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by blackholesRhot
3158 days ago
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I was working in the crude oil / nat gas options pit at the NYMEX during the summer of 2008 when these trades went down (where much of Mexico's hedge was traded but not necessarily the author's portion.) A highly ironic part of this story is that the traders in the pit selling to Mexico thought they were getting an incredible deal. Both because the price of crude was so high at the time but also because they were able to "fade" the market. When you're in a pit like this, there are only ~100 "seats". At the time this meant 100 people who had firms with enough cash to front ~$1.5M so that you could stand for 6.5 straight hours in a tiny space at the NYMEX and shout back and forth. Basically what happens is someone will yell out to the other 100 people "what's the market on DEC'9 crude?" The point is they aren't supposed to say whether they want to buy or sell. Other people will yell out the prices they'd be willing to buy or sell at and the quantity. Say someone is willing to sell 200k options at $100/option, and someone else likes that price, they can yell "sold, 50 DEC'9 crude at 100." meaning they just bought 50k options expiring in December 2009. For this particular trade, there were three brokers that were known for representing mexico's hedge in previous years. Traders were expecting them to come back around this time. When one of these brokers came into the pit and yelled out "what's the market on DEC '9 crude" traders guessed he was hedging for mexico and quoted a price a full dollar above where the market was at. A bunch of people piled on willing to sell at even higher prices. The brokers had no choice but to accept this higher price. I was just a 22 year-old DRW intern on loan from a Stanford PhD program and in my head I was thinking "what the hell is going on.. that's not the fair price. I need to be selling!" I didn't actually sell anything because I didn't have the confidence or authority (it was my first month). But a senior trader explained this to me on our walk back to 7 world trade center after. |
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> When one of these brokers came into the pit and yelled out "what's the market on DEC '9 crude" traders guessed he was hedging for mexico and quoted a price a full dollar above where the market was at
> The brokers had no choice but to accept this higher price.
I don't understand this. They didn't say they want to buy or sell anything. Why were they obligated to do either?