Among the many previously unthinkable moments of 2020, one of the strangest occurred on April 20, when the price of crude oil fell below zero. West Texas Intermediate futures, the most popular instrument used to trade the commodity, had started the day at $18 a barrel. That was already low, but prices kept tumbling until, at 2:08 p.m. New York time, they went negative.

Amazingly, that meant anyone selling oil had to pay someone else to take it off their hands. Then the crude market collapsed completely, falling almost $40 in 20 minutes, to close at –$38. It was the lowest price for oil in the 138-year history of the New York Mercantile Exchange—and in all likelihood the lowest price in the millennia since humans first began burning the stuff for heat and light.

Watching this spectacle unfold were traders, energy executives, and freight company employees—whose livelihoods are tied to oil’s fluctuations. Regulators with the Commodity Futures Trading Commission in Washington stared at their monitors, stunned. “The screen was just going nuts,” Tom Kloza, an analyst at the research firm OPIS Ltd., told Institutional Investor. The experience, he said, was like watching a film by surrealist director Federico Fellini: “You’re able to appreciate it, but no one really knows what’s going on.”

Within 24 hours the insanity was over, oil cost money again, and it was tempting to see what happened as a blip. But WTI futures, in which buyers and sellers agree on a price to trade at some upcoming date, sit at the heart of the $3 trillion-a-year oil and gas industry. WTI is one of the main components that determines the global price of oil—whether that oil is being sold by a Middle Eastern kingdom or a fracking conglomerate in Alberta. It affects what airlines pay for jet fuel and what manufacturers pay for petroleum-based chemicals.

Beyond the physical commodity itself, billions of dollars’ worth of financial products are also pegged to WTI in a specific and idiosyncratic way. Their value is determined by the WTI price at 2:30 p.m. four working days before the 25th of every month. That crucial “settlement” for the May WTI contract was on April 20.

The sudden price drop that day, which wiped out some investors who’d bet on an oil recovery, was explained as the result of a confluence of macroeconomic factors. The pandemic, and resulting economic shutdowns, had decimated demand for oil, and space to store it was rapidly running out. It seemed to be a simple case of “fundamental supply and demand,” said CFTC Chairman Heath Tarbert in an April 21 interview with CNBC. Terry Duffy, chief executive officer of CME Group Inc., which owns the New York exchange, known as Nymex, saw it in similar terms. “The market worked the way the market was supposed to work,” he told the network. “To perfection.”

Perhaps to industry veterans like Duffy, it all made sense, but to anyone who has ever paid to fill up a car or home oil tank, a negative price was difficult to comprehend. Moreover, there had been a torrent of selling starting two hours or so before the settlement, leading to questions about whether someone had deliberately set out to push prices down. Harold Hamm, chairman of oil producer Continental Resources Inc., published a letter demanding an investigation into what he described as “failed systems” and “possible market manipulation.”

After all, the May contract was back at $10 on April 21 and the outlook had barely changed. “Going into April there was chitchat about zero or even negative prices, but nobody was talking about –$40,” says Dave Ernsberger, global head of pricing and market insight at S&P Global Platts, which provides benchmarks for buyers and sellers. “So what’s the real story here?”

U.S. authorities and investigators from Nymex trawled through trading data for insights into who exactly was driving the action on April 20. According to people familiar with their thinking, they were shocked to discover that the firm that appeared to have had the biggest impact on prices that afternoon wasn’t a Wall Street bank or a big oil company, but a tiny outfit called Vega Capital London Ltd. A group of nine independent traders affiliated with Vega and operating out of their homes in Essex, the county just northeast of London, had made $660 million among them in just a few hours. Now the authorities must decide whether anyone at Vega breached market rules by joining forces to push down prices—or if they simply pulled off one of the greatest trades in history. A lawyer for a number of the Vega traders vehemently denies wrongdoing by his clients and says they each traded based on “blaring” market signals.

