United States Senate

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

Committee on Homeland Security and Governmental Affairs

Carl Levin, Chairman

Norm Coleman, Ranking Minority Member

EXCESSIVE SPECULATION

IN THE NATURAL GAS MARKET

STAFF REPORT

WITH ADDITIONAL MINORITY STAFF VIEWS

PERMANENT SUBCOMMITTEE

ON INVESTIGATIONS

UNITED STATES SENATE

RELEASED IN CONJUNCTION WITH THE

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

JUNE 25 & JULY 9, 2007 HEARINGS
SENATOR CARL LEVIN

Chairman

SENATOR NORM COLEMAN

Ranking Minority Member

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

ELISE J. BEAN

Staff Director & Chief Counsel

DAN M. BERKOVITZ

Counsel

KATE BITTINGER

Detailee

MARK L. GREENBLATT

Staff Director & Chief Counsel to the Minority 

MARK D. NELSON

Deputy Chief Counsel to the Minority

Permanent Subcommittee on Investigations

199 Russell Senate Office Building – Washington, D.C. 20510 

Main Number: 202/224-3721

Web Address: www.hsgac.senate.gov [Follow Link to “Subcommittees,” to “Investigations”] 
i

EXCESSIVE SPECULATION

IN THE NATURAL GAS MARKETS

TABLE OF CONTENTS

I. EXECUTIVE SUMMARY ................................................. 1

II. FINDINGS AND RECOMMENDATIONS .................................... 6

A. Findings

1. A single hedge fund, Amaranth Advisors LLC, dominated the U.S. natural gas

market in 2006 ...................................................... 6

2. In August 2006, Amaranth traded natural gas contracts on ICE rather than on 

NYMEX so that it could trade without any restrictions on the size of its positions . . 6

3. Amaranth’s actions in causing significant price movements in the natural gas

market demonstrate that excessive speculation distorts prices, increases volatility,

and increases costs and risks for natural gas consumers, such as utilities, who

ultimately pass on inflated costs to their customers . . . . . . . . . . . . . . . . . . . . . . . . . . 6

4. The two major U.S. exchanges that trade natural gas – NYMEX and ICE – affect 

each other’s prices .................................................... 6

5. Current restraints on speculative trading to prevent manipulation and price

distortions are inadequate .............................................. 7

6. The CFTC is unable to meet its statutory mandate to prevent market manipulation 

and excessive speculation from causing sudden, unreasonable, or unwarranted 

energy prices ........................................................ 7

B. Recommendations ....................................................... 8

1. Congress should eliminate the “Enron Loophole” that exempts electronic energy

exchanges from regulatory oversight ..................................... 8

2. If given additional legal authority, the CFTC should monitor aggregate positions

on NYMEX and ICE. The CFTC and exchanges should strengthen their

monitoring and oversight to prevent excessive speculation for all of the months

in which contracts are traded, not just for contracts near expiration . . . . . . . . . . . . . 8

3. Congress should increase the CFTC budget and authorize CFTC user fees to

help pay for the additional cost .......................................... 8

III. THE ROLE OF NATURAL GAS IN THE U.S. ECONOMY ..................... 9

A. Uses of Natural Gas ..................................................... 9

B. Sources of Natural Gas ................................................... 14

 C. Natural Gas Processing, Distribution, and Storage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

D. Fundamentals of Natural Gas Supply and Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

IV. NATURAL GAS MARKETS ............................................... 23

A. The Cash Market ........................................................ 23

B. The Financial Market .................................................... 27
ii

1. Energy Commodity Exchanges: NYMEX and ICE . . . . . . . . . . . . . . . . . . . . . . . . . . 27

2. Off-Exchange Bilateral Transactions ..................................... 36

C. Market Regulation ...................................................... 40

1. Regulated Markets (NYMEX) .......................................... 40

2. Unregulated Markets ................................................. 41

D. Excessive Speculation .................................................... 44

E. Market Manipulation .................................................... 47

F. Natural Gas Trading ..................................................... 47

V. EXCESSIVE SPECULATION IN THE NATURAL GAS MARKET IN 2006 ....... 51

A. Overview .............................................................. 51

B. Setting the Stage: Natural Gas Market Fundamentals in Early 2006 . . . . . . . . . . . . . . . 54

C. The Rise of Amaranth ................................................... 57

D. January-April 2006: Amaranth Buys and Profits from Large Spread Positions . . . . . . . 59

E. May 2006: Liquidity Evaporates ........................................... 71

F. June and July 2006: Amaranth Increases its Positions . . . . . . . . . . . . . . . . . . . . . . . . . . 77

1. Increasing Summer and Winter Positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

2. March/April Price Spread .............................................. 80

G. Early August 2006: NYMEX Limits Amaranth; Amaranth Moves to ICE . . . . . . . . . . . 88

1. Position Limits and Accountability Levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88

2. NYMEX Reviews of Amaranth’s Positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90

H. Late August 2006: The Market Turns Against Amaranth . . . . . . . . . . . . . . . . . . . . . . . . 99

I. September 2006: Amaranth Collapses ....................................... 111

J. Amaranth’s Market Impact ................................................ 114

VI. PROTECTING U.S. ENERGY AND ECONOMIC SECURITY .................. 119

A. Close the Enron Loophole................................................. 119

B. Reinvigorate the Prohibition Against Excessive Speculation . . . . . . . . . . . . . . . . . . . . . . 120

C. Increase CFTC Resources ................................................. 121

VII. CFTC RESOURCES TO MONITOR NATURAL GAS MARKETS ............... 122

A. CFTC Market Surveillance and Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123

1. CFTC Organization ................................................... 123

2. CFTC Market Surveillance Program ..................................... 125

3. Limitations in CFTC Market Surveillance Program . . . . . . . . . . . . . . . . . . . . . . . . . . 126

B. Limited CFTC Resources ................................................. 128

1. Limited Funds and Personnel ........................................... 128

2. Increased Funding Through User Fees .................................... 133

VIII. ADDITIONAL MINORITY STAFF VIEWS ............................... 135

APPENDIX I - V (345 pages – available upon request) ................................. 136

 

# # #
EXCESSIVE SPECULATION 

IN THE NATURAL GAS MARKET 

JUNE 25, 2007 

I. EXECUTIVE SUMMARY 

 Since 2001, the U.S. Senate Permanent Subcommittee on Investigations (“the 

Subcommittee”) has been examining the structure and operation of U.S. energy markets. In June 

2006, the Subcommittee issued a bipartisan staff report, The Role of Market Speculation in 

Rising Oil and Gas Prices: A Need to Put the Cop Back on the Beat,1

 analyzing the extent to 

which the increasing amount of financial speculation in energy markets has contributed to the 

steep rise in energy prices over the past few years. The report concluded: “Speculation has 

contributed to rising U.S. energy prices,” but also that “gaps in available market data” made 

quantification of the speculative component problematic.2

 The report endorsed the estimate of 

various analysts that the influx of speculative investments into crude oil futures accounted for 

approximately $20 of the then-prevailing crude oil price of approximately $70 per barrel. The 

report’s analysis was based entirely on publicly available data about the overall level of financial 

investments in energy markets and publicly available data on energy prices and supplies. 

 The Subcommittee’s staff report recommended that the Commodity Futures Trading 

Commission (“CFTC”) be provided with the same authority to regulate and monitor electronic 

energy exchanges, such as the Intercontinental Exchange (“ICE”), as it has with respect to the 

fully regulated futures markets, such as the New York Mercantile Exchange (“NYMEX”), to 

ensure that excessive speculation did not adversely affect the availability and affordability of 

vital energy commodities through unwarranted price increases. Congress has not taken any 

action since then to authorize CFTC oversight of unregulated energy markets like ICE. 

 Shortly after the Subcommittee issued the report in 2006, the natural gas market entered a 

period of extreme price volatility punctuated by the collapse in September 2006 of Amaranth 

Advisors LLC (“Amaranth”), one of the largest hedge funds in the natural gas market. From the 

last week in August until the middle of September 2006, Amaranth’s natural gas positions lost 

over $2 billion in value, precipitating the liquidation of the entire portfolio of the $8 billion fund. 

In late summer, natural gas prices began falling. For example, the price of the NYMEX 

futures contract to deliver natural gas in October 2006 fell from a high of $8.45 per MMBtu in 

late July to just under $4.80 per MMBtu in September, the lowest level for that contract in two 

and one-half years. The difference in price between the NYMEX natural gas futures contract for 

March 2007 and for April 2007 – called the price spread – fell from a high of nearly $2.50 per 

MMBtu in July to less than 60 cents in September, a drop of 75%. The price for the immediate 

delivery of natural gas, called the spot price, fell from $7.49 per MMBtu in late August to $3.66 

 

1

 S. Prt. No. 109-65, 109th Congress, 2nd Sess (June 27, 2006). 2 Id., at p. 6. 
 2 

per MMBtu in early October, the lowest level in four years.3 The Electric Power Research 

Institute described this price collapse as “stunning . . . one of the steepest declines ever.”4

 

 Throughout this period, the market fundamentals of supply and demand were largely 

unchanged. Natural gas supplies were plentiful, and the amount of natural gas in storage 

remained higher than average throughout the summer and into the early fall. The large price 

variations in the face of steady supply and demand trends raises several questions: If the 

underlying supply and demand factors were unchanged, what was causing the large price 

swings? To what extent was the collapse of Amaranth related to the fall in prices? If 

Amaranth’s collapse either caused or accelerated the price drops, then were Amaranth’s 

positions responsible for the higher prices and large spreads that prevailed throughout the 

summer? Was there adequate market oversight to ensure that large hedge funds were not 

distorting natural gas prices? 

 In October 2006, the Subcommittee began its investigation into the behavior of natural 

gas prices earlier in the year. The Subcommittee analyzed millions of natural gas transactions 

from trading records obtained from NYMEX and ICE, the two principal exchanges for energy 

commodities, and from Amaranth and other traders. In addition, the Subcommittee conducted 

numerous interviews of natural gas market participants, including natural gas traders, producers, 

suppliers, and hedge fund managers, as well as exchange officials, regulators, and energy market 

experts. NYMEX, ICE, Amaranth, and many traders cooperated with detailed inquiries. The 

Subcommittee also reviewed commodity market statutes and regulations, and researched a 

variety of legal issues. 

 The trading records examined by the Subcommittee disclosed that from early 2006 until 

its September collapse, Amaranth dominated trading in the U.S. natural gas financial markets. 

Amaranth bought and sold thousands of natural gas contracts on a daily basis, and tens of 

thousands of contracts on certain days. It accumulated tens of thousands of natural gas holdings, 

or “positions,” on both NYMEX and ICE. The CFTC defines a “large trader” for reporting 

purposes in the natural gas market as a trader who holds at least 200 contracts; NYMEX 

examines a trader’s position if it exceeds 12,000 natural gas contracts in any one month. 

Amaranth held as many as 100,000 natural gas contracts in a single month, representing 1 trillion 

cubic feet of natural gas, or 5% of the natural gas used in the entire United States in a year. At 

times Amaranth controlled 40% of all of the outstanding contracts on NYMEX for natural gas in 

the winter season (October 2006 through March 2007), including as much as 75% of the 

outstanding contracts to deliver natural gas in November 2006. 

Amaranth’s large positions and trades caused significant price movements in key natural 

gas futures prices and price relationships. For example, Amaranth’s purchases of contracts to 

deliver natural gas in the winter months, in conjunction with Amaranth’s sales of natural gas 

contracts for delivery in the summer months, drove winter prices far above summer prices. 

These differences between winter and summer prices, called “price spreads,” were far higher in 

 

3

 Federal Energy Regulatory Commission (FERC), Winter 2006-07 Energy Market Assessment, Item No.: A-3, 

October 19, 2006, at p. 2. 

4

 Electric Power Research Institute, Natural Gas Issues: Turnaround Prospects, Energy Markets and Generation 

Response, October 2006, at p. 1. 
 3 

2006 than in previous years—until the collapse of Amaranth, when the price spreads returned to 

more normal levels. On several specific dates, Amaranth’s massive trades were responsible for 

large jumps in the price differences between the futures contracts for March and April 2007. 

Traders interviewed by the Subcommittee said that during the spring and summer of 2006 the 

differences between winter and summer prices were “clearly out-of-whack,” at “ridiculous” 

levels, and unjustified by supply or demand. 

Purchasers of natural gas during the summer of 2006 for delivery in the following winter 

months paid inflated prices due to Amaranth’s large-scale speculative trading. Businesses such 

as utilities had to either absorb this added expense or pass the higher costs onto the ultimate 

consumer, such as residential users who paid higher home heating bills. 

The current regulatory system was unable to prevent Amaranth’s excessive speculation in 

the 2006 natural gas market. Under current law, NYMEX is required to monitor the positions of 

its traders to determine whether a trader’s positions are too large. If a trader’s position exceeds 

pre-set “accountability levels,” the exchange may require a trader to reduce its positions. The 

Amaranth case history demonstrates two critical flaws. First, NYMEX has no routine access to 

information about a trader’s positions on ICE in determining whether a trader’s positions are too 

large. It is therefore impossible under the current system for NYMEX to have a complete and 

accurate view of a trader’s position in determining whether it is too large. 

Second, even if NYMEX orders a trader to reduce its positions on NYMEX, the trader 

can simply shift its positions to ICE where no limits apply. This is precisely what Amaranth did 

after NYMEX finally told Amaranth, in August 2006, to reduce its positions in two contracts 

nearing expiration, contracts to deliver gas in September and October 2006. In response, 

Amaranth reduced its positions on NYMEX and increased them on ICE, maintaining the same 

overall positions in the market. Within a few days, Amaranth resumed increasing its positions, 

mostly on ICE. By the end of August, Amaranth held nearly 100,000 short positions in the 

September contract, mostly on ICE, and a total of nearly 90,000 short positions for the October 

contract on both ICE and NYMEX. These were huge positions—each variation of one cent in a 

position of 100,000 contracts changes a trader’s profit or loss by $10 million. As a result, 

NYMEX’s instructions to Amaranth did nothing to reduce Amaranth’s size, but simply caused 

Amaranth’s trading to move from a regulated market to an unregulated one. 

