| NEW YORK
NEW YORK Feb 20 A steep decline in crude oil
prices on Wednesday set off what is fast becoming a familiar
debate on Wall Street: was it man or machine?
The price of U.S. benchmark crude plummeted about $2 per
barrel in morning trading, at one point falling by 42 cents in
just two seconds as more than two million barrels worth of crude
oil contracts changed hands, a Reuters analysis of exchange data
Then something strange happened: the market for the most
heavily-traded U.S. crude oil contract went quiet. For nearly
ten seconds, not one contract crossed the ticker tape,
intensifying the panic already gripping traders scrambling to
find what had set off the decline.
It was by no means a huge sell-off by historical standards.
In early May of 2011, U.S. crude prices collapsed by 10 dollars
a barrel over the course of one wild trading session.
Still, the speed of the $2 dollar slide illustrates how
quickly the oil market can turn, surprising traders after months
of relatively small price moves and low volatility.
The episode also marks the latest in a spate of hiccups
which have plagued market operators, prompting exchanges to put
in place plans for halting trading during abnormal trading
A spokesman for CME Group said the exchange did not
halt trading in crude oil and that the markets functioned
properly throughout the day.
But that has prompted even more questions about whether an
avalanche of computer-driven trading or human error disrupted
Wednesday morning's session.
"We have a real mystery on our hands," said Eric Hunsader,
founder of Nanex, a Winnetka, Illinois-based trading software
company that tracks market activity. Nanex also noticed the
spike in volume and the ten second pause shortly after 11 a.m.
New York time (1600 GMT).
The affected trading instrument, an April contract for
delivery of 1,000 barrels of U.S. crude oil, saw nearly two
million barrels' worth of trading volume in a one-second
interval at around 11:01 a.m., Reuters found. Volume had
averaged about 13,000 barrels per second over the previous
The price of the contract fell from $95.47 to $95.05 just
two seconds later. The price then ticked higher, to $95.16,
before the market froze for about ten seconds. Trades reappeared
shortly before the minute was out, and the market carried on
with the volatile trading session.
U.S. April crude fell $1.88 to finish the day at $95.22 a
barrel, having slumped as low as $94.21, it's steepest daily
fall so far this year.
In the confusion, a rumor had spread that the morning's
precipitous decline had been sparked by a large hedge fund
rapidly liquidating its positions.
Automated and algorithmic trading by hedge funds and big
banks has grown rapidly in recent years. Supporters say it adds
much-needed liquidity to commodity markets, but critics say it
can cause violent, sometimes inexplicable moves in key markets.
Reuters was unable to independently verify the rumor of the
rapid-fire hedge fund liquidation, and many market observers
brushed it off as just that.
"You hear that every time there's a big move in anything,"
said Walter Zimmermann, chief technical analyst at United-Icap
in New Jersey. "Hedge funds tend to all get into the same trade
at the same time and out of the same trade at the same time."
Instead, a rising dollar and a falling stock market were to
blame for oil's decline, Zimmermann said.
Other sources pinned the decline on expectations that Saudi
Arabia intends to raise its oil production in the second quarter
and a comment by a Western diplomat that major powers are ready
to make "a substantial and serious offer" to Iran during talks
over its nuclear program next week.
Still, Hunsader of Nanex, the trading software firm, said
the data is indicative of a major seller in the market.
"The one thing that fits from everything that we see is that
somebody really wanted to sell a lot of crude oil," Hunsader