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London Traders Hit $500 Million Jackpot When Oil Went Negative

By: Liam Vaughan, Kit Chellel, and Benjamin Bain

On April 20 the price of a barrel of oil for delivery the following month plummeted $40 in an hour, settling at –$37. It was the first time crude had ever crossed into negative territory. Regulators, oil executives, and investors have struggled to understand how a commodity at the heart of almost every aspect of global trade had fallen so far that buyers had to pay counterparties to take it off their hands.

But for a small group of veteran traders at a tiny London firm called Vega Capital London Ltd., the mystery mattered less than the results: They pocketed as much as $500 million that day, according to people familiar with the matter, who spoke to Bloomberg Businessweek on condition of anonymity.

Vega’s jackpot, which hasn’t been previously reported, involved about a dozen traders aggressively selling oil in unison before the May West Texas Intermediate contract settled at 2:30 p.m. in New York, the people say. It’s a tactic Vega’s traders used regularly, according to another person familiar with the firm’s strategy, but that day its trading coincided with a period of unprecedented volatility, when demand for fuel was wiped out by the coronavirus pandemic, and storage space in Cushing, Okla., where buyers take physical delivery of WTI crude, had all but disappeared.

Now regulators at the U.S. Commodity Futures Trading Commission, the U.K.’s Financial Conduct Authority, and CME Group Inc., owner of the Nymex exchange where the trading took place, are examining whether Vega’s actions may have breached rules on trading around settlement periods and contributed to oil’s precipitous fall, according to people with knowledge of the probes.

Within 24 hours of the crash, the May WTI contract had bounced back to about $10 a barrel. But the plunge, however brief, created some big losers. They include thousands of Chinese and American retail investors who, lured by oil’s recent slump, had piled into instruments whose value was pegged to the contract’s April 20 settlement price.

Whether Vega’s windfall was a result of savvy trading, blind luck, or something else, the idea that a relative minnow could have such a profound impact calls into question CME Chief Executive Officer Terry Duffy’s April 22 declaration that the futures market had “worked to perfection.”

“The idea that the anomalies that day were a function solely of supply and demand is fanciful at best,” says Joe Cisewski, special counsel to Better Markets, a lobbying group that advocates for tougher regulation. “Oil producers, brokers, and other market participants have been sent into serious financial distress. Regulators need to objectively and thoroughly investigate what happened.”

Spokespeople for the CFTC, FCA, and CME declined to comment. The CFTC has said it’s looking to release a report on the crash later this year. Vega didn’t return emails seeking comment.

Prop-trading firms like Vega give independent traders access to the world’s exchanges, back-office services, and extra capital to trade with in exchange for a desk fee, a commission on every trade, and sometimes a share of any profits. In a trillion-dollar energy ecosystem dominated by the likes of BP, Glencore, and Royal Dutch Shell, prop firms are bit players.

Vega was started in 2016 by Adrian Spires and Tommy Gaunt, friends who’d worked together on the management team at another London prop firm, Tower Trading Group, before branching out on their own. In 2017 about 20 of Tower’s energy traders quit to join Vega, sparking a legal dispute that was settled out of court. Gaunt quit as a director last year, and Spires, 44, now owns all of the business. He left school at 18 to take a job in the trading pits of the London International Financial Futures and Options Exchange. Some of Vega’s traders spent time at the International Petroleum Exchange, buying and selling barrels of oil using hand signals, before commodities trading migrated from open outcry onto screens.

The firm has an office a short walk from Liverpool Street station, above one of London’s All Bar One pubs, which it shares with a group of mostly recent college graduates trading cryptocurrencies for another company also owned by Spires. But most of Vega’s traders work from home, according to people familiar with the firm, even more so since the U.K.’s lockdown came into force.

While more than two dozen individuals trade through Vega’s omnibus account, finding information about them is difficult. Only a few list Vega as their employer on LinkedIn. The company’s website has remained under construction since Vega was founded.

One oil investor describes the firm as something of a throwback to the days of the pits, when rowdy so-called locals made or lost fortunes before heading to the pub to celebrate their winnings or drown their sorrows. Many of Vega’s traders know each other socially, playing golf and taking ski trips. They also trade together during key periods to maximize their impact on the market, the people familiar with the firm say.

What do you think? Should Varga be investigated or is this just favoring the big boys?

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