 The data analyzed by the Subcommittee, together with trader interviews, show that 

NYMEX and ICE are functionally equivalent markets. Natural gas traders use both markets, 

employing coordinated trading strategies. In many instances the volumes on ICE are comparable 

to or greater than the volumes on NYMEX. Traders use the natural gas contract on NYMEX, 

called a futures contract, in the same way they use the natural gas contract on ICE, called a swap, 

for risk management and economic purposes. The data show that prices on one exchange affect 

the prices on the other. Given their equivalence, there is no sound basis for one exchange to be 

regulated and the other not. 

The disparity in regulation between NYMEX and ICE results from the so-called “Enron 

loophole” in the Commodity Exchange Act. The Enron loophole, which was inserted into the 

law in 2000 at the request of Enron and others, exempts electronic energy exchanges such as ICE 
 4 

from CFTC oversight and regulation. Unlike NYMEX, there are no limits on the trading on ICE, 

and no routine government oversight. The Amaranth case history demonstrates that the disparity 

in regulation of the two markets prevents the CFTC and the exchanges from fully analyzing 

market transactions, understanding trading patterns, and compiling accurate pictures of trader 

positions and market concentration; it requires them to make regulatory judgments on the basis 

of incomplete and inaccurate information; and it impedes their authority to detect, prevent, and 

punish market manipulation and excessive speculation. 

Natural gas traders are well aware of the consequences of this limitation. For example, 

when Amaranth’s lead energy trader predicted in an email that “boy I bet you see some CFTC 

inquiries” into a price spike that affected the final price of the September 2006 futures contract, 

another trader reminded him that most of the trades had taken place on ICE using swaps. The 

trader wrote: “Until they monitor swaps no big deal.” His comment captures the problem – 

current law requires our regulators to oversee U.S. energy markets with incomplete information 

and inadequate authority. 

To repair the broken regulatory system, Congress needs to require currently unregulated 

exchanges, such as ICE, to comply with the same statutory obligations as regulated markets, 

such as NYMEX, and operate under the same rules to prevent market manipulation and 

excessive speculation from affecting the price of vital energy commodities. 

 Some market observers contend that Amaranth’s collapse proved the energy markets are 

functioning well, because an overly risky trader met its demise without harming other traders or 

the natural gas market as a whole. In fact, however, many other market participants were 

harmed by Amaranth’s massive speculative trading. For example, utilities that provide gaspowered electricity or heating to homes, schools, and hospitals, and industries that use natural 

gas in manufacturing paid inflated prices. Many of their costs were passed onto consumers. 

Some companies told the Subcommittee that extreme price swings in the natural gas futures 

market make it more difficult and expensive to use the futures market for hedging. Still others 

told the Subcommittee that they have lost confidence in the natural gas market, viewing it not as 

a mechanism to set prices reflecting supply and demand, but as a market increasingly responsive 

to a few dominant traders with sufficient capital to affect prices. 

 

If given authority to police all U.S. energy commodity markets, the CFTC should use this 

authority to monitor aggregate positions taken by traders on both NYMEX and ICE, and to 

analyze trading data from both exchanges. Regulators should also strengthen their monitoring 

and oversight to prevent excessive speculation for all of the months in which contracts are 

traded, not just contracts near expiration. The Amaranth experience demonstrates how excessive 

speculation can distort prices of futures contracts that are many months from expiration, with 

serious consequences for other market participants. To prevent excessive speculation from 

causing unwarranted price changes, commodity regulators need to conduct oversight over both a 

broader market and for a longer time horizon than the next few months. 

A final major problem is the inadequate oversight capabilities of the CFTC. The CFTC 

suffers from antiquated technology systems, a shrinking staff, and flat budgets. In part, these 

budgetary woes have occurred because Congress has never authorized the CFTC, as it has 
 5 

virtually every other federal financial regulator, to collect user fees from the markets it oversees. 

Congress needs to provide the CFTC with adequate resources to do its job, and authorize user 

fees to pay for the additional expense. 

Energy is a critical factor in the future of the U.S. economy. How it is priced is of vital 

concern. The Amaranth case history is not just the story of a single hedge fund dominating the 

market, but of a broken regulatory system that has left our energy markets vulnerable to any 

trader with sufficient resources to alter energy prices for all market participants. 

 The remainder of this Report details the Amaranth case history. Section II presents the 

staff findings and recommendations from the Subcommittee’s investigation. Section III provides 

general information on the importance of natural gas to the U.S. economy, its production, 

economic uses, and the fundamentals of natural gas supply and demand. Section IV provides 

general information on the cash and financial markets for natural gas, and an overview of the 

regulatory structure for the various types of energy exchanges. Section V describes the unusual 

and extreme behavior of natural gas prices in the spring and summer of 2006, and analyzes the 

role of Amaranth and other hedge funds in forming those prices. Section V also describes the 

impact of Amaranth’s trading on other market participants. Sections VI and VII offer 

recommendations to restore the integrity of energy commodity markets in the United States and 

protect them against market manipulation and excessive speculation. Section VIII contains 

additional Minority Staff views on the Report. 
 6 

II. FINDINGS AND RECOMMENDATIONS 

A. FINDINGS 

(1) A single hedge fund, Amaranth Advisors LLC, dominated the U.S. natural gas 

market in 2006.

(a) Amaranth accumulated massive natural gas holdings on NYMEX and ICE 

spanning five years, from 2006-2010. 

(b) Amaranth accumulated such large positions and traded such large volumes 

of natural gas in 2006, on both NYMEX and ICE, that it had a direct effect on 

U.S. natural gas prices and increased price volatility in the natural gas market. 

The larger than usual differences between winter and summer futures prices that 

prevailed during the spring and summer of 2006 were largely the result of 

Amaranth’s large-scale trades rather than the normal market interaction of many 

buyers and sellers. 

(c) Amaranth’s 2006 positions in the natural gas market constituted excessive 

speculation. 

(2) In August 2006, Amaranth traded natural gas contracts on ICE rather than on 

NYMEX so that it could trade without any restrictions on the size of its positions.

(a) When NYMEX directed Amaranth to reduce its positions in September 

2006 and October 2006 natural gas futures contracts, Amaranth simply 

transferred those positions to ICE, an unregulated market, thereby maintaining 

its overall speculative position in the natural gas market. 

(b) NYMEX’s attempt to limit speculative trading during the last day of trading 

on the September 2006 natural gas futures contract failed, because neither 

NYMEX nor the CFTC had any authority, mandate, or ability to limit trading on 

ICE that affected the pricing of the NYMEX futures contract.

(3) Amaranth’s actions in causing significant price movements in the natural gas 

market demonstrate that excessive speculation distorts prices, increases volatility, 

and increases costs and risks for natural gas consumers, such as utilities, who 

ultimately pass on inflated costs to their customers. 

(a) Purchasers of natural gas during the summer of 2006 for delivery in the 

following winter months paid inflated prices due to Amaranth’s speculative 

trading. 

(b) Many of these inflated costs were passed on to consumers, including 

residential users who paid higher home heating bills. 

(4) The two major U.S. exchanges that trade natural gas – NYMEX and ICE – 

affect each other’s prices. 

(a) Significant volumes of natural gas are traded on both NYMEX and ICE, and 

both markets play a key role in setting U.S. natural gas prices. 
 7 

(b) The contracts used on NYMEX and ICE to trade natural gas, called futures 

contracts on NYMEX and swaps on ICE, are equivalent financial products that 

serve the same risk-management purposes. 

(c) Traders routinely buy and sell natural gas contracts on both NYMEX and 

ICE, and hold positions in both markets. 

(d) The price of NYMEX futures and ICE swaps are virtually identical up until 

the final half hour of the last trading day of the NYMEX contract, when 

NYMEX and ICE prices typically differ by a few cents at most. 

(5) Current restraints on speculative trading to prevent manipulation and price 

distortions are inadequate. 

(a) The CFTC lacks statutory authority to establish or enforce speculative 

position limits on the trading of natural gas on ICE or other Exempt 

Commercial Markets. 

(b) When large traders choose to trade on ICE rather than NYMEX, it is 

difficult, if not impossible, for NYMEX to prevent price manipulation or 

excessive speculation from distorting NYMEX prices, because NYMEX does 

not have information regarding, or the jurisdiction to limit, trading on ICE even 

though ICE trades affect NYMEX futures prices. 

(c) The CFTC’s primary strategy to stop excessive speculation has been to 

prevent manipulation of the final price of a futures contract that is about to 

expire, rather than to generally review speculative trades affecting a range of 

futures contract prices. 

(6) The CFTC is unable to meet its statutory mandate to prevent market 

manipulation and excessive speculation from causing sudden, unreasonable, or 

unwarranted energy prices. 

(a) The CFTC lacks statutory authority to effectively oversee U.S. energy 

commodity markets, because the “Enron Loophole” prevents the CFTC from 

overseeing ICE. 

(b) The CFTC lacks budgetary, staff, and technological resources to effectively 

monitor energy commodity markets. 

(c) As a result of the lack of legal authority and budgetary resources, the CFTC 

was unable to prevent excessive speculation in the natural gas market in 2006. 

(d) If the CFTC is not provided with additional legal authority and resources, 

the CFTC will remain unable to accomplish its statutory mission. 

(e) The inability of the CFTC to accomplish its statutory mission with respect 

to the trading of energy commodities presents a threat to the energy and 

economic security of the United States. 
 8 

 B. RECOMMENDATIONS 

(1) Congress should eliminate the “Enron Loophole” that exempts electronic energy 

exchanges from regulatory oversight. Experience since passage of the Commodity 

Futures Modernization Act of 2000, demonstrates there is no sound rationale for 

exempting electronic energy exchanges from regulatory oversight. Excessive speculation 

that occurred on electronic exchanges in 2006 contributed to the overall distortion of 

energy prices in the natural gas market, to the detriment of American consumers, 

businesses, industry, and utilities. Exempt Commercial Markets, such as ICE, should be 

required to comply with the same statutory obligations as Designated Contract Markets, 

such as NYMEX, and should be regulated in the same manner by the CFTC to prevent 

market manipulation and excessive speculation. To ensure fair energy pricing, it is time 

to put the cop back on the beat in all U.S. energy commodity markets. 

(2) If given additional legal authority, the CFTC should monitor aggregate 

positions on NYMEX and ICE. The CFTC and exchanges should strengthen their 

monitoring and oversight to prevent excessive speculation for all of the months in 

which contracts are traded, not just for contracts near expiration. 

(3) Congress should increase the CFTC budget and authorize CFTC user fees to 

help pay for the additional cost. The CFTC’s budget should be increased to provide the 

staff and technology needed to monitor, integrate, and analyze real-time transactional 

data from all U.S. commodity exchanges, including NYMEX and ICE. Needed funding 

should be obtained from user fees imposed on commodity markets.
 9 

III. THE ROLE OF NATURAL GAS IN THE U.S. ECONOMY 

“Speculators may do no harm as bubbles on a steady stream of enterprise. But the 

position is serious when enterprise becomes the bubble on a whirlpool of speculation. 

When the capital development of a country becomes a by-product of the activities of a 

casino, the job is likely to be ill-done.” 

John Maynard Keynes, 19365

 

To understand the behavior of the natural gas market in 2006, and the significance of 

those events, it is useful to review how natural gas is produced and used, the fundamentals of 

natural gas supply and demand, and how the various natural gas futures and derivatives markets 

affect the price of natural gas paid by natural gas users, such as homeowners, businesses, 

manufacturers, and electric utilities. 

 

A. Uses of Natural Gas 

 Natural gas is one of the main sources of energy for the United States, fueling nearly onequarter of the nation’s energy consumption. (Figures 1a and 1b). Natural gas is the cleanest 

burning of the fossil fuels – for an equivalent amount of heat produced, the burning of natural 

gas emits fewer atmospheric pollutants and greenhouse gases than either coal or petroleum.6

 

 

5

 The General Theory of Employment, Interest and Money (1936). 

6

 NaturalGas.org, Natural Gas and the Environment, at http://www.naturalgas.org/environment/naturalgas.asp. 

Compared to the burning of either coal or oil, the burning of natural gas emits virtually no particulates, no sulfur 

dioxide, no mercury, and significantly reduced levels of nitrogen oxides. To generate a given amount of heat 

energy, the use of natural gas emits about 30% less carbon dioxide than petroleum and about 45% less carbon 

dioxide than coal. Id. However, methane, the principal component of natural gas, traps heat 21 times more 

effectively than carbon dioxide, and is therefore a more potent greenhouse gas. Nonetheless, the overall 

contribution to global warming from the use of natural gas as an energy source is much less than the contribution 

from the other fossil fuels. U.S. Environmental Protection Agency, Inventory of U.S. Greenhouse Gas Emissions 

and Sinks, 1990-2004 (April 2006), USEPA #430-R-06-002, Executive Summary. 
 10 

U.S. Energy Consumption

Petroleum

39%

Natural Gas

23%

Coal

23%

Biomass

3%

Geothermal, 

Solar, Wind

1%

Nuclear

8%

Hydroelectric

3%

Figure 1a

Fig. 1a. Natural gas supplies nearly one-quarter of the energy 

consumed in the United States. Data source: U.S. Department of 

Energy, Energy Information Administration (“EIA”). 

U.S. Energy Production

Natural Gas 

Plant Liquids

3%

Natural Gas

27%

Coal

34%

Hydroelectric 

4%

Biomass

4%

Crude Oil

16%

Nuclear

12%

Figure 1b

Fig. 1b. Natural gas generates about one-quarter of the energy produced in the 

U.S. Data source: EIA. 