Paul Commins started his trading career buying and selling oil in the rowdy pits of London’s International Petroleum Exchange, where, according to a former colleague, he was affectionately known as “Cuddles.” He had the kind of broad cockney accent that wouldn’t be out of place in a Guy Ritchie movie and struggled to pronounce his r’s. As a result, his three-digit badge, which everyone wore at the IPE, contained the letters “F-W-E”—pronounced “fwee,” the sound that would come out of his mouth when he tried to say “three.”

Opened in 1980, the IPE was riotous—400 traders and brokers in colorful jackets screaming at one another and using hand signals to strike deals that were then sealed on scraps of paper. They mostly came from working-class backgrounds, often from Essex, known for its brash culture and ostentatious displays of wealth. (The stereotypical Essex male is a soccer-loving “geezer” with a pint in his hand and an expensive “motor.”)

The pits rewarded quick thinking and a tolerance for risk, and Commins—aka Cuddles, aka FWE—thrived there. After a few years filling orders for corporate clients at Trafalgar Commodities, he became a “local”—one of the elite traders in red jackets who wagered their own funds. A former colleague describes him as among the top three in the gas and oil pit where he operated.

The pits were collegial and freewheeling, a place of ethical and regulatory gray areas. If a local overheard news about a big trade that some oil major had in the works, he might try to jump ahead of it, a prohibited but pervasive practice known as front-running. The cavernous trading floor had cameras, but there were blind spots where people went to share information. A former executive struggles to remember a single meeting of the exchange’s compliance committee.

One trick involved an instrument called Trade at Settlement, or TAS, an agreement to buy or sell a future at wherever the price ends up at the closing bell. The contract was aimed at investment funds, whose mandate it was to track the price of oil over the long term. But some traders figured out that they could take the other side of these TAS trades, then work together at the end of the day to push the closing price as low as possible so they could pocket a profit. The practice, while officially against the rules, was so common and effective it had a nickname: “Grab a Grand.”

“It was blatant, what was going on,” according to former IPE Director Chris Cook, who says he learned of the practice after leaving the exchange. There’s no evidence Commins or his colleagues were involved in this practice.

In the IPE’s heyday, the best traders could make tens or even hundreds of thousands of pounds in a day and still hit the pub by 5:30 p.m. But the rise of electronic trading made them obsolete. The IPE pits closed in 2005, forcing Commins, then 36, and hundreds like him to either learn to trade using a computer or give up and do something else. Many struggled to make the transition and quit. Others joined banks or brokers.

Former locals who wanted to continue working for themselves banded together at so-called arcades or prop shops, trading firms where they were given a desk, some office support, and fast connections to markets in exchange for a monthly fee, a small commission on every trade, and, in some cases, a cut of any profits they made. The biggest prop firms, known as “the five families,” were based in London and had dozens of traders on their books, many of whom had come from the pits. But a half-hour’s train ride away, in the small Essex town of Loughton, Commins started a collective of his own.

His group was a mix of seasoned traders and novices in their 20s, usually the sons of Commins’s pals or his children’s peers. Among them were Dog (real name: Chris Roase), a veteran pit trader; Elliot Pickering, a skinny, awkward-looking kid who still lived with his mum and drove a Rolls-Royce convertible; and Aristos Demetriou, who went by “Ari” and was among the group’s biggest earners. Ari’s quick success had sparked a wild rumor circulated among London’s commodity traders that he’d gotten his break while working in a supermarket parking lot, pushing shopping carts, where he spotted Dog driving in and asked how he could afford such a fancy motor.

The traders were all independent, each with his own brokerage accounts and tax returns. But trading records and people who worked alongside them indicate they frequently operated in a similar fashion, buying or selling in the same direction at key moments. Away from the markets, some members of the group did everything together—play golf, watch their soccer team, West Ham United, and take their families to the beachside town of Marbella in Spain (where the catchphrase for the body-conscious was “no carbs before Marbs”). Several bought properties in the same neighborhood, an affluent village called Theydon Bois that combines the bucolic charm of the English countryside with a short tube journey into central London. After work they frequented a bar popular with the cast of The Only Way Is Essex, a kind of cockney-inflected, blingier version of Jersey Shore.

