Nymex Purposely Manipulating Oil Volatility?

Z

Zanatos

One has to wonder if the Nymex is raising its margin requirements in order to increase volatility, I can't see an advantage to them doing so, but the alternative is that they are incredibly stupid, and that doesn't seem to fit with the board members experience and the Harvard degrees.
The higher the contract margin rate (oil, natural gas and gas), the lower the fees they will collect (less contracts being traded). So, its usually advantageous to the exchange to keep margin requirements as low as possible, for simple reasons, the predominant one just mentioned.
Nymex has raised margin requirements twice this month, which on the surface might seem reasonable, given the historic highs, the increased volatility, the change in trading patterns, and the massive volume. Much of this undoubtedly is due to the hedge fund/investment bank losses which cut trading jobs, which jobs are largely being replaced in the commodities sector, as investment banks/funds open up commodity trading ops to get in on the bull futures market. This has caused the trading patterns to change, and added liquidity, and perhaps some of the volatility.
If you actually investigate the technical data, you will find actually that the increase in margin reqs was the predominant factor in INCREASING volatility, which is to say, if they kept the margins the same, volatility would undoubtedly be lower. You can clearly see this in the trading patterns immediately after the margin reqs were raised. Why this is, I can only conjecture that all of the retail orders that smoothe out the trading (fill in the gaps between the funds massive orders), are been reduced, while there are more black boxes and funds trading oil. Then when you get a little unusual volatility, traders start putting in wider stops, which get wider as volatility increases, until we get the situation we have now.
Why am I writing about this?...hmmm.. I am a little more than pissed that oil in particular is getting its trading patterns dramatically altered week-to-week (day to day?), and that it now trades almost the same as natural gas (if I wanted to trade those trading patterns I would trade NG), in large part I believe due to the Nymex.

Anyways...just wanted to put this out there for discussion, what people think the reasons are for the change in oil trading, and if they think oil will ever normalize/when the volatility dies down. I think that once we get out of the historical high range, and the bull run is deflated, that things will calm down...I hope that the volatility in oil is simply a blip, as it is/used to be? my favorite trading instrument.
 
What data do you have that shows a direct correlation of margin increases to higher volatility other then your own interpretation on your perception of trading patterns?
 
You really don't understand leverage, the role and risk of the clearinghouse and what the performance bond is for.


Quote from Zanatos:

One has to wonder if the Nymex is raising its margin requirements in order to increase volatility, I can't see an advantage to them doing so, but the alternative is that they are incredibly stupid, and that doesn't seem to fit with the board members experience and the Harvard degrees.
The higher the contract margin rate (oil, natural gas and gas), the lower the fees they will collect (less contracts being traded). So, its usually advantageous to the exchange to keep margin requirements as low as possible, for simple reasons, the predominant one just mentioned.
Nymex has raised margin requirements twice this month, which on the surface might seem reasonable, given the historic highs, the increased volatility, the change in trading patterns, and the massive volume. Much of this undoubtedly is due to the hedge fund/investment bank losses which cut trading jobs, which jobs are largely being replaced in the commodities sector, as investment banks/funds open up commodity trading ops to get in on the bull futures market. This has caused the trading patterns to change, and added liquidity, and perhaps some of the volatility.
If you actually investigate the technical data, you will find actually that the increase in margin reqs was the predominant factor in INCREASING volatility, which is to say, if they kept the margins the same, volatility would undoubtedly be lower. You can clearly see this in the trading patterns immediately after the margin reqs were raised. Why this is, I can only conjecture that all of the retail orders that smoothe out the trading (fill in the gaps between the funds massive orders), are been reduced, while there are more black boxes and funds trading oil. Then when you get a little unusual volatility, traders start putting in wider stops, which get wider as volatility increases, until we get the situation we have now.
Why am I writing about this?...hmmm.. I am a little more than pissed that oil in particular is getting its trading patterns dramatically altered week-to-week (day to day?), and that it now trades almost the same as natural gas (if I wanted to trade those trading patterns I would trade NG), in large part I believe due to the Nymex.

Anyways...just wanted to put this out there for discussion, what people think the reasons are for the change in oil trading, and if they think oil will ever normalize/when the volatility dies down. I think that once we get out of the historical high range, and the bull run is deflated, that things will calm down...I hope that the volatility in oil is simply a blip, as it is/used to be? my favorite trading instrument.
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Quote from Zanatos:


Why am I writing about this?...hmmm.. I am a little more than pissed that oil in particular is getting its trading patterns dramatically altered week-to-week (day to day?), and that it now trades almost the same as natural gas (if I wanted to trade those trading patterns I would trade NG), in large part I believe due to the Nymex.
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So you are pissed your trading system broke now that all the newly attracted market attention changed the market?