 
 11 

 The price of natural gas directly affects every segment of the U.S. economy, from 

individual households to small businesses to large industries. “Natural gas is used in over sixty 

million homes. Additionally, natural gas is used in 78% of restaurants, 73% of lodging facilities, 

51% of hospitals, 59% of offices, and 58% of retail buildings.”7

 Natural gas generates 

approximately one-fifth of the domestically produced electricity in the United States.8

 The 

majority of American homes are heated with natural gas.9 Additionally, natural gas is used for a 

variety of industrial products, including fertilizer, paints, carpets, plastics, dyes, photographic 

film, antifreeze, medicines, and explosives.10 (Figure 2). 

 Natural Gas Uses

Commercial 

(nonmanufacturing)

13.4%

Natural Gas 

Well and Field 

Operations

5.2%

Natural Gas 

Pipeline and 

Distribution

2.6% Vehicle Fuel

0.1%

Industrial 

30.2%

Electric Power 

Plants

28.6%

Residential 

19.9%

Figure 2

Fig. 2. Natural gas is used in a variety of economic sectors. 

Data source: EIA. 

 The total domestic demand for natural gas is highly seasonal. Total demand increases in 

the winter as temperatures fall and the demand for natural gas for residential heating rises. 

Demand for natural gas is at its lowest during the summer months, although in recent years 

summertime demand for natural gas has risen to meet short-term needs of electric utilities during 

heat waves. Industrial and commercial use of natural gas is fairly constant year-round. 

(Figure 3). 

 

7

 American Petroleum Institute (API), Issue: Natural Gas, April 7, 2006, available at API website, 

http://www.naturalgasfacts.org/. 

8

 U.S. Department of Energy (DOE) Energy Information Administration (EIA), Natural Gas Basics, EIA website, 

http://www.eia.doe.gov/oil_gas/natural_gas/info_glance/natural_gas.html. 

9

 A 2001 EIA survey found that 54% of all U.S. households use natural gas as the main heating fuel. 

10 U.S. Department of Energy (DOE) Energy Information Administration (EIA), Natural Gas Basics, EIA website. 
 12 

Seasonal Demand for Natural Gas 

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Jan-01

Jul-01

Jan-02

Jul-02

Jan-03

Jul-03

Jan-04

Jul-04

Jan-05

Jul-05

Jan-06

Jul-06

Jan-07

Industrial Other Electric Power Commercial Residential

trillion cu. ft.

Figure 3

Fig. 3. Demand for natural gas is seasonal. Data source: EIA. 

Table 1 presents the total expenditures in 2005, by state, for natural gas delivered to 

residential, commercial, and industrial consumers and electric power plants. For the U.S. as a 

whole, these expenditures for natural gas totaled approximately $205 billion. 

Table 1 

Natural Gas Expenditures, by State, 2005 (in dollars) 

State Residential Commercial Industrial Electric 

Power 

Total Natural 

Gas 

Expenditures 

Texas 2,309,343,446 1,675,701,340 11,206,533,687 11,906,058,792 27,097,637,264

California 5,729,738,065 2,488,517,884 7,688,789,158 5,568,487,855 21,475,532,962

New York 5,788,094,146 4,865,906,362 750,887,104 2,809,505,992 14,214,393,603

Louisiana 540,003,684 285,499,763 7,300,853,946 2,605,101,053 10,731,458,445

Illinois 5,084,499,781 2,261,066,718 2,607,965,080 523,428,165 10,476,959,744

Ohio 4,195,065,381 1,945,127,275 3,297,072,028 266,273,565 9,703,538,249

Pennsylvania 3,482,855,525 1,890,415,320 2,087,250,527 830,595,996 8,291,117,369

Michigan 3,783,843,799 1,639,555,304 1,850,311,419 731,364,939 8,005,075,461

New Jersey 3,105,519,379 2,225,130,067 844,390,547 1,235,970,374 7,411,010,367

Florida 324,897,975 766,126,281 598,501,153 5,516,086,660 7,205,612,069

Indiana 1,794,438,281 844,647,722 2,662,697,539 309,890,501 5,611,674,043

Georgia 2,087,172,684 780,510,263 1,561,799,588 790,604,525 5,220,087,059

Massachusetts 1,830,265,680 809,748,252 653,077,306 1,467,888,651 4,760,979,888

Oklahoma 692,653,501 433,337,195 1,379,437,439 2,005,233,633 4,510,661,768

Wisconsin 1,565,400,402 893,577,361 1,293,952,456 514,082,737 4,267,012,956

Colorado 1,278,311,707 582,913,885 1,096,804,062 686,379,860 3,644,409,515
 13 

Virginia 1,293,128,432 780,182,243 798,612,777 644,068,957 3,515,992,409

Alabama 659,410,142 350,019,343 1,436,795,678 1,013,283,366 3,459,508,529

Minnesota 1,441,889,759 974,505,544 807,424,911 220,684,665 3,444,504,879

Missouri 1,353,859,603 701,490,034 729,188,094 269,930,950 3,054,468,681

North Carolina 982,250,959 616,710,211 971,528,915 229,038,499 2,799,528,584

Arizona 484,285,857 314,094,781 144,800,785 1,792,077,727 2,735,259,149

Mississippi 321,692,759 248,159,908 846,960,587 1,275,641,299 2,692,454,553

Maryland 1,269,370,411 834,523,969 289,303,573 212,156,597 2,605,354,550

Tennessee 894,376,931 676,671,718 954,240,032 47,716,612 2,573,005,294

Washington 868,791,437 518,835,333 686,128,594 436,970,266 2,510,725,631

Kentucky 734,901,018 452,690,889 1,108,843,887 145,697,220 2,442,133,015

Iowa 826,763,404 480,298,410 908,225,747 188,155,281 2,403,442,842

Arkansas 458,712,591 321,509,375 838,481,351 420,798,433 2,039,501,750

Connecticut 723,040,528 464,822,462 239,075,140 594,871,443 2,021,809,574

Kansas 783,973,578 339,426,479 750,503,272 109,740,518 1,983,643,847

Nevada 453,505,112 275,874,667 135,050,738 1,102,162,594 1,966,593,111

Oregon 513,491,814 287,911,738 536,263,536 592,226,412 1,929,893,500

South Carolina 423,489,214 302,941,073 741,503,567 381,697,401 1,849,631,255

New Mexico 370,320,737 225,168,280 213,972,795 349,431,239 1,158,893,051

Utah 563,603,453 283,494,983 185,961,323 103,786,008 1,136,845,767

Nebraska 405,445,972 258,936,086 343,222,769 65,814,978 1,073,419,805

West Virginia 387,331,373 306,522,484 350,262,612 23,051,125 1,067,167,595

Rhode Island 282,307,039 147,091,801 66,167,519 425,072,855 920,639,214

New Hampshire 116,741,776 134,769,220 84,388,915 389,448,961 725,348,872

Idaho 228,775,368 130,456,142 191,726,678 96,886,213 647,844,400

Wyoming 121,427,742 84,403,340 357,693,741 3,337,287 566,862,109

Maine 18,584,197 68,912,469 36,573,146 412,524,567 536,594,379

Montana 212,227,406 140,817,523 180,943,021 1,804,205 535,792,155

Delaware 150,746,119 108,817,285 165,686,904 109,179,907 534,430,215

D.C. 233,695,504 232,879,434 0 0 466,574,938

Alaska 103,305,895 83,329,917 136,976,232 134,350,637 457,962,680

South Dakota 142,639,489 101,525,989 85,605,220 30,247,134 360,017,832

North Dakota 121,892,106 102,299,767 110,681,625 8,092 334,881,589

Vermont 37,676,052 25,286,917 20,100,605 287,653 83,351,227

Hawaii 15,961,296 46,819,500 7,198,755 0 69,979,551

U.S. Total 61,710,782,568 35,946,688,681 57,744,345,049 49,770,350,889 205,172,167,187

Table 1. Data source: EIA, Natural Gas Monthly, March 2007, Tables 13-17, 19-22. Price calculations 

for several states are based on extrapolations from prior year and aggregate national data. 
 14 

B. Sources of Natural Gas 

 Like the other fossil fuels, natural gas is generated when decayed organic matter is 

trapped beneath the surface of the earth and subject to high pressures and temperatures over long 

periods of time. Natural gas is extracted through wells drilled into porous rock in regions of oil 

and gas deposits. Natural gas consists primarily of methane, but also contains butane, pentane, 

and other gaseous and liquid hydrocarbons. 

 In 2005, there were over 425,000 natural gas and gas condensate wells in the United 

States.11 The leading areas of gas production within the United States are located in the states of 

Texas, Oklahoma, Wyoming, New Mexico, Louisiana, and in Federal waters in the Gulf of 

Mexico. (Figure 4).12 

Annual Natural Gas Production 

0

1

2

3

4

5

6

Texas

Gulf of Mexico

Oklahoma

New Mexico

Wyoming

Louisiana

Other States

Alaska

Figure 4

trillion cu. ft.

Fig. 4. Texas and the Gulf of Mexico account for over half of domestic 

production of natural gas. Data source: EIA. 

 

11 U.S. Department of Energy (DOE) Energy Information Administration (EIA), Number of Producing Gas and Gas 

Condensate Wells, EIA website. 

12 EIA, Natural Gas Monthly, March 2007, Table 6. 
 15 

 

As domestic consumption of natural gas now exceeds production, the United States relies 

on imports for approximately 15% of its natural gas supply (Figure 5). Nearly all of the natural 

gas imported by pipeline comes from Canada. Since 2000, the United States has imported 

substantial quantities of liquefied natural gas (LNG), mostly from Trinidad and Tobago 

(Figure 6). 

U.S. Natural Gas 

Annual Production and Imports

0

5

10

15

20

25

30

2002 2003 2004 2005 2006

Imports

Production

trillion cu. ft.

Figure 5

Fig. 5. The U.S. imports approximately 15% of its natural gas supply. Data 

source: EIA, Natural Gas Monthly, March 2007, Table 1. 

 

How Natural Gas is Measured 

In the United States, natural gas is measured by volume (cubic feet) and by energy 

content (British Thermal Unit, or Btu). One Btu is the amount of heat required to 

raise the temperature of one pound of water by one degree Fahrenheit. One cubic foot 

of natural gas contains about 1031 Btu, or approximately the same amount of energy 

as in a candy bar. Natural gas usually is measured in quantities of thousands of Btu 

(MBtu) or millions of Btu (MMBtu). For retail sales, natural gas is often measured 

in units of therms (th). One therm equals 100,000 Btu. 
 16 

U.S. Annual Natural Gas Imports

0

1

2

3

4

5

2002 2003 2004 2005 2006

Pipeline

LNG

trillion cu. ft.

Figure 6

Fig. 6. Imports of Canadian natural gas by pipeline account for approximately 

85% of total U.S. imports. Data source: EIA Natural Gas Monthly, March 2007, 

Table 5. 

C. Natural Gas Processing, Distribution, and Storage 

 After natural gas is produced from a well, it is sent by pipeline from the wellhead to a 

natural gas processing plant to separate the methane gas from the other liquid and gaseous 

components. The unwanted liquids are separated and the unwanted gases are vented and flared, 

while the other useful gases, such as ethane, propane, butane, and iso-butane, are collected for 

distribution elsewhere.13 

 After processing, the dry natural gas, which is now almost entirely methane, is 

transported by pipelines either directly to large industrial or electricity-generating end-users, to 

natural gas marketers, to storage facilities, or to local distribution companies (LDCs). The 

LDCs, in turn, deliver natural gas to consumers, including households. LDCs are either investorowned or owned by local governments. 

The price of natural gas as a commodity is the largest component of residential natural 

gas prices, accounting for about half of each residential bill. The cost of local distribution is the 

second-largest component of residential prices. (Figure 7). 

 

13 NaturalGas.org, Natural Gas – From Wellhead to Burner Tip, at http://www.naturalgas.org/naturalgas/ 

naturalgas.asp. 
 17 

Components of Residential Natural Gas Prices 

0

2

4

6

8

10

12

14

16

18

2002 2003 2004 2005 2006

Local Distribution

Processing, Transmission,

& Storage 

Commodity

$ per thousand cu. ft.

37%

51%

51%

 57% 47%

15%

10%

11%

10% 15%

 48%

39%

 38%

 33%

 38%

Figure 7

Fig. 7. The commodity cost of natural gas accounts for approximately half of a 

residential natural gas bill. Data source: EIA, Natural Gas Monthly, March 2007. 

Because one of the major uses of natural gas is for home heating, natural gas demand 

peaks in the winter months and ebbs during the summer months. During the summer months, 

when supply exceeds demand, natural gas prices fall, and the excess supply is placed into 

underground storage reservoirs. During the winter, when demand for natural gas exceeds 

production and prices increase, natural gas is removed from underground storage. (Figure 8). 

Working Gas in Storage

0

0.5

1

1.5

2

2.5

3

3.5

4

Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07

 trillion cu. ft.

Figure 8

Fig. 8. Natural gas storage levels are seasonal. Natural gas is injected into 

storage during the summer and taken out of storage during winter. 

Data source: EIA, Weekly Working Gas in Underground Storage.
 18 

Generally, storage reservoirs are created by pumping natural gas into either depleted gas 

reservoirs, caverns excavated in subsurface salt formations, or underground aquifers. Not all of 

the gas in underground storage can be recovered because some of the gas must remain to provide 

adequate pressure to pump out the recoverable gas. The volume of natural gas in a storage 

reservoir that can be recovered is referred to as the amount of “working gas” in storage. 

D. Fundamentals of Natural Gas Supply and Demand 

 Natural gas production in the U.S. peaked in 2001. Although high prices have stimulated 

the drilling of many new wells (Figure 9), many of the larger, mature fields, particularly in the 

Gulf of Mexico, are being depleted, so that overall domestic production has declined over the 

past few years (Figure 10). 

