Wednesday, April 2, 2014

The High Frequency Trading Debate is Not New

I love Michael Lewis. He is the writer I most want to be. I live in his world, I am a journalist and have been a broker and am married to a trader. I know stuff. But I am not Michael Lewis. He is a brilliant writer. I am a hack and part-time flack. HOWEVER, I take exception to the recent the fuss over his book "Flash Boys." I keep hearing on CNBC that NO ONE knew how big the problem of high frequency trading was. I did. Here is one of the tongue-in-cheek blogs I wrote about the issue - in September, 2010.
In the 1960's American sitcom Get Smart there were two opposing agencies - CONTROL and KAOS. At CONTROL you had The Chief, Maxwell Smart (Agent 86) and Agent 99 as the good guys. KAOS was the bad guys of course.
In today's seemingly perplexing world of electronic trading The Chief appears to be played by U.S. Senator Charles Schumer. The well-meaning but hapless Maxwell Smart is played by U.S. Securities and Exchange Commission Chairman Mary Schapiro. (The SEC staff can take turns as Agent 99.) KAOS is represented by high frequency and algorithmic trading.
The Chief (Schumer) made a strong suggestion (order) to regulators to get a grip on KAOS, by looking into slowing down some high-speed trading at times of market stress and investigating manipulative strategies including quote stuffing.
Agent 86 (Schapiro) got on the case and the investigation is underway. One telling statement by Schapiro this week alluded to the algos that automate execution when she said that regulators need to decide whether they "are subject to appropriate rules and controls."
"An out-of-control algorithm not only can cause serious losses to the firm that uses it, it can also cause severe trading disruptions that harm market stability and shake investor confidence," Schapiro said in the statement. She added that the SEC will review market fragmentation and the role of dark pools of liquidity that fall outside the traditional market structure.
“High-frequency trading firms are subject to very little in the way of obligations,” Schapiro said at an event held by the Security Traders Association in Washington. “We will consider carefully whether these firms should be subject to an appropriate regulatory structure governing key aspects of their market behavior, including quoting and trading strategies.”
The SEC may also need to peer a little more closely into the market structure that preceded all of these issues. A third of TabbFORUM readers polled said that the Securities and Exchange Commission had something to do with the May 6 flash crash: 31% of respondents to the poll blamed the crash on Reg NMS. (Still, 29% said it was “something else." Cue Siegfried - the Vice President in charge of Public Relations and Terror at KAOS).
All of this investigating is good news, as long as moderation is the byword for resolution. If indeed your opinion is that HFT and algos are run by a shady KAOS-style cartel on Wall Street then the more controls the better. It is my opinion that KAOS-as-HFT is a figment of non-financial industry scaremongers, and that a lighter touch is needed.
CONTROL can best come out on top if it deploys the proper tools: pre-trade risk management and controls, real-time risk management, real-time market monitoring and surveillance. All of these will help to stop KAOS in its tracks before it has the chance to throw another bomb into the room (flash crash...get it?).
I knew about HFT. The SEC knew about HFT. The trading firms and exchanges and brokers knew about HFT. And everyone knew it was a bomb waiting for a detonator. I just wish I had written the book!

Thursday, March 27, 2014

Banning crude by rail in North America

When a train loaded with crude oil from North Dakota rolled away from its night-time berth near the town of Lac-Megantic, Quebec, no one would have predicted the scope of its devastation.
The July 2013 derailment and explosion left 47 people dead, a town decimated and the fires took days to extinguish. Rail cars were piled up like charred sausages from the grill scraped off a plate into the rubbish bin; the burnt remains of a BBQ gone wrong.  
Regulators and the oil industry were astonished -- crude oil was not supposed to explode. But Lac-Megantic was only one example of American crude oil from North Dakota doing just that. 

