When Chris Cook was responsible for keeping the pit traders in check at the International Petroleum Exchange in London, they used to call the daily crude oil settlement “Grab a Grand.”
Cook worked in compliance at the IPE in the 1990s when the first “Trade at Settlement” contracts were introduced, allowing buyers and sellers to come together and agree to transact at wherever the settlement price ended up that afternoon. TAS was devised to help funds that merely wanted to track the price of oil, but before long some traders figured out that the settlement could be nudged and that there was money to be made by taking the other side of transactions with parties who didn’t much care about the price.
TAS “was a good innovation, but there was always the potential for abuse, which is why the market should have been restricted to funds, producers and end-users and not speculators,” said Cook, who learned of the wrongdoing after leaving the IPE and is now a consultant in the energy industry. “It was blatant, what was going on.”
Now, the Trade at Settlement instrument is under scrutiny once again after a group of independent traders at a small British prop firm called Vega Capital London Ltd. made as much as $500 million on April 20, when oil fell below zero for the first time, settling at -$37.