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The energy sector’s Libor-style scandal

13 November 2012

2:55 PM

13 November 2012

2:55 PM

As David reported earlier, today’s Guardian carries allegations of price-fixing in the energy markets. The paper has an account by Seth Freedman, who worked as a price reporter at ICIS Heren, detailing how he observed suspicious trades that looked like attempts to manipulate the daily index price.

Based on Freedman’s account, the alleged manipulation looks very much like that employed by City traders in the recently-exposed Libor scandal. Ironic, then, that the ‘suspicious’ trades Freedman observed came on the same day as Martin Wheatley published his review of Libor for the Treasury: Friday 28 September. Even after bankers had resigned and as new regulations for that sector were being planned, traders in the £300 billion wholesale gas market may well have been playing a very similar game.

What Freedman saw were several trades of ‘day-ahead’ gas contracts at abnormally low prices just as his company, ICIS Heren, was collecting information to set its benchmark index. Right around the 4.30pm ‘window’, six trades were reported at 58.0p, which Freedman calls ‘a massive move, half a penny or so from the mid-point of where gas was trading at that time’. For the rest of the day — both before and after the collection window — the same contracts were trading at or above 58.5p. This graph, from the Guardian, shows the six ‘suspicious’ trades:

‘Six times people have tried to force the price down, it appears to us,’ says Freedman. And he’s even given the Guardian a recording of a conversation in which a trader tells him ‘sometimes there is a feeling that somebody is taking the piss there on the day-ahead index’.

And why might traders try to fix that index? Freedman explains: ‘Long-term contracts for the supply of gas which are based on our closing prices can be affected to the tune of millions of pounds.’

The FSA and Ofgem are investigating the allegations, and David Cameron’s spokesman has said: ‘If there has been manipulation of the energy market then action needs to be taken very quickly… If there has been wrongdoing, the regulator should come down on those people very hard.’ Energy Secretary Ed Davey echoed those words in the Commons this afternoon, saying:

‘Market abuse is always wrong — but at a time when people and companies are struggling with high energy bills, the country would expect us to take firm action if these allegations prove true, and we will. These allegations of market manipulation are being taken very seriously. We will support the regulators taking whatever steps necessary to ensure that the full force of the law is applied, if they are true, so that any guilty parties are held to account.’

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