Sunday, October 6, 2013

Commodities: Private equity takes over where banks leave off

(Originally published on Platts.com)
Just as the US oil industry starts to get really interesting, banks are being forced to leave it.
New regulations and over-zealous government, nervous over the presence of banks in physical oil and commodities markets, are pushing the banks to shed their assets—and making room for other moneyed institutions to jump in.
Profitable opportunities are visible, with production soaring as the US winkles out tight oil and gas. E&P beckons investors, as do infrastructure plays such as rail terminals and blending facilities.
But banks are wary of making new investments and are seriously considering sloughing off the ones that they already have.
The US Senate Banking, Housing and Urban Affairs Committee is looking into whether large merchant banks, such as JP Morgan, should be allowed to own or operate oil terminals, pipelines, or warehouses that hold vast amounts of aluminum and other businesses that deal in global commodities.
JPMorgan Chase is selling or spinning off its entire physical commodity trading operations, as a Platts Oilgram News story reported. The bank emerged over the past few years as a major commodities trader, along with other US banks as Morgan Stanley, Goldman Sachs, Citigroup and Bank of America Merrill Lynch.
So, as the banks begin to shed their trading and physical assets, private equity firms are quietly sneaking in to take their place, and one of them at least is on the verge of an IPO in London.
Riverstone Holdings, an American private equity fund with over $24 billion committed to E&P, midstream and power investments, is planning an initial public offering for Riverstone Energy Ltd. The company will launch in late October on the London Stock Exchange, and is expected to raise up to £1.5 billion ($2.4 billion).
Riverstone has already gone where banks (now) fear to tread, taking ownership in refining maverick Tom O’Malley’s PBF, UK shale gas company Cuadrilla, and US deepwater E&P company Cobalt, among many others.
Perhaps Riverstone’s founders, both from Goldman Sachs, had inklings that commodities would be yanked away from investment banks once they became Fed-controlled “real banks.” After all, banks owning oil storage, and refineries — and trading the oil — when the market was rising was never going to look altruistic.
But from a private equity firm, no one expects altruism.   
Riverstone is just one of many that are investing heavily in energy assets. Denham Capital, which flies under the oil industry radar, has $7 billion under management in oil, gas, power and renewable funds. Billionaire Mikhail Fridman’s L1 Energy Fund will invest $20 billion (that his Alfa Group made from the TNK-BP sale in March this year) in oil and gas projects. And these are just the tip of the private-equity-in-energy iceberg.
According to Forbes, private equity accounted for 10% of 2012 energy buyout deal value worldwide. And 83% of energy-related buyout deal value was for oil and gas properties—nearly half of them in North America. (This included 2012’s biggest buyout, Riverstone Holdings and Apollo Global Management’s $7.2 billion acquisition of EP Energy, Forbes said.)
So, is this a new trend or one that is destined to become dull and mainstream? Is this a case of the bandwagon having sailed past already?
According to fund management firm Hamilton, in an article in Pensions & Investments magazine, limited partners are beginning to question if there is too much private equity capital chasing the energy sector.
“The simple answer is: No,” it said. “The size of the market, the long-term growth prospects and the complex nature of the energy value chain will continue to present investment opportunity. The massive capital spending requirements to meet expected global demand dwarf the amount of private equity capital available today.”       
   

Wednesday, September 11, 2013

Oil investors spurn Mexico and Latin America

(This blog originally appeared on Platts.com)   
     Everyone knows there is a lot of oil in Mexico. Venezuela has its fair share, as do Brazil and Argentina. There’s even more oil to be found in Ecuador, and the Falklands is having its day in the sun. But the news about oil exploration and production investment today is predominately focused on the US and Canada. Why is that?
      Decades of nationalistic sentiment have created a no-go area in Mexico and Latin America, with foreign nationals and major oil companies mostly conspicuous by their absence.
      When Enrique Pena Nieto was elected last year as Mexico’s new president, he pledged to reform the oil industry. Last month, he proposed that Pemex, the state oil and natural gas monopoly, would be able to launch contracts on the basis of profit-sharing rather than production-sharing.  But then the analysis started coming down, and it wasn’t good.