 

Number of 

Producing Natural Gas Wells

200

250

300

350

400

450

1990 1992 1994 1996 1998 2000 2002 2004

thousand

Figure 9

Fig. 9. Rising natural prices stimulated the drilling of new wells. 

Data source: EIA, Number of Producing Gas and Condensate Wells. 
 19 

U.S. Annual Natural Gas Production 

18.0

18.5

19.0

19.5

20.0

20.5

21.0

1990 1992 1994 1996 1998 2000 2002 2004 2006

trillion cu. ft.

Figure 10

Fig.10. Despite the increasing number of natural gas wells, domestic production 

is declining. Hurricane Katrina significantly reduced production in 2005. 

Data source: EIA. 

At the same time, demand for natural gas for the generation of electricity is continuing to 

increase. Because natural gas burns cleaner than either coal or oil, and permits for gas-fired 

generation are easier to obtain than for other types of fuel, natural gas has been a popular choice 

for new electrical generating capacity. The amount of natural gas used to generate electricity 

increased by more than 50% between 1996 and 2005, and the capacity of natural gas-fired 

electrical generating facilities has tripled since 1999.14 (Figure 11). 

 

14 American Petroleum Institute, Understanding Natural Gas Markets (2006), at p. 9. 
 20 

Electricity Generated by Natural Gas

0

100

200

300

400

500

600

700

800

1994 1996 1998 2000 2002 2004

million Megawatt-hours

Figure 11

Fig. 11. Demand for natural gas to generate electricity has been increasing. 

Data source: EIA, Electric Power Annual with data for 2005, Table 1.1. 

Declining production of natural gas in the face of increasing demand and limited storage 

capacity has contributed to the rise in natural gas prices over the past several years. Various 

other factors also have pushed up prices. These include rising crude oil prices, which enables the 

price of substitute fuels, such as natural gas, to rise without creating any economic incentives for 

fuel switching. Hurricanes during the summers of 2004 (Ivan) and 2005 (Katrina, Rita, and 

Wilma) destroyed oil and gas drilling platforms in the Gulf of Mexico, resulting in significant 

production losses. Other extreme weather conditions in each of the past few years, such as arctic 

blasts during the wintertime and heat waves during the summer, have also increased demand and 

price volatility. As a result of these various factors, wellhead and residential natural gas prices 

have doubled over the past six years (Figure 12). 
 21 

Residential and Wellhead Prices

Annual Average 

0

2

4

6

8

10

12

14

16

1994 1996 1998 2000 2002 2004 2006

$ per MMBtu

Residential

Wellhead

Figure 12

Fig. 12. Average natural gas prices have doubled since 2000. 

Data source: EIA. 

 These price increases have resulted in large cost increases for the average household that 

uses natural gas for home heating. For example, the average household in the Midwest using 

natural gas for heating paid approximately $750 for natural gas during the 2003-2004 heating 

season (October through March), $855 for the 2004-2005 heating season, and $1,101 for the 

2005-2006 heating season.15 

 Because most of the demand for natural gas in the winter is inelastic—people will pay to 

heat their homes and cook their food regardless of how expensive it gets—demand increases or 

supply shortfalls during the winter months can lead to sharp price spikes. Price spikes have 

occurred in most of the recent winters. (Figure 13). Tight supplies and cold weather led to a 

steep rise in natural gas prices in late 2000 that carried into 2001.16 In February 2003 frigid 

temperatures that froze production wells nearly doubled natural gas prices.17 In mid-January 

2004, New England “faced its coldest weather since 1943,” leading to record-high spot prices in 

New England of as much as $75 per MMBtu.18 The Federal Energy Regulatory Commission 

(FERC) concluded that the 2004 spike “appeared to be the result of a supply shortage driven by 

extraordinary demand that left little residual supply available for allocation through the pricedriven spot market. Buyers were willing to pay record prices because the consequences of 

failure to obtain supply exceeded the cost of paying these unusually high prices.”19 In late 2005, 

U.S. gas supplies “faced unprecedented disruption from hurricanes Katrina and Rita. These 

severe supply disruptions led to sharp price increases that were most severe in the eastern United 

 

15 EIA, Residential Natural Gas Prices, What Consumers Should Know, DOE/EIA-X046 (November, 2006), at p. 4. 

16 EIA, U.S. Natural Gas Market: Recent Trends and Prospects for the Future (May 2001), at p. vii. 17 FERC, Report on the Natural Gas Price Spike of February 2003 (July 23, 2003), at p. 3. 

18 FERC, 2004 State of the Markets Report (June 2005), at pp. 12-14. 

19 Id.
 22 

States.”20 As production was disrupted for several months, prices stayed high until early 2006, 

when warmer winter weather and increased production elsewhere ameliorated the effects from 

the hurricanes. 

Recent Winter Price Spikes

NYMEX Natural Gas Futures

1st month contract 

0

2

4

6

8

10

12

14

16

18

Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06

$ per MMBtu

Dec-Jan 

2001 Feb 2003

Jan 2004

Nov 2004

Dec 2005

Figure 13

Fig. 13. Natural gas prices have spiked in five of the past six winters. 

Data source: EIA, from NYMEX price data. 

 

20 FERC, 2006 State of the Markets Report, at p. 3. 
 23 

IV. NATURAL GAS MARKETS 

“If orgies of speculation are permitted to spread too far . . . the ultimate collapse is 

certain not only to affect the speculators themselves, but also to bring about a general 

depression involving the entire country.”

-- Paul M. Warburg, 192921

Natural gas prices are determined through the interaction of the two major types of 

markets for natural gas: the cash, or physical, market, which involves the purchase and sale of 

physical quantities of natural gas; and the financial markets, which involve the purchase and sale 

of financial instruments whose prices are linked to the price of natural gas in the physical market. 

 This section reviews the nature of these markets and their role in establishing natural gas 

prices. It then provides an overview of the laws and regulations applicable to the major markets 

for energy futures and derivatives. 

A. The Cash Market 

 When natural gas is physically transferred from one firm to another during the process of 

production, transportation, storage, and distribution, the price of the gas is generally set by 

negotiation between the parties who either agree on a fixed price or incorporate a reference to the 

prevailing market price for natural gas at that stage of the process at that particular location. If a 

transaction takes place at a location where there is not a reliable reference price, then the price 

may be set at a differential to the prevailing price at the nearest location where there are enough 

transactions to provide a reference price. 

 Publishers of industry newsletters, such as Platts and Natural Gas Intelligence, take 

surveys of the price of transactions at the key locations where natural gas is sold or delivered, 

and publish daily summaries and monthly “indexes” of those prices. These key locations are 

often referred to as “hubs,” a location where natural gas pipelines converge, or “citygates” where 

gas is delivered to a local distribution company.22 One such location is known as the Henry Hub 

in Louisiana where a large number of natural gas pipelines converge. 

The published daily prices and monthly indices are often used as reference points in 

contracts setting the price of subsequent natural gas transactions. “In Platts’ daily gas survey the 

number of transactions now typically exceeds 3,000.”23 Rather than individually negotiating a 

contract price, buyers and sellers often base the price of the gas on the published prices for 

similar transactions at that location, or at a specified differential to a published price in the event 

that the gas is to be delivered at a different geographic location. 

 

21 Commercial and Financial Chronicle, March 9, 1929, cited in Edward Chancellor, Devil Take the Hindmost: A 

History of Financial Speculation (Farrar Straus Giroux, New York, 1999), at p. 210. 22 See, e.g., Platts, Methodology and Specifications Guide, North American Natural Gas, February 2007. 23 Comments of Platts Before the Federal Energy Regulatory Commission, Transparency Provisions of the Energy 

Policy Act of 2005 (November 1, 2006), Docket No. AD06-11-000, at p. 4. 
 24 

 Large natural gas users, such as industrial users or local distribution companies, usually 

purchase natural gas in the spot market on a daily basis for immediate delivery, or on a monthly 

basis for a fixed amount of gas to be delivered each day of the specified month or months. 

Monthly contracts may be entered into one or more months in advance of the delivery month. 

Until recently, most natural gas delivered pursuant to a monthly contract in the physical 

market was priced according to a published index price for the delivery month. Determining the 

monthly index price for natural gas is a process steeped in industry tradition. Historically, the 

focus has been on transactions which occur during the “bidweek,” which is the last five days of 

the month preceding the month in which the gas is to be delivered. Platts, for example, surveys 

fixed-price transactions entered into during the bidweek, as reported by a large number of major 

gas sellers, and then uses the reported prices to compute a monthly index price for gas to be 

delivered during the following month.24 Monthly purchases of natural gas in the physical market 

typically use that monthly index price, unless the parties have negotiated their own fixed-price 

deal. 

 In recent years, instead of using a published monthly index price derived from reported 

prices, buyers and sellers are increasingly referencing the relevant NYMEX futures contract for 

delivery of natural gas and using the price that is finally settled on for delivery of gas under that 

standard monthly contract. The final settlement price for each NYMEX contract is determined 

by taking the volume-weighted average of prices on the NYMEX during the last half hour of 

trading on the date that the NYMEX contract expires, which is on the third-to-last business day 

of each month. The final NYMEX settlement price is publicly posted shortly after the close of 

trading. 

 Natural gas contracts that reference the NYMEX settlement price are called “physical 

basis” deals. If a physical basis deal seeks to deliver natural gas at a location other than the 

Henry Hub, the delivery point in all standard NYMEX natural gas contracts, the contract adds a 

price differential to the standard settlement price to take into account differences in natural gas 

prices between the Henry Hub and the actual delivery location. 

 In its most recent “State of the Market” report, FERC took note of the growing reliance 

on the NYMEX settlement price as the basis for pricing monthly transactions in the cash market: 

By 2006, most of the transactions that set these [monthly] indices in the Northeast 

United States and along the Gulf Coast were physical basis deals. But many of 

these physical basis deals set their price as the final settlement price for the 

Nymex futures contract at Henry Hub plus a fixed, agreed-upon differential. 

Consequently, in these locations, index prices are effectively an average of these 

 

24 According to Platts, “Eight of the 10 largest gas marketers report prices to publishers, and publishers capture 80% 

of the physical gas volumes sold by the top 25 marketers. Many major gas sellers, primarily producers, have made 

the necessary commitment to report prices in accordance with FERC’s policy statement. However, participation in 

price surveys by large gas buyers, primarily local distribution companies, has been notably lower.” Comments of 

Platts Before the Federal Energy Regulatory Commission, Transparency Provisions of the Energy Policy Act of 

2005 (November 1, 2006), Docket No. AD06-11-000, at p. 1. 
 25 

fixed, agreed-upon differentials added to the final Nymex settlement price. In 

those areas, index prices reflect the Nymex price.25

 In 2007, Platts reported to FERC that its surveys had found: “Physical basis deals [were] 

used at 33 of 41 delivered-to-pipeline locations and at 14 of 22 market center locations in the 

monthly survey. ... In February [2007], for the 47 points where basis is used, basis trade 

represented 54.1% of total volume and 53.4% of the number of deals.”26 

 The close relationship between the NYMEX settlement price for natural gas futures 

contracts and the Platts monthly index price for natural gas in the cash market is shown in 

Figures 14a and 14b. FERC summarized the reasons for the linkage between prices in the cash 

and futures markets as follows: 

As a practical matter, monthly cash physical and futures natural gas prices are and 

must be closely related to one another, if markets are working effectively. The 

fact that many participants can engage in both futures and monthly cash physical 

markets means that any material differences will be arbitraged away. That is, at 

least some market participants will pick the least expensive way to establish a 

position using different combinations of products. In doing so, they will force the 

values of those different combinations to converge. Consequently, big changes in 

cash physical market values naturally affect futures trading, and vice versa.27

 

25 FERC, 2006 State of the Markets Report, at p. 49 (emphasis in original). 26 Supplemental Comments of Platts Before the Federal Energy Regulatory Commission, Transparency Provisions 

of the Energy Policy Act of 2005, Docket No. AD06-11-000, at pp 1-2. The American Gas Association (AGA) 

reports that LDCs continue to rely heavily on monthly price indices for their long- and mid-term supply agreements. 

American Gas Association, LDC Supply Portfolio Management During the 2005-2006 Winter Heating Season, 

(September 7, 2006), at p. 3. The AGA also found that most of these LDCs use financial instruments to hedge at 

least a portion of these purchases: “Eighty-seven percent of the companies responding to the AGA survey indicated 

use of financial instruments to hedge at least a portion of their supply purchases. . . . For this past winter, twentytwo of the sample companies providing data hedged up to 50% of their gas supply purchases during the winter.” Id.

at 4. 

27 FERC, 2006 State of the Markets Report, at p. 48. 
 26 

 Figure 14a 

Monthly Index Price 

and NYMEX Final Settlement Price

$3

$5

$7

$9

$11

$13

$15

Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07

Platts index

NYMEX final settlement

$ per MMBtu

Fig. 14a. The Platts monthly index price and the NYMEX final settlement price 

are closely linked. Data source: Platts. 

 Figure 14b 

Difference Between 

 Monthly Index Price and 

NYMEX Final Settlement Price

-$0.04

$0.00

$0.04

$0.08

$0.12

$0.16

Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07

$ per MMBtu

Fig. 14b. The NYMEX futures contract price and the Platts monthly index price 

typically differ by only a few cents. The 12-cent differential in September 2005 

was due to market disruptions from Hurricane Katrina. Data source: Platts.
 27 

B. The Financial Market

 The natural gas physical or cash market focuses on transactions involving the physical 

transfer of natural gas. Natural gas financial markets, in contrast, focus on the purchase and sale 

of financial instruments whose price is linked to the price of natural gas in the physical market 

but that rarely result in the physical delivery of natural gas. 

