NYMEX Electricity Futures Floor Broker: Getting a Worse Price on Purpose

A NYMEX floor broker faced a final $680,000 civil penalty for electricity futures manipulation after selling below available bids and buying above available offers to move settlement prices for Avista Energy’s benefit. The Commodity Futures Trading Commission found that the broker helped turn the close into a tool for increasing the value of the company’s over-the-counter derivatives. If you knew the orders, the OTC book or the physical power hedge, you could see why the desk wanted a price that looked wrong on the trading floor.

The government’s Supreme Court opposition brief recounts the findings against the registered floor broker. Recordings captured planning and execution. The brief calls selling below prevailing bids “violating the bids” and buying above prevailing offers “violating the offers.”

This was commodity market manipulation built around the relationship between the execution and the position it served. We see the inversion plainly: getting a worse price was the assignment. The value lay in moving the settlement that another contract used.

How the NYMEX Electricity Settlement Worked

Electricity settlement manipulation targeted a price calculated during the last two minutes of trading. This is the closing-price distortion often called banging the close. The Commodity Futures Trading Commission’s settlement order concerning an Avista Energy trader explains the market behind the broker’s trades.

Palo Verde futures covered delivery of a monthly block of on-peak electricity at the Palo Verde switchyard in Arizona. California Oregon Border futures covered on-peak power delivered at that border. Utilities, marketers and electricity users could use these contracts for hedging and pricing. On the floor, the contracts were PV and COB.

On options-expiration days in 1998, the nearby futures settlement was the average of prices traded during the close, weighted by transaction size. PV’s window ran from 3:23 to 3:25 p.m. Eastern time. COB’s followed from 3:28 to 3:30 p.m. The timing and size of an order determined how much it could contribute to that calculation.

The markets had low volume and open interest, with wide bid-ask spreads. Experienced brokers and traders considered an order of 25 or 30 contracts large enough to move prices materially. A short window in a thin market gave a concentrated order unusual influence over the number used to settle other contracts.

The OTC Position Behind the Closing Trades

Avista Energy’s cash-settled over-the-counter options used the NYMEX settlement price on options-expiration day. According to the related trader’s settlement order, those options became profitable when the futures settlement crossed particular levels, and more profitable as it moved farther in the desired direction.

The Commission alleged that the traders built their futures orders around those payouts. When the over-the-counter book benefited from a lower settlement, the instruction was to sell futures at the close. When the book benefited from a higher settlement, the instruction was to buy. The desired direction came from the position elsewhere in the business.

The order describes two ways the traders allegedly managed the futures exposure left behind. One used forward contracts in the more liquid physical electricity market. Quantities, delivery periods and locations approximately offset the futures orders placed at the close. The resulting physical and futures positions formed a spread that the order described as low risk and easy to unwind.

The other approach put an opposite futures position in place before the close. Ahead of the July buying, for example, the traders allegedly accumulated short futures positions slowly, seeking to avoid moving prices while doing so. The closing purchases would offset those shorts. Some positions came through Exchange for Physicals transactions, which paired a short futures position with a long physical position.

The June 2024 working paper An Analysis of Market Manipulation Definitions Around the World, produced as part of a World Federation of Exchanges research project, describes cross-market strategies in which the price is moved in one instrument and the profit is taken elsewhere. Its analysis explains why the relevant trades may cross instruments, counterparties and trading desks. Here, that perspective puts the futures close, the over-the-counter payout and the physical hedge in the same account of what the desk was doing.

Selling the Close, Then Buying It

The broker’s manipulation findings covered PV contracts on April 24, May 22 and July 27, 1998, and COB contracts on the July date. The Commission’s account of the decision identifies those four charges. The related trader’s settlement order supplies the detailed allegations about the instructions behind the orders.