Tuesday, July 9, 2013

Lac-Megantic oil-by-rail crash could be rail's Exxon Valdez


     As the smoke clears in Lac-Megantic, Quebec after a runaway train packed with crude oil tankers crashed, the oil industry is coming to terms with a business that has perhaps grown too far, too fast.
     The Lac-Megantic accident is shining an unwelcome spotlight on the lack of regulatory oversight on oil by rail in both the US and Canada. The fact that the rail cars (belonging to the Maine, Montreal & Atlantic rail company) that crashed and exploded were considered unfit to carry hazardous materials sharpens that focus.
     Getting landlocked crude out of newer fields in North Dakota, Canada and other far flung parts of North America has become an obsession with producers, traders – and with refiners, looking lustfully at the cheaper feedstock.
     The oil rush has changed the face of rail in North America. In a country where passenger and cargo-bearing rail was largely replaced by the car and large 18-wheel trucks half a century ago, the speed with which new railroad lines, railcars and loading facilities are being built is simply astonishing.
     Today around one million barrels per day of crude oil is moved via rail across the US and Canada. To put that into perspective, it equates to more than the total output of the UK North Sea, which fell below 1.0m b/d last year. Or roughly to four VLCC’s worth of crude oil every week. In other words, it is a lot of oil.
     And this is set to grow. In the US, crude by rail shipments are expected to reach to near 1.10 million b/d at the end of 2014, up from about 718,000 b/d this month and about 156,000 b/d in January of 2012, according to Bentek Energy, a division of Platts.
     The Railway Association of Canada estimated that as many as 140,000 carloads of crude, totaling about 91 million barrels, will be shipped on Canadian tracks this year, compared with 500 carloads, or about 325,000 barrels, in 2009.
     The headlong dive into crude by rail may have just been stopped short by the Lac-Megantic incident. And, just as the Exxon Valdez oil spill in Alaska in 1989 spelled the end of single-hull oil tankers coming to the US (and banned them worldwide in 2010), the Lac-Megantic crash would spell the end of using DOT-111A railcars. And it could herald a new rash of regulation for the rail industry.
     A US National Transportation Safety Board study in 2012 said that 69% of tank cars are DOT-111A. In Canada, these are known as CTX-111A, and comprise 80% of the fleet, according to Canada Transportation Safety Board’s chief investigator Donald Ross.
Ross said that changes as a result of the MM&A investigation could include thicker steel or shields for the tank cars. The American NTSB had already changed the specifications of DOT-111 from October, 2011 to include thicker shells and a ½ inch thick head shield. But there is no rule on retrofitting existing cars, which have a long service life.
     Like the single-hull tanker post-Exxon Valdez, DOT-111As could be the next casualty of the oil rush in North America.
     But there are other issues raising their ugly heads, including the state of some of the railroad tracks around both countries: While the oil industry is spending billions on railcars and loading/unloading facilities, who is spending the money to maintain and upgrade the railroads?
     As Avrom Shtern, a rail-transport policy representative with Montreal-based Green Coalition, said in Oilgram News July 9: The Canadian government's budget cuts have left the rail industry to police itself. "That's unacceptable. You can't just write rules and expect the railways to police themselves," he said.
     Also, questions over the capital adequacy of smaller gathering and distribution companies such as World Fuel, which owned the oil on board the MM&A train, and others are rife. Will they have the financial stability to survive a lawsuit?
     The crash was only a few days ago, so most of these questions will be answered over time. But one thing is for sure, crude by rail has come a long way fast. But the Quebec accident could slow the pace and the way in which the industry grows going forward in both Canada and the US.

Tuesday, May 21, 2013

Commodities trading: Not for the faint-hearted

(First published on Platts.com) Once the darling of hedge funds, commodities are now looking like a poisoned chalice. Last year, hedge funds such as BlueGold, which specialized in crude oil; Centaurus, in natural gas; and Fortress Commodities, across all raw materials, shut down. Several commodities fund of funds also closed last year after clients fled.

Commodities trading, it seems – and in particular oil – is not for the faint of heart. The field is littered with failed ventures and prison sentences.

International sanctions on exporting countries such as Iran can make trading crude an even more dangerous game. On May 9, the US Treasury said it was penalizing Sambouk Shipping for contravening these sanctions. Sambouk is allegedly associated with Dimitris Cambis, who, along with a network of front companies, was executing ship-to-ship transfers of Iranian oil to obscure its origin.

Getting access to less-than-transparent sources of oil, metals, grains and other commodities has become more hazardous as the US Department of Justice and Securities and Exchange Commission begins to aggressively enforce the Foreign Corrupt Practices Act (FCPA). Archer Daniels Midland became the first commodities trading house to suffer under it.

Because of the global importance of commodities such as oil and foodstuffs, the commodities markets have become a target for public criticism regarding manipulation, bribery and corruption.

So much so that Switzerland, the go-to location for commodities trading houses over the past ten years, is fretting that it will suffer reputational damage because of its newish role as a trading hub. Switzerland is home to the world’s biggest oil and other commodity trading houses, including oil traders Vitol, Glencore, Trafigura, Mercuria and Gunvor.

