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

PVM lost nearly $10 million in a couple of hours because of what he did. Speculators were what made sure they got that outcome. When they went to unload their position, they were a selling (they owned too much, which they had overpaid for) into a buyers market. Without speculators in the market, they (or anyone) could corner a market -- even one as large as the oil futures market. The reason it is impossible to do is it is a very liquid market filled with speculators -- or traders.

 

On June 8 last year (2011), somewhere between 8 p.m and 9 p.m., the natural gas futures market on NYMEX went through the craziest 20 second spike in price (downward) you can imagine. Natural gas futures are much more lightly traded than oil futures. I was short a couple of contracts (I was short for several months) and happened to be watching (I was doing other stuff at the computer), even though watching a market like that after 8 p.m. is normally like watching a turtle race.

There is a lot of high-frequency trading in the market. They are computers programmed with algorithms that try to execute automatic profitable quick-hit trades if there are market moves.

Something I had never seen happened. Normally, there are only a few bids and asks out there at that time of after hours trading with NYMEX nat gas. In normal market conditions, if contracts at the top bid are executed, the price moves lower because the next highest bid (which is lower) moves up to the top level. There aren't a lot of bids and asks out there, so a few contracts bought will move the price lower, or a few contracts bought will move the price higher. It's normal. The market is kind of illiquid during those hours.

The exact opposite started to happen while I was watching, though. It went through about 12 waves, and it was obvious it was computerized trading by the pattern, but I have no clue what the algorithm was or why. As bids were executed, the price started to rise. And when offers were executed (normally prices should rise), the price went down.

It went through 12 peaks and troughs like that, and on the 12th trough it hit what turned out to be a 3 percent decline, which triggered a gazillion stop orders (people not sitting at their machines, but who had put in an order to sell should the price drop a certain amount). The market went into an instantaneous selloff -- pretty much all of it computerized, because I may have been the only person in the world who happened to freakishly be sitting there watching it. It was 15 seconds... and the price of nat gas dropped 8 percent. From top to bottom it was a 34 cent drop, which on one nat gas contract is a $3,400 move. Luckily I had the presence of mind to click the button and buy into it just after the price started to rise again (and I booked a huge profit), and when the market completely recovered (and settled back in as if the price spike hadn't happened), I went short again with my position (which was a trade I held onto for a few months). It was a lot of money, which, of course, I didn't deserve -- and came at the expense of people I really do feel bad about. It also probably evened out a half dozen stop orders I have had triggered on me during volatile market movements, where I took a loss.

The next day, the chairman of the CFTC said they were investigating the cause, but I never heard anything more about it until more than a year later -- this past summer. Buried in something they put out, which someone e-mailed me, NYMEX quitely announced that a trader with Whiteside Energy had left an automated system (I believe with a poorly programmed algorithm) up and running unattended and that somehow caused the volatility, which then triggered all of the sell stops. I don't know exactly what they did, but at least they named a culprit.

A lot of people got majorly screwed by what happened, when their stop orders were executed. It made me gunshy about putting in stop orders and walking away from open positions, but nothing like that has happened to me, thankfully.