Gas price manipulation: how it works

There was nothing unusual about gas trading on 28 September – until Seth Freedman prepared to set the daily index price. Here he explains the suspicious pattern that shattered his faith in the system

The suspicious trading behaviour which led to an FSA investigation Link to this video Half an hour till the closing bell, the market's in freefall. Final session of the year, even though it's only the end of September. Happy New Gas Year: in the energy trading world, today's a seismic event. End of the month, end of the quarter, end of the season, and – deck the halls – end of the gas year too. No wonder traders are nervous. Day-ahead price is getting a kicking. It was only down 0.25 when I sent out my market update at 15.50; now it's down a full penny more heading into the final few minutes of dealing.
I open up the Greenwich Mean Time webpage, leave the yellow bar counting down the seconds on my right-hand screen as I cut up the call slips and walk round the room. Drop the E.ON one on my desk, hope Dan picks up when I dial, could do with a solid run-through of prices all the way out on the curve.
James can have Statoil, he's quickest on the draw and they fire out their numbers like a Browning 50-caliber machine gun. Barely look at the others as I slap the slips down while I zigzag round the office: BG here, Gazprom there, Merrill Lynch for her, EDF for him, quick check of the oil price on Reuters then back into the hot seat. Actually, what the fuck? Jump out my chair and back to the Reuters terminal – that Brent crude chart looks properly dodgy, flick up the oil newsbar but the cupboard is bare: no reason the price should've just tanked like that from 16.00 onwards. No straight reason, at any rate.
The pricing window opens at 16.00 on the nose, stays open till 16.30, and what do you know? Front-month contract's been ticking up nicely all day, no real news, no US employment data or supply-side shocks, just a quiet one heading into the weekend, then – bang – 16.00 arrives and the front month falls through the floor. Nosedives like it's taken a direct hit in the fuselage, no support, no dead cat bounce, not a friend in sight as it plummets ever downwards. Pound to a penny that'll recover as soon as the window shuts, but can't sit around watching it till then, our window opens in less a minute, I've only got eyes for the gas price.
16.29.10 says my faithful yellow bar, I crack my knuckles and scan the lefthand monitor. System's slightly short, having been long a few hours ago.
On a normal day that would have given the prompt [near term contracts to deliver gas within the same month] a bit of a boost going into the close, but today's not one of those. 16.29.17; quick glance at the National Grid entry zone graphs: Langeled – the main pipeline delivering gas from Norway – is still pouring gas in, only a touch down from the overnight rate.
LNG send-out (gas being pumped into the system from liquefied natural gas terminals) is pathetic by comparison, but there's a bit of supply tightness there and that's already been factored into the prompt and near curve [medium term contracts]
Alarm bells
16.29.29. Sophie sends a text, timing couldn't be worse, I'll call back soon as the first round of prices are in. Can't remember what time dinner is, no time to think about that now, it's almost witching hour.
16.29.36, cough once for luck, then suck in a lung-full of air. 16.29.39, I hate this bit, wish we just had a gong: "MAKE YOUR DAY-AHEAD AND WEEKEND CALLS", mouth shouting on autocue, fingers doing the same on the phone. My timing's exquisite: 16.29.58 as the first ring peals out on the E.ON trading desk somewhere in Germany.
 No time for pleasantries, not for me or for him. "Day-ahead 58.5, no, hold on … it's just collapsed as we speak … 58 printing now."
Alarm bells ringing, even louder than the oil ones a few minutes ago. That's a major move, sliding half a penny with nothing in between sounds pretty suspect, but no time to dwell on it, he's already spitting out the rest of the curve. "Weekend 59.25-35, nothing working days, October 59-59.1, November 61.95" …
I let my subconscious do the writing, my mind's back on Day-ahead. When he gets to summer '14 I say "thanks" and let him go, don't really need any more comment than the "hold on … it's collapsed" bit; day-ahead is what's of most interest today, the rest's pretty bland given the market's so thin. No one wants to take proper positions ahead of next week, when winter replaces summer and a new gas year begins.
No numbers from Errol, but Sandro's screenshot is in, I jot down the prices, they're a pretty much perfect match with Dan's. Day-ahead aside, of course, that one's all over the place. Sandro's got 58.40 bid, 58.75 offered, last print [trade] at 58.00, something's totally off there.
Two minutes till the ICAP call, check Reuters again: wish I was an oil trader, saw that one coming a mile off, 16.30's been and gone and Brent's on the bounce again – soon as the price setting window shut, it reversed the losses and insouciantly ticked up again like nothing had ever happened.
Back at my desk I instant message my friend Kenny, a former price reporter. "This market is so bent," I type. "Fridays can throw up the occasional storm," comes his reply. "Probably believe it's easier to manipulate on a Friday … which is true."
16.35.00: Dial up ICAP (a brokerage which facilitates deals between energy companies), a barrow-boy baritone blasts down the line. "'Allo mate, wanna run-through, do ya"? I murmur my assent, but he's already rattling off the prices without skipping a beat. "Day-ahead 58s, weekend 59.35, working ays …" I don't normally interrupt them, but this time I'm intrigued. "Hold on, sorry, that day-ahead, was that firm?" He sounds like he was expecting the query: "Yeah, that's where we had to close it at, unfortunately …"
Not sure where unfortunately comes into it, or why he'd say that to me, but I keep schtum and let him go on. "It was offered at 58 at the time [16.30], then 0.02 seconds after was paid there," he explains. I thank him, then he moves onto the front month – "59s, all right dude? Have a good 'un" – and he's gone. I get back to Kenny on Yahoo and tell him what I've just heard. Kenny's reply: "Classic".
Fix in the air
Spot on. I bet they're taking the piss, odds on they have something to do with that last second collapse. Trouble is, I can't ask them. Can't ask anyone anything, to be honest – half the traders only speak to us off the record, and the other half aren't authorised by their compliance departments to do anything other than read out the numbers like the talking clock, then hang up.
All my attention still on Day-ahead, I go downstairs for a quick smoke before the trades sheet arrives. Bet the price recovered straight after 16.30, just like oil did, and just like you'd expect if there was a fix in the air. My instinct says there's no way that was a fair quote at 58, the price never gives up half a penny in a flash like that without something being amiss.
Back upstairs, ten to five. ICAP's closing run email sets the price at 58.5 – that means the price did recover straight away as predicted.
17.06, trades come in, I open the spreadsheet and hone straight in on Day-ahead. Exhibit B: only six trades at 58, everything else screaming out that the price should be more like 58.5. Heart says ignore the suspicious ones, head says call in the bosses. Let them take the rap: that's what they're paid for. I tap Neil on the shoulder, tell him what I know, show him the figures, and let him take charge.
After a good deal of deliberation, he takes the easy way out. Plucks the midpoint of the dodgy block of deals at 58 and the more rational set at 58.5, sets the price at 58.25 and we all head for the door. Could have been worse I suppose; we haven't given the bad guys exactly what they wanted.
But it feels a lot like we let them move the price on this key day by a quarter of a penny. And chances are that somewhere someone is grinning at having made a killing by putting one over on those mug price reporters.