The financial markets for energy commodities are often described as consisting of two 

types of markets: “futures exchanges” and “over-the-counter” (OTC) markets. This grouping 

has traditionally turned on whether a particular financial instrument being traded meets the 

statutory definition of a “futures contract” under the Commodity Exchange Act (CEA). Under 

the CEA, financial instruments that meet the statutory definition of a futures contract must be 

traded on a futures exchange regulated by the CFTC. Financial instruments that do not meet the 

legal definition of a futures contract are not required to be traded on a regulated exchange. The 

markets in which these other financial instruments are traded—including both exchanges and 

bilateral transactions—are often referred to as the OTC market. 

Because the definition of a futures contract involves arcane legal considerations 

regarding the wording and elements of a particular type of contract, another analytical approach 

is to group the energy commodity markets according to the economic function and nature of the 

financial instruments being traded. This approach also produces two categories of markets: one 

market consists of the organized commodity exchanges on which standardized contracts for 

energy commodities are traded; the other consists of off-exchange transactions between two 

parties involving contracts that may or may not be standardized. 

The major organized commodity exchanges that trade standardized contracts for natural 

gas and other energy commodities in the United States are NYMEX, which is located in New 

York City, and ICE, whose headquarters is located in Atlanta, Georgia. NYMEX is a fully 

regulated futures exchange overseen by the CFTC, whereas ICE is a virtually unregulated 

exchange that operates largely outside CFTC oversight and the confines of the CEA. 

1. Energy Commodity Exchanges: NYMEX and ICE 

 (a) Characteristics of a Commodity Exchange

Although brokers and others use a variety of methods and technologies to match buyers 

and sellers of financial instruments, a commodity exchange has three key features: (i) trading is 

limited to listed, standardized contracts whose price is linked to the price of the commodity in 

the physical market; (ii) buyers and sellers do not enter contracts directly with each other, but 

rather trade through clearing firms and a clearinghouse; and (iii) the bids and offers are 

transparent to all market participants, and the prices and volumes of completed transactions are 

immediately posted for public review.28 

 

28 Some exchanges charge a fee for access to real-time price and volume information. 
 28 

 (i) Standardized Contracts

 The standardization of contracts is one of the major advantages of trading on an exchange 

as compared to individually negotiating bilateral deals. To execute a trade involving a 

standardized contract, the only term that must be negotiated is the price. A standardized contract 

specifies all other terms for the commodity transaction, such as quantity, quality, whether and 

where physical delivery of the commodity is to occur, and how any subsequent financial 

settlement of the contract is to be calculated. 

 Standardized contracts can be more easily traded than individually negotiated contracts. 

They can be traded many times, to many different people. The standardization of contract also 

improves the price discovery process, as it provides a common reference point for comparing 

transactions. 

 On a commodity exchange, the price negotiation takes place through either the open 

outcry system, which is the traditional system of traders and brokers gesturing and shouting to 

each other bids and offers in trading pits located on the exchange floor, or through an electronic 

system in which bids and offers are posted on computer screens located anywhere and matched 

electronically without any face-to-face contact between the parties or their brokers. 

Three basic types of standardized financial instruments are traded on commodity 

exchanges: futures, swaps, and options. 

Futures contracts. A futures contract is a standardized contract by a buyer to accept and 

a seller to deliver a specified quantity of a particular commodity at a specified place and time in 

the future for a price specified at the time the contract is entered. Rather than provide a 

mechanism for the actual delivery of physical volumes of natural gas, the primary purposes of 

futures contracts are to allow market participants to protect themselves against future price 

changes and provide a market-based mechanism for price discovery.29 The vast majority of 

traders who buy or sell futures contracts do not intend to make or take delivery of the commodity 

under the futures contract. Speculators buy and sell futures contracts in an attempt to profit from 

changes in prices over time. Hedgers use the futures market to lock in the price of future 

purchases or sales. All of these market participants and others look to the futures market for 

information about anticipated trends in supply, demand, and prices. 

Trading on a futures contract is required to be concluded at the end of the month before 

delivery is due. Most traders who are holding futures contracts (“long” positions) will sell an 

equivalent number of contracts so they will not have to take delivery of the underlying 

commodity. Similarly, in the last month of trading, most traders who have sold futures contracts 

(“short” positions) will then buy an offsetting number of futures contracts so they will not have 

to make delivery of the commodity. 

 

29 One of the major differences between a forward contract and a future contract is that in the former delivery is 

intended whereas in the latter is not. See Commodity Futures Trading Comm. v. Co. Petro Marketing Group, Inc., 

680 F.2d 573 (9th Cir. 1982). 
 29 

 Take, for example, a producer of natural gas who has a contract to deliver gas to a client 

several months into the future, and will be paid for that gas according to the price in the cash 

market (the “spot” price) at the time of delivery. The producer is concerned that the spot market 

price for natural gas may fall and reduce or eliminate its profits. At the same time, an industrial 

user who has to purchase gas in the future may be concerned that the spot price in that future 

month may be too high. By entering into a futures contract that fixes the price of natural gas to 

be delivered in the future month, both the producer and the industrial user can protect themselves 

against adverse price movements. 

In addition to natural gas producers and end-users, market speculators may also be 

willing to buy or sell futures contracts and bear the risk of price movements in return for the 

possibility of obtaining a financial gain from the price changes. Many speculators routinely 

trade futures and other financial instruments to profit from changes in the price of the underlying 

commodity. A certain amount of speculation, therefore, plays a vital function in bringing 

liquidity to the market. 

Swaps. Like a futures contract, a commodity swap locks in the value of a commodity at 

a particular price. Unlike a futures contract, however, swaps do not involve the delivery of the 

commodity. In one of the most common types of commodity swaps, the seller of the swap 

agrees to pay the buyer for any increases in the price of the underlying commodity above an 

agreed-upon value (the price of the swap) at the time when the swap expires, and the buyer 

agrees to pay the seller for any decreases below the agreed-upon value. As with a futures 

contract, a seller of a swap is protected against any decreases in the price of the commodity, and 

a buyer is protected against any price increases. 

 Swaps were originally developed in the financial markets to provide a means to hedge 

against fluctuations in currency exchange rates, interest rates, bond rates, and mortgage rates. 

Commodity traders adopted these instruments to provide a better hedge against price risks that 

could not be fully covered by the standardized futures contracts traded on the exchanges. 

 Buyers and sellers of commodity swaps soon recognized, however, that the 

standardization of commodity swaps would facilitate the trading of these instruments and 

enhance the overall liquidity of the swap market. Standardized swaps were developed to parallel 

the performance of futures contracts, and electronic exchanges developed to provide for the 

electronic trading of these standardized swaps, which were often called “futures look-alikes.” 

Today, ICE is the leading exchange for the trading of energy commodity swaps in natural gas 

and electricity. 

 The ICE natural gas swap and the NYMEX natural gas futures contract perform the same 

economic functions. The ICE swap contract even provides that its final settlement price will 

equal the final settlement price of the NYMEX futures contract for the same month, which 

means that the final price for two financial instruments will always be identical. 

 The major difference between the two is that the ICE swap is “financially settled,” 

meaning that the holder of a swap at expiration is not under any obligation to make or take 

delivery of the commodity, but rather will either pay, or be paid, the difference in the price paid 
 30 

for the swap and the final settlement price of the swap. A person who has bought or sold a 

financially-settled contract that has not offset that position before the contract expires will either 

pay or be paid a dollar amount based on the price of the contract at expiry; no physical delivery 

of any commodity is involved. 

 Unlike the holder of a futures contract, the buyer or seller of a financial swap contract 

does not have to trade out of that position prior to expiration of the contract to avoid having to 

make or take delivery of the commodity. 

If a trader buys a swap for $8, for example, and the final settlement price is $9, then the 

trader would be paid $1. This economic result is the same as if the trader had purchased a 

NYMEX futures contract for $8 and then either sold a NYMEX futures contract at settlement for 

the final settlement price of $9, or taken delivery of the natural gas at settlement, and sold the gas 

for $9 in the cash market. Because ICE fixes the final settlement price for its main natural gas 

swap equal to the final settlement price of the corresponding NYMEX futures contract, NYMEX 

futures contracts and ICE swaps provide economically identical hedging and risk-management 

functions for natural gas users and traders. 

Options. An options contract gives the holder of the contract the right, but not the 

obligation, to buy or sell the underlying futures contract at a certain price for a specified time. 

On the opposite side, the seller, or writer of an options contract, incurs an obligation to perform 

should the options contract be exercised by the purchaser.30 Options can also be used for swaps. 

 (ii) Clearing

In addition to standardized financial instruments, another key feature of an exchange is 

the clearinghouse, which is operated by or on behalf of the exchange. In many exchanges, firms 

that are members of the exchange own and operate the clearinghouse. In addition to keeping 

track of all the trades that occur on the exchange each day, the clearinghouse actually clears each 

individual trade and guarantees performance on all the contracts traded on the exchange. Traders 

on an exchange do not actually enter into contractual relationships with each other; rather each 

trades through the clearinghouse which, in effect, acts as a party to every transaction. 

To guarantee contract performance, the members of the clearinghouse deposit funds into 

the clearinghouse. The rules of the exchange also require brokers trading through the 

clearinghouse and their customers to post deposits or “margins” related to the value of the 

positions taken in their trades to cover any losses that may occur. At the end of each day of 

trading these margin accounts are “marked-to-market” – the exchange collects money from 

accounts that have lost value and credits those accounts that have gained value – so that 

sufficient funds to guarantee performance are on deposit at all times.31 In this manner, 

 

30 NYMEX website, Frequently Asked Questions, at http://www.nymex.com/faq.aspx. 31 Marked-to-market is defined by NYMEX as a “[d]aily cash flow system used by U.S. futures exchanges to 

maintain a minimum level of margin equity for a given futures or options contract position by calculating the gain or 

loss in each contract position resulting from changes in the price of the futures or options contracts at the end of each 

trading day.” NYMEX website, Glossary, at http://www.nymex.com/glossary.aspx. 
 31 

“counterparty risk” – the risk that the other party to a trade will default on performance – is 

greatly reduced. 

Traditionally, one of the major advantages of trading on an approved exchange has been 

that the exchange guarantees financial performance and removes counterparty risk. According to 

the Chicago Board of Trade (CBOT), which uses a clearinghouse, “the success of this system is 

obvious. Since its start in 1925, no customer within or outside of the [CBOT] exchange has lost 

money due to default on a futures position.”32 This advantage to trading on an approved 

exchange has diminished in recent years as clearing services have been developed for traders 

entering into standardized contracts off-exchange. 

ICE, for example, has contracted with a clearinghouse for traders who trade standardized, 

cleared products. Unlike NYMEX, ICE does not require its participants to become formal 

members of its exchange or to join a clearinghouse. Instead, ICE allows any large commercial 

company qualifying as an “eligible commercial entity” under the CEA to trade on ICE’s 

electronic exchange without having to become a member of the exchange, pay a fee, or employ a 

broker. ICE has contracted with a third party to provide clearing services for traders who desire 

to have their trades cleared. By trading only with other cleared traders, a party trading on ICE 

can eliminate the risk of default by the other party just as if the trade was conducted on a futures 

exchange. Many of the same large firms that are clearing firms for trading on NYMEX also 

have contracted to be clearing firms for trading on ICE. 

ICE extols the virtues of trading through its clearinghouse: “The introduction of cleared 

OTC trading has revolutionized the market by reducing bilateral credit exposure while improving 

capital efficiency and increasing market liquidity.”33 ICE has also stated the following in a filing 

with the Securities and Exchange Commission (SEC): 

The use of a central clearinghouse rather than the reliance on bilateral trading 

agreements [has] resulted in more participants becoming active in the OTC 

markets. In addition, clearing through a central clearinghouse typically offers 

market participants the ability to reduce the amount of capital required to trade as 

well as the ability to cross-margin positions in various commodities.34

 

32 Chicago Board of Trade, Action in the Marketplace. 33 ICE, “You Are Cleared to Trade,” ICE website, at https://www.theice.com/otc_cleared.jhtml. 34 Intercontinental Exchange Inc., Form 10-Q, filed May 2, 2006 (“ICE 10-Q”), at p. 16. ICE derives significant 

revenues from its cleared transactions. In its most recent 10-K filed with the SEC, ICE reported, “Transaction fees 

derived from trade execution in cleared OTC contracts were $131.2 million for the year ended December 31, 2006 

and represented 71.8% of our total OTC revenues during the year ended December 31, 2006, net of intersegment 

fees.” Intercontinental Exchange Inc., Form 10-K, filed February 26, 2007, at p. 9. ICE also wrote: “While we 

derive no revenue directly from providing access to these clearing services, we believe the availability of clearing 

services and attendant improved capital efficiency has attracted new participants to the markets for energy 

commodities trading.” Id. 
 32 

 (iii) Transparency

The third key feature of an exchange is that bids, offers, and basic data about transactions 

are transparent to all market participants, whether or not they are parties to a particular trade. On 

the floor of an open-outcry exchange, bids and offers are either shouted or gestured for all floor 

brokers and traders to see and hear; on an electronic exchange the bids and offers are 

electronically posted to everyone with an access terminal. 

Each time a transaction is completed on an exchange, the exchange records the names of 

the parties and the time and terms of the transaction, including the price and the volume. The 

prices and volumes of each transaction are immediately posted on the exchange “ticker” for all 

market participants to see. 

 (b) NYMEX Natural Gas Futures and ICE Natural Gas Swaps 

 In the United States, the major exchange-traded financial contracts used for natural gas 

are the NYMEX natural gas futures contract and the corresponding ICE natural gas swap (called 

“the Henry Hub” swap). 

The standard natural gas futures contract traded on NYMEX is for a volume of 10,000 

MMBtu of natural gas to be delivered at the Henry Hub during the month specified in the 

contract. The contract directs that, “All deliveries shall be made at as uniform as possible an 

hourly and daily rate of flow over the course of the delivery month.”35 Traders can buy or sell a 

standardized NYMEX futures contract to deliver natural gas in any future month in any year for 

up to five years into the future. 