April and May Favored a Lower Settlement

On April 24, the OTC positions benefited if the May PV settlement fell. The Commission alleged in the trader’s settlement order that the trader instructed a floor broker to sell at the lowest possible price. The order quotes the trader discussing the close beforehand:

The quoted instruction stated the desired market result before the trades happened. On May 22, the alleged strategy again called for a lower settlement, this time for June PV contracts. The order alleges the brokers followed instructions to sell at progressively lower prices, except for one trade. The Commission alleged sales totaling 180 June contracts during the close.

July Favored Higher Prices in Both Contracts

On July 27, the desired direction reversed. The related settlement order alleged that higher August PV and COB settlements would increase the value of Avista Energy’s over-the-counter contracts. The order alleges that the trader repeatedly instructed a broker’s phone clerk to bid higher during the closes.

According to the order, the clerk reported a two-dollar rise in the PV price from the trading, and the trader wanted more. In a subsequent conversation, according to the order, he agreed to buy another 25 PV contracts on the condition that the trade count toward the settlement. The order alleges that the trader agreed to pay $58 after a broker explained that the initial proposal would pull the settlement down. The alleged bargain: pay more, provided it moves the settlement. The Commission’s later announcement separately reports findings against the floor broker for the July after-hours, noncompetitive trade and for falsely recording and reporting its price.

What Evidence Is Required to Prove Fraud?

In this electricity-futures action, recordings, witness testimony, order execution and the linked OTC positions explained both the intended price and how the trading produced it. The government’s Supreme Court brief recounts the evidence supporting the broker’s manipulation finding.

Other traders testified about violations of bids and offers. The assistant described witnessing the conduct, being told to use code words, hearing other traders’ complaints and seeing efforts to conceal evidence from NYMEX investigators.

The Commission connected the broker’s ability to move prices, his purpose in doing so, the artificial prices and the trades that caused them. The brief says recorded conversations supported the finding of intent, while expert testimony connected the large closing trades in an illiquid market to the resulting prices. The evidence joined the instruction to the effect.

The same brief explains that controlling the whole market was unnecessary for this form of manipulation. The opportunity came from the size of the closing orders relative to a thin market and the settlement calculation that used them. That is why an account of the close can matter more than a broad description of the firm’s market share.

The Commission’s original announcement credits the NYMEX Compliance Department with assisting the Commission’s Division of Enforcement in its investigation. Recordings, witness testimony and order execution connected the trading to the intended settlement price.

What Is the Penalty for Market Manipulation?

The appeals court reduced the broker’s civil penalty because the same conduct had been counted both as manipulation and as helping commit it. Avista Energy separately agreed to pay a $2.1 million civil penalty to settle allegations of electricity-futures settlement manipulation. The Commission’s original announcement ties the company’s alleged conduct to increasing the value of its over-the-counter options. The company settlement and the broker’s contested action were separate CFTC enforcement outcomes arising from the same trading strategy.

The Same Incentive in Other Energy Markets

Related-position incentives also appear in natural gas and crude oil cases. In the Amaranth action, the Commission alleged that natural-gas futures sales during expiry settlement windows sought to benefit related positions. The closing window supplied the connection between the futures sales and the intended gain.

In its Parnon and Arcadia action, the agency alleged that the companies accumulated physical crude at Cushing through futures expiry and then sold it, with derivatives gains offsetting physical losses. In both allegations, a trade that moved the price served a position elsewhere in the business.

What a Trading Insider Can Explain

An insider may know why a broker was told to keep bidding higher, which option position benefited from the settlement, or why an opposite physical position appeared on another book. A clerk who heard the instruction and a power trader who understood the hedge could explain different parts of the same strategy.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. The separate CFTC whistleblower program can pay awards totaling 10% to 30% of qualifying sanctions collected. We assess which program fits your information with you.

You Know What the Closing Order Was Meant to Do

If you can explain the instruction behind the close or the book that stood to gain, speak to one of our Whistleblower Experts about the closing trades you saw. We bring the trading judgment and CFTC whistleblower lawyers who understand energy markets to build your strongest commodities whistleblower case, and stay beside you through it.