On Monday evening at 10:00 ET, 10:00 AM in Singapore, a broker entered an unusually large order for Brent crude on the InterContinentalExchange's electronic trading platform. Initial reports pegged the trade as a buy order for 14,000 lots, or 140m barrels of crude oil. Later reports said it was 'only' 7,000 lots. Either way, it was a gigantic order for out-of-hours trading (the day before only 100 lots traded at that time), which spiked the market by a couple of dollars. The rumour machine, being what it is in the oil markets, blamed a rogue trader and pegged the losses at up to $50m. As it happened,it was a broker. Now, despite the mainstream media referring to brokers as traders, brokers do NOT trade. They execute trades on behalf of a principal. The brokerage that processed the trades - PVM - ended up losing $10m after unwinding the positions.
That a broker in Singapore was able to get into the ICE system and execute trades totaling 7m barrels of oil (with a value of around half a billion dollars) is terrifying. ICE's platform has risk controls in place, but somehow the broker bypassed them. There are only 4 crude oil brokers in PVM's Singapore office, according to its website, so it shouldn't take them long to find out who did it. Why he or she did it - although interesting - is not the point. (In the 1980's PVM's founder Pat Mazoroli famously had his brokers keep telex machines in their bedrooms so they wouldn't miss a deal. That ticked off most of them, but they didn't go around making large rogue trades. Actually, they couldn't have before electronic trading.) The point is that if someone can get past the risk controls of an electronic direct market access platform, those controls need to be tightened. ICE is on the case, so is the FSA.