To presume changing margin requirements changes the character of the contract is probably not realistic. It makes sense to change the margin requirements when the contract notionally controls a lot more money. IE why should you be able to control $96K worth of oil with a much lower amount of cash (designed around a $70K contract)? I haven't studied this, but there's probably a direct correlation between margin requirements and notional contract and daily volatility #s.

volatility of crude isn't really that wild lately, to tell you the truth. The swings were no different, if not much less on a percentage basis, than the type of movement in early 07 late 06 with the rapid selloff in crude.

Sounds like you need to reduce leverage and acknowledge the speculative interest now in the crude superbull may have broken what appears to be a 'short the rally' system designed around a more rangebound choppy market. One thing is likely certain: within a few weeks when the inevitable thrashing and abandonment of crude does occur, your system will probably return to working.
 
Quote from Zanatos:

One has to wonder if the Nymex is raising its margin requirements in order to increase volatility, I can't see an advantage to them doing so, but the alternative is that they are incredibly stupid, and that doesn't seem to fit with the board members experience and the Harvard degrees.
The higher the contract margin rate (oil, natural gas and gas), the lower the fees they will collect (less contracts being traded). So, its usually advantageous to the exchange to keep margin requirements as low as possible, for simple reasons, the predominant one just mentioned.
Nymex has raised margin requirements twice this month, which on the surface might seem reasonable, given the historic highs, the increased volatility, the change in trading patterns, and the massive volume. Much of this undoubtedly is due to the hedge fund/investment bank losses which cut trading jobs, which jobs are largely being replaced in the commodities sector, as investment banks/funds open up commodity trading ops to get in on the bull futures market. This has caused the trading patterns to change, and added liquidity, and perhaps some of the volatility.
If you actually investigate the technical data, you will find actually that the increase in margin reqs was the predominant factor in INCREASING volatility, which is to say, if they kept the margins the same, volatility would undoubtedly be lower. You can clearly see this in the trading patterns immediately after the margin reqs were raised. Why this is, I can only conjecture that all of the retail orders that smoothe out the trading (fill in the gaps between the funds massive orders), are been reduced, while there are more black boxes and funds trading oil. Then when you get a little unusual volatility, traders start putting in wider stops, which get wider as volatility increases, until we get the situation we have now.
Why am I writing about this?...hmmm.. I am a little more than pissed that oil in particular is getting its trading patterns dramatically altered week-to-week (day to day?), and that it now trades almost the same as natural gas (if I wanted to trade those trading patterns I would trade NG), in large part I believe due to the Nymex.

Anyways...just wanted to put this out there for discussion, what people think the reasons are for the change in oil trading, and if they think oil will ever normalize/when the volatility dies down. I think that once we get out of the historical high range, and the bull run is deflated, that things will calm down...I hope that the volatility in oil is simply a blip, as it is/used to be? my favorite trading instrument.
More...

So it would be: Historic high, margin requirement, volatility? As the margin requirements change some traders stay some leave AND the way they trade? I agree with you but defer to sparky as to why it is done.
 
Check out this book published about 15 years ago which detailed the hunt brothers foray into the silver market. Their plan was to use their pnl of their massively long futures position into buying even the mines themselves which would have effectively cornered the market. One day, the COMEX just changed the rules such as position limits and margins which killed that massive rally. I would not be suprised if the NYMEX, in the event of another war, would change the margins wayyy up ( maybe after getting a little nudge from the white house?) to extinguish the feverish speculative frenzy for most except for the biggest hedge funds which can afford the margins.
 
"I would not be suprised if the NYMEX, in the event of another war, would change the margins wayyy up ( maybe after getting a little nudge from the white house?) to extinguish the feverish speculative frenzy for most except for the biggest hedge funds which can afford the margins."

I at one time agreed with this, but doing so now re margin requirements would not have the same effect because of the current global market conditions. If money was cheaper (margin requirements were lower) in asia or elswhere they would effectively take the business.
 
Quote from nutmeg:

"I would not be suprised if the NYMEX, in the event of another war, would change the margins wayyy up ( maybe after getting a little nudge from the white house?) to extinguish the feverish speculative frenzy for most except for the biggest hedge funds which can afford the margins."

I at one time agreed with this, but doing so now re margin requirements would not have the same effect because of the current global market conditions. If money was cheaper (margin requirements were lower) in asia or elswhere they would effectively take the business.
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Agreed. and another thing - a lot of these markets trade parallel OTC markets that are 'off exchange' but arbed to NYMEX. There, no position limits and 'credit facility' are established between counterparties directly. In other words, much higher leverage is possible.

NYMEX is only a small part of the game. ICE and i'm sure many other facilities exist that I'm not aware of to run and control price.
 
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