Tuesday, December 8, 2009

Making Billions in Gas Trading

Last night, while flipping through my growing magazine stack, I happened upon a very interesting article in Fortune on John Arnold, the former Enron trader who founded Centaurus Energy and has made a multi-billion dollar killing trading natural gas futures and derivatives over the past few years.

The article is as much a profile of the man and his firm as it is a discussion of the possibility of the Commodity Futures Trading Commission (CFTC) implementing controls to rein in large scale speculation, which partly  has been blamed for high levels of commodity price volatility.  The article traces how the past decade has seen the creation of immense profits and huge flameouts (remember Amaranth in 2006?) in a trading market originally designed to help gas users hedge their price exposure.  Following the 2000 Futures Modernization Act, a.k.a. the "Enron Loophole," trading activity has exploded and is now dominated by profit-seeking speculators rather than profit-protecting operating companies.  Hey, that's how the free market works.

A friend of mine who is both an academic and a trader noted that a new generation of students are going through business schools wanting to be traders.  It's the "new black."  The fashion used to be consulting, then investment banking, then venture capital, then hedge funds, now trading.  Her lament is that many schools are teaching profit-based trading rather than fundamentals-based trading.  Graduates will be gunslingers, only equipped to seek a fast profit.  They will not be able to operate a more nuanced hedging portfolio.  It's sort of like turning out mercenaries instead of trained soldiers.

As more people seek profit in the commodity trading busiess, you risk seeing the fundamentals of the commodities market become the "tail" to the trader's "dog."  Something's got to give.

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