In a world where deep knowledge, hands-on experience and extensive personal contacts are necessary to do a deal, even those at the top of their game can get into hot water or lose money.

So it is not surprising when Wall Street and City of London hedge funds miss the boat. Trading paper contracts, such as energy futures and derivatives, can be difficult when you don’t have an insider’s view into the physical movements of oil.

What is surprising, perhaps, is that some of the mega-importers of oil have not succeeded in entering the oil trading game. After all, purchasing vast quantities of crude oil and products should theoretically teach importers some of the tricks of the trade.

But many new entrants apparently fail to grasp the basics of the oil trading culture. One recent example is PetroChina. It hired a small staff of traders and operations people in Houston in 2008, with the aim of increasing the Chinese company’s US trading volumes and growing the Houston office.

Last week, a team of six of its Houston oil traders (and reportedly some support staff) left the Chinese oil company en masse, allegedly because promised bonuses were not paid.

The oil trading game is difficult, dangerous and often loss-making. But there is one caveat that remains true: If a company wants its staff to take the risks involved, it should be prepared to make it worth their while.



Monday, April 15, 2013

Pickens, Chickens and Eggs: Using LNG as Transport Fuel

(Originally published on Platts.com) When T. Boone Pickens takes a notion to invest in something, he tries to make sure that everybody else takes the same notion.  So, when he announced that he was putting his money behind LNG filling stations in the US for long-haul trucks, people took notice.

But rhetoric is just the beginning. There is a huge need for the actual infrastructure to support the idea, commonly known as the chicken-and-egg conundrum. If Pickens — and Canada and China and Europe — build LNG-filling stations, will they (trucks, ships) come? They should. After all, gas is cheap, clean and plentiful. But support from government and industry is essential to get the egg to grow into a chicken.

Luckily, Pickens is not the first person to get behind the LNG-as-transport-fuel notion. It is happening all across the globe, with companies and countries pledging support for natural gas and LNG-powered vehicles and ships.

In Canada, the federal government is introducing regulations to discourage ships from using bunker fuel in the Great Lakes and within 200 miles offshore, which will encourage greater use of LNG in marine transportation, according to reporting from our Calgary correspondent Ashok Dutta. Trucks and even locomotives in Canada are also using LNG.

Shell is increasing its LNG-for-transport projects to include shipping the fuel to Canada and the US for trucking, and to Europe for marine use. The European Commission is proposing that LNG fueling stations be installed in all 139 maritime and inland ports on the Trans-European Core Network by 2020 and 2025, respectively.  Singapore plans to have LNG bunkering in place by 2014. And auto and truck engine makers such as Volvo and Westport are gearing up to make and market so-called HHP (high horsepower) engines which will use LNG as fuel.

But LNG is a tricky substance, needing cooling or compressing in order to move it, store it and use it. An LNG-fueled truck has to install a special thermal fuel tank to hold the super-cooled liquid. Also, special engines that run on LNG must be installed. So, is it worth the effort?

According to Ben Schlesinger, founding president of Benjamin Schlesinger and Associates energy consultancy, using gas for transport is a no-brainer. LNG is also clean; it eliminates 100% of sulfur and 20-25% of carbon dioxide emissions.

Also: “There is no price risk — it has been low for 20 years. It is easy to install in trucks. It is easy to hedge. The payoff for a vehicle is one year,” Schlesinger said at a lunch seminar on March 26 in New York (although other experts have put the payback period at 1-3 years).

The shipping industry also thinks that it is a good idea, chickens and eggs aside. At the Sea Asia CEO Roundtable last month, Precious Shipping’s managing director put it this way: “The fuel of the future is gas.”

So… LNG is clean, it is cheap, it is plentiful and industry and government are putting some commitment and money into the infrastructure. What more could anyone ask?  That it offers a new source of revenue for governments, perhaps?

The US state of Georgia has already thought about that, according to the local Times Herald.  On March 27, its Senate passed legislation that drivers who use LNG in their cars and trucks will not escape the state’s motor fuel tax. The bill had already been passed by the House of Representatives, and is now awaiting the governor’s signature.
Other states and countries will no doubt follow Georgia, making LNG as a transport fuel a win-win.