 Under NYMEX rules, trading on a futures contract terminates on the third business day 

prior to the month in which delivery of the natural gas is due. A futures contract is said to 

“expire” after the last day of permitted trading. The final price of the futures contract is 

determined using a formula that focuses on the trades made during the last half hour of trading 

on the last day of trading. Trading ends each day at 2:30 p.m. The last half hour is often referred 

to as the “final settlement period,” and the final contract price is often referred to as the “final 

settlement price.” The final settlement price is important, because many natural gas contracts, 

both on and off exchange, state that the price to be used in the contract will equal the final 

settlement price of the corresponding NYMEX futures contract. 

NYMEX futures contracts often experience the most trading in the last few months 

before the contract expires. It is not uncommon for many trades to take place during the last 

trading day, and even during the last half hour. The CFTC and NYMEX have focused 

significant attention on the trading that takes place near the expiration of a futures contract in an 

attempt to prevent large trades from inappropriately affecting the final settlement price. For 

example, the CFTC has imposed a “position limit” that bars any trader from buying or selling 

more than 1,000 contracts during the last half hour of trading, unless the trader has obtained an 

exemption or made another arrangement with regulators. 

 

35 NYMEX, Natural Gas Futures, Specifications, NYMEX website at http://www.nymex.com/NG_spec.aspx. 
 33 

Many natural gas producers and users buy or sell futures contracts for up to 12 months in 

the future to hedge their purchases or sales. The volume of trading in natural gas contracts more 

than 18 months in the future is not large, and most of the trading this far into the future is done 

by speculators. 

 The ICE natural gas swap has many features similar to the NYMEX futures contract, but 

there are also some differences. Table 2 presents the standard specifications applicable to both 

types of natural gas contracts: 

Table 2 

NYMEX and ICE Basic Natural Gas Contract Specifications

NYMEX Natural Gas Futures 

Contract 

ICE Natural Gas Henry Hub 

Swap 

Trading Unit 10,000 MMBtu 2,500 MMBtu 

Price Unit $ per MMBtu Same as NYMEX 

Last Trading Day 

Trading terminates three 

business days prior to the first 

calendar day of the delivery 

month. 

Same as NYMEX 

Settlement Type Physical Financial 

Final Settlement 

Price 

Volume-weighted average of 

prices of trades during the last 

half-hour of Last Trading Day 

(2:00 to 2:30 PM). 

Same as NYMEX Final 

Settlement Price on Last Trading 

Day 

Delivery 

Location Henry Hub, Louisiana N/A 

Delivery Period 

First calendar day of delivery 

month through last calendar day 

of delivery month. 

N/A 

Trading Hours 

Open outcry: 9:00 AM - 2:30 PM 

Electronic trading: 

6:00 PM of the prior trading day 

to 5:15 PM of the trading day. 

Electronic trading: 

2:30 PM of the prior trading day 

to 2:30 PM of the trading day. 

 As Table 2 indicates, the NYMEX natural gas futures contract is physically settled, 

meaning that a trader that is a net buyer of futures contracts for a particular month (a “long” 

position) must either sell an equivalent number of contracts for that month prior to the expiration 

of the contract or take delivery of the amount of gas in the contracts at the contract delivery 

location, which for natural gas futures contracts is the Henry Hub in Louisiana. Similarly, a 

trader that is a net seller of futures contracts for a particular month (a “short” position) must 

either buy an equivalent number of contracts prior to expiration or make delivery of the net 

volume of natural gas in the trader’s short position at the contract delivery location. 

 Like other commodity traders, natural gas traders rarely make or take delivery pursuant to 

a futures contract. Buyers and sellers of physical quantities of natural gas use futures contracts 

to hedge their exposure to price changes in the physical market rather than as a means to acquire 

physical quantities of natural gas. Many large traders nonetheless have acquired the capability to 
 34 

make or take delivery of natural gas in order to obtain the flexibility at contract settlement to not 

have to buy or sell futures contracts if the prices in the futures market are less favorable to the 

trader than the prices in the cash market. 

 NYMEX futures contracts can be bought or sold either on the floor of the exchange in 

New York, through the open outcry process, or through the NYMEX electronic trading platform, 

called Globex, where the bids and offers appear on a computer screen, which can be located 

anywhere. Since its introduction last summer, the Globex electronic trading system has become 

a widely used platform for trading the NYMEX natural gas futures contract.36 The prices and 

volumes of all completed transactions are immediately posted to the market and can be viewed 

from the floor of the exchange, on an electronic trading screen, or through paid subscription. 

Basic daily trading data, including daily trading volume, the closing and daily settlement price, 

and open interest, is available for free on NYMEX’s website.37 

 The main natural gas contract traded on ICE is functionally equivalent for risk 

management purposes to the NYMEX natural gas futures contract, but is labeled by ICE as a 

“swap” rather than a futures contract. As previously explained, because the final settlement price 

of the ICE Henry Hub natural gas swap is pegged to the final settlement price for the 

corresponding NYMEX futures contract, these two types of contracts behave identically for riskmanagement purposes.38 All bids and offers are immediately posted on the ICE trading screen, 

as are the price and volume of all completed trades. Basic daily trading data is available for a 

fee.39 

 All of the traders interviewed by the Subcommittee considered NYMEX natural gas 

futures and ICE natural gas swaps to be functionally equivalent and interchangeable for risk 

management purposes. These traders stated their decisions on which type of contract to trade – 

futures or swaps – are based on which of the two markets has greater liquidity and on which 

 

36 NYMEX exchange-wide statistics indicate that as of mid-April 2007, the volume of futures contracts traded 

electronically was greater than twice the volume traded on the NYMEX floor. NYMEX.com: Estimated Exchange 

Wide Volume, 04/13/2007, at http://www.nymex.com/volume.aspx. 

37 The Commodity Exchange Act requires regulated markets to publish daily information about settlement prices, 

volume, open interest, and opening and closing ranges for all actively traded contracts. 7 U.S.C. § 7(d). Open 

interest is defined by the CFTC as “the total of all futures and/or option contracts entered into and not yet offset by a 

transaction, by delivery, by exercise, etc.” Open interest held or controlled by a trader is referred to as that trader’s 

position. See CFTC Backgrounder, The Commitment of Traders Report, at http://www.cftc.gov/opa/backgrounder/ 

opacot596.htm. 

38 Because the final settlement price for the ICE swap is defined to be the final settlement price of the NYMEX 

futures contract for the same month, the most significant divergence in price between the two contracts often occurs 

during the final 30 minutes of trading for the NYMEX contract, which is used to compute the final NYMEX 

contract price. (The NYMEX final settlement price is computed by taking the volume-weighted average price of all 

trades during the final 30-minute period.) Most of the trading during these final 30 minutes will occur on NYMEX 

rather than ICE, and hence the NYMEX price often will “lead” the ICE price during this period. Based on the ICE 

and NYMEX data reviewed by the Subcommittee, as well as trader interviews, this final settlement period is the 

only period in which it can be categorically stated that one exchange “leads” the other in price. 

39 Under the Commodity Futures Modernization Act, the CFTC may require exempt commercial markets to publish 

similar information if the CFTC determines that the market “performs a significant price discovery function” for the 

underlying cash market. 7 U.S.C. § 2(h)(4)(D). The CFTC has not made this determination for any of the futures 

look-alike contracts traded on ICE. 
 35 

contract is more favorably priced. Data provided to the Subcommittee shows that many traders 

have positions in multiple contracts on both exchanges at the same time. 

 Several traders explained to the Subcommittee that there is significant volume of 

arbitrage trading between the ICE swaps market and the NYMEX futures market. Arbitrage 

traders seek to exploit any differences in price that temporarily emerge during the course of 

trading; by buying the lower-priced contract and then selling the higher-priced contract, an 

arbitrage trader will make a profit as the two prices converge. As more and more traders pursue 

this strategy, however, the lower-priced contract rises in price, and the higher-priced contract 

falls in price, so that any price differences soon disappear. 

 Figures 15a and 15b show how closely the price of an ICE swap matches the price of the 

corresponding NYMEX futures contract. The interrelatedness of the price curves for these two 

types of contracts means that the price risks from purchasing an ICE swap are identical to the 

price risks from purchasing a NYMEX futures contract. 

 Figure 15a 

NYMEX Futures and ICE Swaps 

for October 2006

Daily Prices

0

2

4

6

8

10

12

Jan-06

Feb-06

Mar-06

Apr-06

May-06

Jun-06

Jul-06

Aug-06

Sep-06

NYMEX daily settlement price

ICE last trade price

$ per MMBtu
 36 

 Figure 15b 

NYMEX Futures and ICE Swaps 

for October 2006

Difference in Daily Price

-12

-8

-4

0

4

8

12

Jan-06

Feb-06

Mar-06

Apr-06

May-06

Jun-06

Jul-06

Aug-06

Sep-06

cents per MMBtu

Figs. 15a and 15b. Although ICE and NYMEX prices closely track each other, 

the NYMEX contract often is priced a few cents higher than the ICE swap. 

(Traders differ on why.) For each trading day, these charts show the NYMEX 

daily settlement price and the last traded daily price on ICE. Data sources: 

NYMEX and ICE. 

Since both types of exchange-traded contracts are cleared, there is no greater 

counterparty risk from trading in one market rather than the other. In sum, the structure of the 

ICE swaps and NYMEX futures contracts, the virtually identical prices of these two contracts, 

and the testimony of traders provide compelling evidence that the NYMEX natural gas futures 

contract and the corresponding ICE natural gas Henry Hub swap are economically 

indistinguishable financial instruments for risk-management purposes. 

2. Off-Exchange Bilateral Transactions 

 In addition to using an organized exchange to find a counterparty and a suitable price, 

traders often seek to find a counterparty on their own or through a broker. Traders also can use 

the ICE trading screen to enter into bilateral, non-cleared transactions rather than cleared 

transactions. 

 Traders who use a broker to facilitate a trade pay the broker a commission for his or her 

services in locating a counterparty. Although the firms that specialize in bringing parties 

together for off-exchange energy commodity trades have historically been referred to as “voice 

brokers” because of the way they traditionally conducted their business – over the telephone – 

this term no longer accurately describes their practices. Today, much of the process of soliciting 

and communicating with potential counterparties is conducted through the use of e-mails and 

instant messaging. In many instances, voice communication is used only to formally 
 37 

acknowledge acceptance of terms that already have been agreed to by means of electronic 

communication.40

 Unlike trades conducted on an exchange, where each party to a trade remains anonymous 

to the other, each party to a bilateral off-exchange transaction learns the identity of the other 

party. Unless the parties to an off-exchange transaction agree to submit their trade for clearing, 

each party to a bilateral, non-cleared transaction must bear the risk of non-performance by the 

other party, and thus needs to know the identity of that party to determine their 

creditworthiness.41 In addition, because a bilateral deal is entered into off-exchange, the price 

and volume of the trade is not posted for other market participants. Hence, these bilateral deals 

do not provide a real-time price discovery mechanism for other traders to nearly the same extent 

as the trades conducted on an exchange do. 

 Both NYMEX and ICE provide clearing services for parties that want to reduce their 

counterparty risk by having their off-exchange bilateral transactions cleared. Although there is 

no market-wide data on the percentage of off-exchange bilateral trades that are submitted for 

clearing; anecdotal evidence presented to the Subcommittee and the trading data reviewed by the 

Subcommittee indicates that most off-exchange bilateral transactions involving standardized 

natural gas contracts – perhaps as much as 80-90% – are later submitted for clearing. To submit 

a trade for clearing, each party must have established an account with a clearing firm and the 

transaction must involve one of the standardized contracts approved by the exchange. Unlike 

transactions completed on an exchange, there is no real-time reporting of the prices and volumes 

of off-exchange transactions that are subsequently submitted for clearing.42 

 ICE will accept for clearing a bilateral transaction that involves a standardized contract 

that is also traded on the ICE electronic exchange. Hence, ICE provides a trader with three 

different ways to accomplish risk-management goals: (1) use of the electronic exchange to enter 

into a trade involving a cleared standardized contract; (2) use of the ICE electronic exchange 

trading screen to identify a counterparty to a bilateral non-cleared transaction involving one of 

the standardized contracts traded on ICE; and (3) use of ICE to clear a standardized ICE-traded 

bilateral contract entered into off-exchange. 

 

40 Subcommittee interviews of natural gas traders. 41 Typically, traders provide brokers with a list of acceptable potential counterparties. The brokers will then seek to 

facilitate trades only between mutually acceptable counterparties. In these brokered transactions, a trader may not 

learn the actual identity of a counterparty until after the trade has been agreed to, although the trader will know that 

the counterparty is acceptably creditworthy. Similarly, traders that choose to use the ICE electronic trading screen 

to identify counterparties for bilateral, non-cleared transactions will inform ICE of the firms with which it has 

appropriate credit arrangements; the ICE trading screen observed by that trader will then show bids and offers only 

from such approved counterparties. Once the bilateral transaction is executed, each party learns the actual identity 

of the other party. Id. 42 The ICE screen displays the price and volume of off-exchange transactions submitted for clearing (ICE calls these 

“block” trades), but there may be a significant time delay from when the initial transaction is completed and when it 

is sent to ICE for clearing. Several traders stated to the Subcommittee that because of this potential delay they do 

not view the reported prices and volumes of block trades as a reliable indicator of current prices and volumes. 
 38 

 The NYMEX ClearPort system also provides both a trading and clearing service. 

According to NYMEX: 

NYMEX ClearPort gives market participants unparalleled flexibility to either 

trade this extensive slate of derivatives through the NYMEX ClearPort trading 

system or, to conduct their own transactions off-exchange, negotiate their own 

prices, and still take advantage of the financial depth and integrity of the 

Exchange clearinghouse by submitting the transactions through NYMEX 

ClearPort clearing.43 

 Because the CEA prohibits the trading of futures except on a regulated exchange, traders 

cannot enter into natural gas futures contracts off-exchange and then submit them for clearing. 