For a long time, Commins and much of his crew traded as an off-site offshoot of Tower Trading Group, one of the five families. But when two Tower managers, Adrian “Britney” Spires and Tommy Gaunt, left to start their own outfit in 2016, Commins and about 20 other Tower traders joined them. Under the umbrella of the new firm, Vega Capital London, he continued adding to his stable, offering slots to young men with ties to his social group. One was Connor Younger, the son of a building contractor pal, who a few years earlier had been posting on social media about the adolescent pleasures of rap music and chasing girls.

It’s not clear what commercial arrangement Commins had with the traders he scouted or with Vega Capital, which has dozens of individuals on its roster who have nothing to do with the Essex crew. But there were financial connections among them. Commins and Demetriou co-owned a firm called PC & AD Developments, while Commins, Demetriou, and Pickering have all been directors of an entity called PAT Developments Ltd. The companies, which don’t have websites, are listed as being involved in real estate.
 

At the start of 2020 the big industrial economies were healthy, investors were optimistic, and West Texas Intermediate was trading at about $60 a barrel. Prices began to fall in February after the first reports of the coronavirus. That accelerated as the outbreak turned into a pandemic. By the end of March, WTI futures were at $20, the lowest they’d been since after Sept. 11. Then, after tense negotiations, the big oil producers—led by Russia, Saudi Arabia, and the U.S.—agreed to reduce production by 10% to try to stabilize prices.

The cut wasn’t nearly enough. All oil futures were down, including Brent crude, which is based on oil found in Europe’s North Sea, but there was a particular problem with WTI. Unlike with Brent, which allows buyers and sellers to settle what they owe one another in cash, anyone holding an expiring WTI contract at the end of a month is obliged to take possession of 1,000 barrels of light, sweet crude in Cushing, Okla. (Despite being tiny and landlocked, Cushing is known as “the Pipeline Crossroads of the World.” It became a center for refining and distribution after wildcatters struck oil there a century ago.)

Normally, speculators can get around this by selling out before the expiration date and buying the following month’s contract, a process known as “rolling.” But low prices in March and early April had attracted a rush of amateur investors into products tracking oil, including a large Chinese fund called Crude Oil Treasure, which advertised with the tagline “Crude oil is cheaper than water.” These funds would all have to roll over contracts worth billions of dollars—and, thanks to the virus, buyers would be hard to find.

Meanwhile, storage tanks in Cushing were filling up fast. With so little space available, the cost of keeping oil threatened to exceed any potential profit from selling it. That combined with an abundance of frantic sellers to cripple an already fearful market. On April 3, Nymex issued an unprecedented warning that prices could go negative.

The crucial settlement day for the May WTI contract, April 20, was a Monday. In Essex, some of the Vega traders logged on before sunrise to take advantage of the big session. Britain was in lockdown, and the lights from their front rooms and studies dotted the still-dark village. Central to their strategy would be the TAS contracts that had once been popular in the pits, according to several people familiar with the matter.

Here’s how it works: Imagine a trader sees that WTI is at $10 and predicts it’s going to end the day at $5. To capitalize, he buys 50,000 barrels in the TAS market, agreeing to purchase oil at wherever the price ends up by 2:30 p.m. At the same time, he starts selling regular WTI futures: 10,000 barrels for $10 and then, if the market is falling as predicted, 10,000 more at $9, and again at $8. As the settlement window approaches, the trader accelerates his selling, offloading a further 10,000 contracts at $7, then another chunk at $6, helping push the price lower until, sure enough, it settles at $5. By now he is “flat,” meaning he’s sold as many barrels as he’s bought and isn’t obliged to take delivery of any actual oil.

