negative prices.
Rumors of a major score by a group of Essex boys spread quickly among traderson chat groups, though the winners were coy about discussing their profits,according to someone who says he saw the messages. When asked about the size oftheir haul, one joked that he had to go—the mobile reception was breaking up onhis yacht.
If the group had made $7 million that day instead of almost $700 million,they’d probably be celebrating. But the size of their winnings, coupled withtheir backgrounds—and political pressure to understand what happened—means thatVega has the attention of regulators. In August, Sherrod Brown, the OhioDemocrat and ranking member of the Senate banking committee, wrote toregulators saying the incident created “the impression of a market susceptibleto manipulation.”
The CFTC has been investigating Vega Capital, according to people familiar withthe matter. The U.S. Attorney for the Southern District of New York has started its own probe todetermine whether a felony was committed, the people say. Both authorities, aswell as CME Group, declined to comment on the existence of any ongoinginvestigation.
Even so, no authorities have accused Vega Capital or any of the tradersreferenced in this article of doing anything illegal. Buying TAS and offsettingit in the futures market is a common and acceptable practice, and it was nosecret that prices on April 20 might fall. Where traders have gotten intotrouble in the past is when they’ve been caught trying to deliberately push theclosing price rather than simply benefiting from where it ends up. In 2012,Dutch company Optiver Holding BV was fined $14 million and three of itsemployees were temporarily banned from trading commodities after the CFTCaccused the company of manipulating settlement prices. Email and phone recordsshowed Optiver’s traders talking about trying to “hammer” and “bully” thesettlement after accumulating TAS. Such clear-cut evidence of intent is rare.Since the CFTC was founded in 1974, it has won just one manipulation case attrial.
“Each of our clients regularly puts his own money at risk to try to make aprofit. Sometimes it works sometimes it doesn’t,” the law firm Simkins, whichrepresents eight of the nine traders, said in statement. “On 20 April blaringmarket signals—including the exchange’s repeated warnings that prices could gonegative—led market participants ranging from small proprietary traders tolarge financial institutions to trade on the assumption that prices would drop.And while no one could have predicted just how far they’d drop, each of ourclients, like many others around the world, traded on his own view of themarket. They don’t intend to comment on speculation about their profits.”
Whatever happens with Vega, its wild trading day has laid bare thevulnerabilities of the TAS mechanism, which also exists in markets for gas,cattle, and other commodities. Craig Pirrong, a finance professor at theUniversity of Houston, published a paper last year suggesting that market participantscan build a large position through TAS with very little impact on prices, thenoffset it in the regular market in a way that moves prices—an “asymmetry,” heargued, that invites manipulation. Senior officials at the CFTC are nowconsidering whether TAS is in need of reform. Last month the agency publishedwhat it described as an interim report on the events of April 20 that focusedon macroeconomic conditions but didn’t take into account the issue of potentialmanipulation because of the ongoing investigation. It drew criticism from one ofthe agency’s own commissioners, Dan Berkovitz, a Democrat who is seen as acandidate to take over as chairman in January. He described the interim reportas “incomplete and inadequate.”
“The commission must undertake and provide a meaningful analysis so that it cantake whatever remedial or corrective actions may be appropriate to ensure theintegrity of this critically important market,” Berkovitz says. “This was oneof the most extraordinary events in any commodity market in decades.” MichaelShort, a CFTC spokesman, says that the agency is limited in what it can shareand that criticisms seem to “miss the point that it is an interim report.” Healso says that the regulator was prepared for April 20 and that “large marketswings are not new for CFTC staff.”
Back in Theydon Bois, Commins and his crew are keeping a low profile. Some havestopped trading monthly settlements, according to people familiar with theirwork. Several have registered new companies, and it’s not clear what hashappened to their winnings. After April 20, Vega Capital parted with G.H.Financials Ltd., the clearinghouse that held its trading accounts and had adegree of responsibility for overseeing its activities. The firm has a newclearinghouse and continues to trade.
News of the win has been met with a mixture of incredulity and pride amongLondon’s trading community—and has even led to a new nickname: “the fifthBeatle,” for Vega co-founder Gaunt, who left the firm a few months before thebig day. “It’s funny how if it was BP or Goldman Sachs that made the money, no one would bat an eyelid,but when it’s a bunch of working-class lads, people say they’re cheating,” saysone trader who knows them, expressing a widely held sentiment. “I say good luckto them.”