NYMEX, however, offers a swap contract for trading or clearing through ClearPort that, like the 

ICE Henry Hub natural gas swap, is economically equivalent to its natural gas futures contract. 

Like the ICE swap, the NYMEX natural gas swap financially settles at the final settlement price 

of the NYMEX natural gas futures contract, and the standard volume is one-quarter the volume 

of the natural gas futures contract. In contrast with ICE, however, the NYMEX Henry Hub 

natural gas swap is considered to be a part of the natural gas futures market for regulatory 

purposes, and thus NYMEX applies the same regulatory oversight to the trading of this contract 

as it does to the trading of the natural gas futures contract.44 

 Figure 16 shows the volumes of the basic Henry Hub natural gas futures contracts and 

swaps traded on ICE and NYMEX for a single contract month, October 2006. As shown in these 

charts, the volumes of the natural gas swaps traded on the ICE electronic exchange are 

comparable to – and on some days even greater than – the volumes of the natural gas futures 

contracts traded on NYMEX, particularly in the last couple of months prior to the expiration of 

the contract. 

 Additional figures for additional contract months are provided in Appendix A. 

Generally, these figures indicate that for more distant contract months, trading volumes are 

greater for the NYMEX natural gas futures contract than the comparable ICE swap, making it the 

more liquid contract in the distant months. The data also suggest that off-exchange bilateral 

transactions may represent a significant portion of outstanding positions in these long-dated 

contracts. 

 Overall the 2006 trading data show that NYMEX and ICE are active commodity markets, 

in competition with each other, and whose traders play a central role in determining natural gas 

prices in the United States. 

 

43 NYMEX, NYMEX ClearPort Services, at http://www.nymex.com/cp_overview.aspx. Although substantial 

volumes of off-exchange contracts are submitted to ClearPort for clearing, the ClearPort trading platform has yet to 

develop a substantial volume of exchange-type trading. 

44 Interview with NYMEX, March 27, 2007. 
 39 

Figure 16 

NYMEX AND ICE TRADING VOLUMES

NATURAL GAS CONTRACTS FOR OCTOBER 2006

ICE ELECTRONIC TRADING (CLEARED)

0

30000

60000

90000

 OTC CLEARED ON ICE

0

30000

60000

90000

Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06

 NYMEX FUTURES (NG)

0

30000

60000

90000

OTC CLEARED ON NYMEX (NN)

0

30000

60000

90000

Fig. 16. Volume of contracts traded and cleared on NYMEX and ICE for natural gas contracts for October 

2006. Data source: NYMEX and ICE. 
 40 

C. Market Regulation

Although both NYMEX and ICE play an integral role in natural gas price formation, the 

two exchanges are subject to vastly different regulatory restrictions and government oversight 

under current federal law. 

 Section 3 of the CEA states that the purpose of the Act is to establish “a system of 

effective self-regulation of trading facilities, clearing systems, market participants and market 

professionals under the oversight of the [Commodity Futures Trading] Commission.” Under this 

tiered regulatory structure, the exchanges have the primary responsibility for market surveillance 

and oversight. The CFTC’s regulatory program is designed to rely on the market oversight and 

surveillance conducted by the exchanges, but the CFTC also supplements the exchanges’ efforts 

with its own surveillance and oversight of trading. One of the key purposes of the CFTC’s 

commodity market surveillance and oversight is “to deter and prevent price manipulation or any 

other disruption to market integrity.”45 

 Due to provisions in the Commodity Futures Modernization Act of 2000 (CFMA) that 

are often referred to as the “Enron loophole,” electronic energy exchanges are exempt from this 

system of regulation.46 The result is that one type of energy exchange – represented by NYMEX 

– is both self-regulated and regulated by the CFTC, whereas the other type of energy exchange – 

exemplified by ICE – is not required to be self-regulated and is not regulated by the CFTC. As 

will later be shown, ICE’s exemption from regulatory oversight has undermined the 

effectiveness and market integrity of both ICE and NYMEX in pricing U.S. energy commodities. 

1. Regulated Markets (NYMEX) 

 The CEA, as amended by the CFMA, requires that all futures contracts be traded on a 

futures exchange that has been approved by the CFTC as a “Designated Contract Market” 

(DCM). To qualify as a DCM, an exchange must develop a market regulation and oversight 

program that complies with the core principles set forth in the CEA. These core principles 

require a DCM to maintain certain programs and capabilities to prevent market manipulation and 

to ensure fair and orderly trading: 

• “the ability to prevent market manipulation through market surveillance, compliance, 

and enforcement practices and procedures, including methods for real-time monitoring 

of trading and comprehensive and accurate trade reconstructions;”47

• the enforcement of rules to ensure fair and equitable trading;48 

 

45 7 U.S.C. § 5(b) (2006). 

46 The legislative history of the Enron loophole is set forth in the Subcommittee’s previous reports. See Minority 

Staff of the Permanent Subcommittee on Investigations, U.S. Strategic Petroleum Reserve: Recent Policy Has 

Increased Costs to Consumers but not Overall U.S. Energy Security, S. Prt. 108-18, at p. 185, 108th Congress, 1st

Sess. (Mar. 5, 2003). 

47 7 U.S.C. § 7(b)(2) (2006). 

48 7 U.S.C. § 7(b)(3) (2006). 
 41 

• the enforcement of disciplinary rules that authorize the board of trade to discipline, 

suspend, or expel market participants that violate the rules of the exchange; 49 

• the trading only of contracts that are “not readily susceptible to manipulation;”50

• the monitoring of trading “to prevent manipulation, price distortion, and disruption of 

the delivery or cash-settlement process;”51

• the adoption of position limits or position accountability for speculators “to reduce the 

potential threat of market manipulation or congestion, especially during trading in the 

delivery month;”52

• the emergency authority to suspend trading in any contract, require traders to liquidate 

positions, or impose special margin requirements;53 and 

• daily publication of trading information.54

 NYMEX is one of thirteen exchanges the CFTC has designated as a contract market.55 

To meet its obligations to monitor trading, prevent manipulation, and ensure the financial 

integrity of its markets, NYMEX has established a regulatory program, which is headed by a 

Chief Regulatory Officer, to monitor daily trading, determine overall and daily margin 

requirements, oversee and evaluate the conduct of brokers and traders, monitor the performance 

of clearing firms, establish and enforce position limits, investigate complaints, and bring 

enforcement actions for violations of the exchange’s rules of conduct. The NYMEX regulatory 

program has an annual budget of approximately $6.2 million, most of which supports the salaries 

of the nearly 60 people in that program. 

 2. Unregulated Markets 

 a) ICE 

 

 None of these core principles apply to ICE. ICE has no legal obligation to monitor 

trading, no legal obligation to prevent manipulation or price distortion, and no legal obligation to 

ensure that trading is fair and orderly. In addition, the CFTC has no authority or obligation to 

monitor trading on ICE. As a result, there is no regulatory oversight of trading on ICE. 

 ICE’s unregulated status is due to the 2000 enactment of the so-called Enron loophole in 

the CFMA, which added section 2(h)(3) to the CEA. Section 2(h)(3) exempts from CFTC 

 

49 7 U.S.C. § 7(b)(5) (2006). 

50 7 U.S.C. § 7(d)(3) (2006). 

51 7 U.S.C. § 7(d)(4) (2006). 

52 7 U.S.C. § 7(d)(5) (2006). 

53 7 U.S.C. § 7(d)(6) (2006). 

54 7 U.S.C. § 7(d)(7) (2006). The CFTC’s regulations at 17 C.F.R., Part 38, Appendix A, provide guidance on 

maintaining compliance with these core principles. 

55 See CFTC.gov, Designated Contract Markets Registered with the CFTC, at http://www.cftc.gov/dea/ 

deadcms_table.htm?from=home&page=epexchcontent#Designated_Contract_Markets. 
 42 

oversight all agreements, contracts, and transactions in energy and metals (“exempt 

commodities”) that are traded on electronic trading facilities between “eligible commercial 

entities” (ECEs).56 Generally, an ECE must be a large financial institution, insurance company, 

investment company, corporation or individual with significant assets, employee benefit plan, 

government agency, registered securities broker, or futures commission merchant. An ECE may 

not act as a broker for another party. A market operating under section 2(h)(3) is deemed an 

“exempt commercial market” (ECM) – exempt from CFTC oversight.57

 The CEA imposes few requirements on exempt commercial markets. An ECM is subject 

to the CEA’s general statutory prohibitions against fraud and price manipulation. An ECM must 

report summary market data to the CFTC and if the CFTC determines that the market performs a 

significant price discovery function in the cash market – which the CFTC has never done for any 

market – the ECM must provide volume and price data to the public. An ECM also must keep 

trading records and inform the CFTC of complaints it receives about trading practices. Other 

than these broad provisions, an ECM is exempt from the CFTC’s regulatory oversight. 

 The CFTC describes its lack of authority over exempt commercial markets as follows: 

In contrast to its authority over designated contract markets and registered 

derivatives transaction facilities, the CFTC does not have general oversight 

authority over exempt commercial markets. Exempt commercial markets are not 

registered with, or designated, recognized, licensed, or approved by the CFTC.58 

 

The CFTC does not apply any of the oversight or monitoring measures it uses to oversee 

regulated futures markets like NYMEX to exempt commercial markets like ICE. Table 3 

compares the oversight mechanisms that apply to the two types of exchanges. 

Table 3 

NYMEX and ICE 

Differences in Measures to Prevent Price Manipulation 

Does the Measure Apply to: 

Measure to Prevent Price Manipulation Futures Markets 

(NYMEX) 

Exempt Markets 

(ICE)

CFTC Market Surveillance Program 

• CFTC staff monitoring of daily trading reports Yes No 

• Weekly reports and reviews for expiring 

contracts Yes No 

• Option of special data call by CFTC Yes Yes 

 

56 7 U.S.C. § 2(h)(3) (2006). 

57 7 U.S.C. § 1a(11) (2006). 

58 See CFTC, Exempt Commercial Markets That Have Filed Notice with the CFTC, at CFTC website at 

http://www.cftc.gov/dea/dea_ecm_table.htm. 
 43 

Does the Measure Apply to: 

Measure to Prevent Price Manipulation Futures Markets 

(NYMEX) 

Exempt Markets 

(ICE)

Core Principles for Exchange Operation 

• Exchange is responsible for monitoring 

compliance with market rules Yes No 

• Traded contracts must not be readily 

susceptible to manipulation Yes No 

• Exchange must monitor trading to prevent 

manipulation, price distortion, and disruption 

of the delivery or cash-settlement process 

Yes No 

• Position limits for speculators to reduce the 

threat of manipulation or congestion Yes No 

• Emergency authority to liquidate positions, 

suspend trading, or impose special margin 

requirements 

Yes No 

• Daily submission of trading data to CFTC Yes Limited 

• Daily publication of trading data Yes No 

• Exchange must keep records of trading Yes Yes 

Large Trader Reporting 

• Large trader reporting by clearing members Yes No 

• Large trader reporting by exchanges Yes Voluntarily 

provided by ICE 

• Trading account information filed by traders Yes No 

 b) Off-Exchange Bilateral Transactions 

 Several provisions of the CFMA also exempt from government oversight bilateral 

transactions in energy commodities that are individually negotiated by the parties and that are 

“not executed or traded on a trading facility.” Under section 2(g) of the CEA, for example, 

which was added to the CEA by the CFMA in 2000, energy swaps are placed outside of the 

Act’s requirements. Section 2(g) provides that all agreements, contracts, and transactions “in a 

commodity other than an agricultural commodity” between “eligible contract participants” that 

are individually negotiated by the parties and that are “not executed or traded on a trading 

facility” are fully exempt from all regulation under the CEA.59 

 

59 7 U.S.C. § 2(g) (2006). The term “eligible contract participant” (ECP) includes financial institutions; insurance 

companies; corporations, trusts, and partnerships with total assets greater than $10 million; large pension benefit 

plans, governmental entities, natural persons with assets greater than $5 million who are entering the transaction for 

risk management purposes, and certain others. Id. at § 1a(12). The term ‘trading facility’ means a person or group 

of persons that constitutes, maintains, or provides a physical or electronic facility or system in which multiple 

participants have the ability to execute or trade agreements, contracts, or transactions by accepting bids and offers 

made by other participants that are open to multiple participants in the facility or system.” Id. at § 1a(33). An 
 44 

 Section 2(h)(1) of the CEA provides a similar exclusion. Section 2(h)(1) was intended to 

exempt from regulation dealer markets and one-to-many trading platforms, such as the defunct 

“Enron Online,” in which one person or firm would act as the counterparty to many or all other 

traders. This section provides that all agreements, contracts, and transactions in an “exempt 

commodity,” which includes both energy and metal commodities, between “eligible contract 

participants” and “not entered into on a trading facility” are generally exempt from the 

requirements of the CEA.60 Unlike the swap transaction exclusion, this exemption applies even 

if the agreement, contract, or transaction is not individually negotiated. 

 One of the sources of confusion following the passage of the CFMA is the inconsistency 

between sections 2(g) and 2(h)(1) – whereas § 2(g) totally excludes energy and metals swaps that 

are individually negotiated from the CEA, § 2(h)(1) exempts energy and metals transactions 

from the exchange-trading and other requirements but generally applies the anti-fraud and antimanipulation provisions to over-the-counter transactions in these commodities. It is not clear 

whether the exclusion provision takes precedence over the exemption provision, or vice versa. 