The trader’s bet has come off. His profit is $150,000, the difference between what he sold oil for (50,000 barrels at prices ranging from $10 to $6, for a total of $400,000) and what he bought it for in TAS contracts (50,000 barrels at $5 a barrel, or $250,000). All of this is perfectly legal, providing the trader doesn’t deliberately try to push the closing price down to an artificial level to maximize his profits, which constitutes market manipulation under U.S. law. Manipulation can result in civil penalties such as fines or bans, or even criminal charges carrying a potential prison sentence of up to 10 years. It’s also illegal in the U.S. to place trades during or before the settlement with “intentional or reckless disregard” for the impact.

Commins’s traders had historically been able to make big money in a few hours on settlement days trading in the same direction, according to people who watched them work. But the strategy was risky. If an even bigger player showed up at the end of the session and made the opposite bet, it could push the market in the other direction. There were days they lost millions of dollars among them, recalls one trader who knows them. “They had balls of steel,” says another. “It was quite unbelievable to see.”

As China’s Crude Oil Treasure fund and others sold WTI contracts in the TAS market on April 20, the Essex traders bought them, according to people familiar with their trading, committing to buy large quantities of oil at whatever the settlement price turned out to be. Between 11 p.m. U.K. time on April 19, when the market opened, and 5 p.m. (noon in New York) the following day, the price dropped from around $18 to $10 a barrel. As it fell, Commins and his friends sold batches of regular WTI contracts, just like in the example above, as well as calendar spreads, another financial instrument that allows traders to bet on the future price of oil. All they needed was for prices to keep falling, the further the better. As the day wore on, however, they became nervous. In text messages described to Bloomberg Businessweek, they exchanged details of their individual trades and questioned whether they were taking on too much risk.

With a little more than two hours to go until the settlement, trading activity across the futures market spiked, driving the price from $10 to $5, then all the way to zero. The shift into negative prices occurred at 2:08 p.m., at which point any remaining stragglers still brave enough to be buying oil in the hope of a rebound got out of the market. Over the next 22 minutes, under the weight of ongoing selling by Vega and others, the May contract plummeted. Nymex calculates the settlement price by taking a weighted average of trades occurring from 2:28 p.m. to 2:30 p.m. The final “print,” as settlement prices are known, came in at –$37.63. In the last half-hour the nine Vega Capital traders were, as a group, by far the biggest sellers of both WTI futures and spreads, according to trading data described to Businessweek—a remarkable situation in a market normally dominated by the likes of BP, Glencore, and JPMorgan Chase.

In a mockery of the norms of commerce, the Vega crew had ended up being paid both for the futures they’d sold when oil was positive during the day and for those they bought via TAS. That, combined with the profit from the spread trades, resulted in a total take of $660 million for the nine biggest earners, according to the trading data. Demetriou, who’s 31; Pickering, 25; and Younger, 22, pocketed in excess of $100 million each, while Roase made about $90 million. Commins took home $30 million or so. Even his son, George, who’s in his early 20s with little apparent trading experience, made $8 million.

Elsewhere, investors around the world counted their losses. China’s Treasure fund informed its customers that everything they’d put in was now gone. “It didn’t occur to us” oil could go negative, A’Xiang Chen, a 26-year-old investor from Shenzhen, told Bloomberg News. Syed Shah, a day trader in the Toronto suburbs who’d started buying crude futures when the price fell to $3 a barrel, wound up owing $9 million. Interactive Brokers, America’s largest online trading service, lost $104 million because its software wasn’t equipped to handle negative prices.

Rumors of a major score by a group of Essex boys spread quickly among traders on chat groups, though the winners were coy about discussing their profits, according to someone who says he saw the messages. When asked about the size of their haul, one joked that he had to go—the mobile reception was breaking up on his yacht.
 

If the group had made $7 million that day instead of almost $700 million, they’d probably be celebrating. But the size of their winnings, coupled with their backgrounds—and political pressure to understand what happened—means that Vega has the attention of regulators. In August, Sherrod Brown, the Ohio Democrat and ranking member of the Senate banking committee, wrote to regulators saying the incident created “the impression of a market susceptible to manipulation.”

The CFTC has been investigating Vega Capital, according to people familiar with the matter. The U.S. Attorney for the Southern District of New York has started its own probe to determine whether a felony was committed, the people say. Both authorities, as well as CME Group, declined to comment on the existence of any ongoing investigation.

Even so, no authorities have accused Vega Capital or any of the traders referenced in this article of doing anything illegal. Buying TAS and offsetting it in the futures market is a common and acceptable practice, and it was no secret that prices on April 20 might fall. Where traders have gotten into trouble in the past is when they’ve been caught trying to deliberately push the closing price rather than simply benefiting from where it ends up. In 2012, Dutch company Optiver Holding BV was fined $14 million and three of its employees were temporarily banned from trading commodities after the CFTC accused the company of manipulating settlement prices. Email and phone records showed Optiver’s traders talking about trying to “hammer” and “bully” the settlement after accumulating TAS. Such clear-cut evidence of intent is rare. Since the CFTC was founded in 1974, it has won just one manipulation case at trial.

“Each of our clients regularly puts his own money at risk to try to make a profit. Sometimes it works sometimes it doesn’t,” the law firm Simkins, which represents eight of the nine traders, said in statement. “On 20 April blaring market signals—including the exchange’s repeated warnings that prices could go negative—led market participants ranging from small proprietary traders to large financial institutions to trade on the assumption that prices would drop. And while no one could have predicted just how far they’d drop, each of our clients, like many others around the world, traded on his own view of the market. They don’t intend to comment on speculation about their profits.”

Whatever happens with Vega, its wild trading day has laid bare the vulnerabilities of the TAS mechanism, which also exists in markets for gas, cattle, and other commodities. Craig Pirrong, a finance professor at the University of Houston, published a paper last year suggesting that market participants can build a large position through TAS with very little impact on prices, then offset it in the regular market in a way that moves prices—an “asymmetry,” he argued, that invites manipulation. Senior officials at the CFTC are now considering whether TAS is in need of reform. Last month the agency published what it described as an interim report on the events of April 20 that focused on macroeconomic conditions but didn’t take into account the issue of potential manipulation because of the ongoing investigation. It drew criticism from one of the agency’s own commissioners, Dan Berkovitz, a Democrat who is seen as a candidate to take over as chairman in January. He described the interim report as “incomplete and inadequate.”

“The commission must undertake and provide a meaningful analysis so that it can take whatever remedial or corrective actions may be appropriate to ensure the integrity of this critically important market,” Berkovitz says. “This was one of the most extraordinary events in any commodity market in decades.” Michael Short, a CFTC spokesman, says that the agency is limited in what it can share and that criticisms seem to “miss the point that it is an interim report.” He also says that the regulator was prepared for April 20 and that “large market swings are not new for CFTC staff.”

Back in Theydon Bois, Commins and his crew are keeping a low profile. Some have stopped trading monthly settlements, according to people familiar with their work. Several have registered new companies, and it’s not clear what has happened to their winnings. After April 20, Vega Capital parted with G.H. Financials Ltd., the clearinghouse that held its trading accounts and had a degree of responsibility for overseeing its activities. The firm has a new clearinghouse and continues to trade.

News of the win has been met with a mixture of incredulity and pride among London’s trading community—and has even led to a new nickname: “the fifth Beatle,” for Vega co-founder Gaunt, who left the firm a few months before the big day. “It’s funny how if it was BP or Goldman Sachs that made the money, no one would bat an eyelid, but when it’s a bunch of working-class lads, people say they’re cheating,” says one trader who knows them, expressing a widely held sentiment. “I say good luck to them.” —With Alex Longley
 
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