 Moreover, to the extent that a negotiation over price can be considered “an individual 

negotiation,” it would appear that sections 2(g) and 2(h)(1) cover the same transactions and are 

in direct conflict regarding the applicability of the CEA’s anti-fraud and anti-manipulation 

provisions. The CFTC staff interprets the term “individual negotiation” to include price 

negotiations; under this interpretation there is no difference between sections 2(g) and 2(h)(1). 

Under this interpretation, all instruments traded under 2(h)(1) on “one-to-many” facilities or 

through dealer-brokers could be considered excluded swaps. 

 Off-exchange bilateral transactions that would be wholly or partially exempt from CFTC 

regulation under either of these exemptions may be brought within the CFTC’s scope of 

regulation if those transactions are subsequently submitted for clearing to a CFTC-regulated 

market. Thus, for example, off-exchange bilateral transactions that are subsequently submitted 

to NYMEX for clearing are regulated as futures contracts. Off-exchange bilateral transactions 

that are subsequently submitted to ICE for clearing, however, are still generally exempt from 

CFTC regulation. 

D. Excessive Speculation 

In addition to requiring market regulation and oversight, and prohibiting market 

manipulation, the CEA prohibits excessive market speculation. Section 4a(a) of the CEA directs 

the CFTC to establish limits on speculation in order to prevent “sudden or unreasonable 

fluctuations or unwarranted changes” in the price of commodities traded on an exchange: 

 “electronic trading facility” is a trading facility that “operates by means of an electronic or telecommunications 

network” and maintains an audit trail of bids, offers, orders, and transactions on the facility. Id. at § 1a(10). 

60 7 U.S.C. § 2(h)(1) (2006). “The term ‘exempt commodity’ means a commodity that is not an excluded 

commodity or an agricultural commodity.” Id. at § 1a(14). “Excluded commodities” are a variety of financial 

derivatives, including interest rate, currency, equity, debt, credit, weather, economic index, and other derivatives 

based on one or more commodities for which there is no cash market or whose price levels are not within the control 

of any party to the transaction. Id. at § 1a(13). 
 45 

Excessive speculation in any commodity under contracts of sale of such commodity for 

future delivery made on or subject to the rules of contract markets or derivatives 

transaction execution facilities causing sudden or unreasonable fluctuations or 

unwarranted changes in the price of such commodity, is an undue and unnecessary 

burden on interstate commerce in such commodity. For the purpose of diminishing, 

eliminating, or preventing such burden, the Commission shall . . . fix such limits on the 

amounts of trading which may be done or positions which may be held by any person.61

The CFTC explains, “All agricultural and natural resource and many financial futures and 

options contracts are subject to speculative position limits. For several markets (corn, oats, 

wheat, soybeans, soybean oil, soybean meal, cotton), the limits are determined by the 

Commission and set out in Federal regulations. For all other markets, the limits are determined 

by the exchanges according to standards established by the Commission.”62 

 Because the potential for congestion, disruption, and price manipulation is highest during 

the month in which a contract expires (termed either the “spot” or “expiration” month), the 

CFTC applies and requires more stringent speculative position limits during the spot month. 

CFTC’s regulations state: “For physical delivery contracts, the spot month limit level must be no 

greater than one-quarter of the estimated spot month deliverable supply.”63 For the spot month 

in cash-settled markets, an exchange must establish speculative position limits “no greater than 

necessary to minimize the potential for manipulation or distortion of the contract’s or the 

underlying commodity’s price.”64 

 CFTC regulations and exchange rules allow a trader to be granted an exception to the 

speculative position limits if they are engaged in “bona fide hedging” rather than speculating. 

By definition, traders who are using the futures market to offset or “hedge” a risk in the physical 

market are not speculating on price changes in either the physical or futures market; because of 

their hedge they neither gain nor lose from price changes in the futures market. To achieve this 

price neutrality, a trader needs to be able to take a position in the futures market that is equal to 

and opposite to their position in the cash market. Hence, the CFTC’s regulations allow a trader 

to apply for and receive a “hedge exemption” for positions or transactions whose purpose is “to 

offset price risks incidental to commercial cash or spot operations and such positions are 

established and liquidated in an orderly manner in accordance with sound commercial 

practices.”65 Traders seeking a hedge exemption must apply for a specific exemption and supply 

documentation to support the application. 

 

61 7 U.S.C. § 6a(a) (2006). 

62 CFTC, Backgrounder: Speculative Limits, Hedging, and Aggregation in Commodity Futures and Options, CFTC 

website, at http://www.cftc.gov/opa/backgrounder/opaspeclmts.htm. In calculating position limits, the CFTC and 

the exchanges will aggregate multiple positions that are subject to common ownership as if they were held by a 

single trader, and will combine futures and options positions on those futures to obtain an aggregate futuresequivalent position in that contract. 

63 17 C.F.R. § 150.5 (2002). 

64 Id. 65 17 C.F.R. § 1.3(z) (2002). 
 46 

 For certain futures markets, including the energy markets, the CFTC has authorized 

exchanges to establish “accountability levels” rather than position limits for traders holding 

contracts in months other than the spot month.66 The CFTC explains: 

If a market has accountability rules, a trader—whether speculating or hedging—is 

not subject to a specific limit. Once a trader reaches a preset accountability level, 

however, he must provide information about his positions upon request by the 

exchange. Depending on the size of the market and type of commodity, any 

trader over the accountability level must also consent to stop increasing his 

position if so ordered by the exchange.67

 In compliance with the CFTC’s directives, NYMEX has established position limits and 

accountability levels for various energy contracts.68 The NYMEX position limits and 

accountability levels are shown in Table 4. 

Table 4 

Position Limits and Accountability Levels for NYMEX Energy Futures Contracts 

Position Limits 

(# of contracts) 

Accountability Levels 

(# of contracts) Market 

Expiration Month Net Single Month 

(other than expiration)

Net All Months 

Combined

Natural Gas 1,000 for last 3 days 12,000 12,000 

RBOB Gasoline 1,000 for last 3 days 7,000 7,000 

Heating Oil 1,000 for last 3 days 7,000 7,000 

Crude Oil 3,000 for last 3 days 20,000 20,000 

 In contrast to NYMEX, ICE has established no position limits or accountability levels for 

its traders. That means a trader can speculate without limit by trading on ICE, where no such 

restrictions apply. As the Subcommittee has found in this investigation, when NYMEX 

attempted to limit Amaranth’s speculative positions in the natural gas market, Amaranth simply 

switched its positions to ICE. 

As currently written, the CEA does not directly prohibit traders from engaging in 

excessive speculation. Rather, the CEA directs the CFTC to issue position limits to prevent 

excessive speculation from causing sudden, unreasonable, or unwarranted price changes. To 

enforce this provision of the CEA in the energy markets, the CFTC has issued fixed position 

limits for specific energy commodities and contracts, and authorized regulated exchanges to 

issue accountability limits to trigger reviews of trader positions. If an exchange determines that a 

position is excessively concentrated, the exchange can order the trader to reduce that position. 

 

66 See 17 C.F.R. § 10.5(e) (2002). 

67 CFTC, Backgrounder on Speculative Limits. 68 NYMEX.com: Exchange Rulebook, §§ 9.26A, 9.27, 9.27A, at NYMEX website, at http://nymex.com/ 

rule_main.aspx. 
 47 

Violations of a position limit or an order to reduce a position are considered civil violations of 

the CEA, punishable in the same manner as violations of other statutory and regulatory 

provisions. NYMEX policy is to send warning letters on the first two occasions that a trader 

violates a position limit; for subsequent violations traders are subject to civil monetary penalties 

and even forfeiture of their trading privileges on the exchange. These types of violations are not 

treated as crimes, unless they are part of an effort to manipulate commodity prices or commit 

some other criminal offense.

E. Market Manipulation 

The CEA states that the manipulation of commodity prices is a felony punishable by a 

fine of up to $1 million and imprisonment of up to five years.69 Although it is one of the core 

provisions of the law, neither the CEA nor its implementing regulations provides a specific 

definition of manipulation. The CEA states only that it is against the law for “[a]ny person to 

manipulate or attempt to manipulate the price of any commodity in interstate commerce, or for 

future delivery on ... any registered [exchange], or to corner or attempt to corner any such 

commodity.”70 

 The case law interpreting the CEA’s prohibitions against market manipulation is 

confusing and contradictory. The current test for establishing manipulation requires the 

following four elements to be established by a preponderance of the evidence: 

(1) the accused had the ability to influence market prices; 

(2) the accused specifically intended to influence market prices; 

(3) artificial prices existed; and 

(4) the accused caused the artificial prices.71

 F. Natural Gas Trading 

 To understand the natural gas market, it is important to examine not only the nature of the 

commodity, the cash and financial markets, and CFTC regulation and oversight, but also the key 

trading strategies that many natural gas traders follow. 

 In general, natural gas producers and marketers are less concerned with the absolute price 

of natural gas than with ensuring they obtain an adequate margin of profit for the gas they sell. 

What matters most to producers and marketers is whether they can sell the gas for more than it 

cost to acquire. End users of natural gas have a slightly different perspective – they are most 

concerned with obtaining natural gas at the lowest price relative to their other costs and 

expenses. Speculators have a third perspective: they seek to profit from the frequent price 

changes in the natural gas market – devising strategies to profit from both price differences and 

price volatility. 

 

69 Section 9 of the CEA. 

70 7 U.S.C. § 13(a)(2). For more information, see the Subcommittee’s detailed discussion of this provision of the 

law in its 2003 Report, Appendix 1, pp. 125-37. 

71 In the matter of Cox and Frey, 1987 Westlaw 106879 (C.F.T.C.). 
 48 

Price Spreads. Typically, rather than purchase a contract that locks in an absolute price 

level for a particular month, natural gas traders use trading strategies that involve relative price 

levels between different months. These strategies—called “spread trading”—involve the 

simultaneous purchasing of a futures contract for one month—called the “long” month—and the 

selling of the same number of futures contracts for a different month—called the “short” month. 

The purchases are linked together in the exchange’s trading records with the price difference 

between the two shown as the price spread. For example, if a trader buys a contract for March at 

$7.50, and in the same transaction sells a contract for April at $7.25, the exchange will list both 

trades together as a single transaction with a price spread of $0.25. 

 A natural gas distributor, for example, may use a spread strategy to buy a futures contract 

for natural gas to be delivered to the distributor in the summer, when prices are low, and at the 

same time sell a futures contract for natural gas to be delivered in the winter, when prices are 

high. In this manner, the distributor can lock in a profit by selling natural gas for more than it 

cost the distributor to purchase the gas. A distributor is likely to pursue this type of strategy if 

the difference in price between the winter and summer contracts—the price spread—is greater 

than the distributor’s costs in storing the physical gas between those summer and winter months. 

Large winter/summer price spreads therefore provide a financial incentive for marketers and 

distributors to accumulate gas in storage during the summer months for sale during the winter 

months. 

 On the other side of the trade, a speculator may believe that a price spike is likely to 

occur in the upcoming winter, as has occurred in most of the previous years, and therefore that 

winter prices will be much higher than the summer prices. To profit from the difference in 

prices, the speculator may buy a winter/summer spread, meaning that the speculator will buy a 

futures contract for a winter month and at the same time sell a futures contract for a summer 

month. For example, a speculator who buys 100 January contracts for $7.50 each and 

simultaneously sells 100 July contracts for $7.25 can be said to be “buying 100 January/July 

spreads at 25 cents,” which will cost the speculator a total of $2.50. If the speculator had instead 

bought 100 January contracts, without any offsetting July contracts, it would have had to pay 

$75.00 for those contracts. As this example shows, spread trading can be a lot less expensive 

than buying contracts for single months. 

The “Forward Curve.” To aid in their analysis of price spreads in the natural gas 

markets, traders use a type of chart called the “forward curve.” The forward curve shows, for 

any given date, the price of each NYMEX futures contract for successive future months. The 

forward curve for natural gas clearly depicts the differences in natural gas futures prices between 

the winter and summer months. Figure 17 displays, for example, the forward curve for natural 

gas on June 1, 2007. The points that make up the forward curve reflect the final, actual NYMEX 

price on that date to buy a futures contract to deliver natural gas in each future month over the 

next five years. The points form curves that look like waves because, in each year, the futures 

prices for the winter months are higher than the futures prices for the summer months, reflecting 

a higher anticipated demand for natural gas during the winter heating seasons. 
 49 

 Figure 17 

Natural Gas Forward Curve:

Price of Each NYMEX Natural Gas Futures 

Contract on June 1, 2007

6

7

8

9

10

11

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09

Jan-10

Jul-10

Jan-11

Jul-11

Jan-12

Jul-12

$ per MMBtu

month of futures contract 

Fig. 17. The seasonality of natural gas demand is reflected in the “forward 

curve,” which shows for a specified date the price of each natural gas futures 

contract for future months. The natural gas forward curve peaks in the winter 

months and falls in the summer months. Data source: NYMEX. 

 Figure 18 shows what the forward curve looked like in mid-August of each year from 

2002 through 2006. Not only did the absolute level of futures prices rise from 2002 to 2006, but 

the difference in futures prices between summer and winter months – the winter/summer 

spread – increased as well, reflecting the market’s view that natural gas prices during the winters 

would continue to be at a premium. The reason for the unusually high prices and large 

differences between the winter and summer prices in 2006 is discussed in the next section. 

Amaranth’s excessive speculation in natural gas futures played a central role. 
 50 

 Figure 18 

NYMEX Natural Gas Forward Curves

2002 - 2006

2

3

4

5

6

7

8

9

10

11

12

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58

$ per MMBtu

future months 

 2002

2003

 2004

 2005

 2006

Fig. 18. The forward curve in 2006 was higher and the winter/summer price 

spreads were larger than in previous years. Data source: NYMEX. 
 51 

V. EXCESSIVE SPECULATION IN THE NATURAL GAS MARKET IN 2006 

“Nowhere does history indulge in repetitions so often or so uniformly as in Wall 

Street. When you read contemporary accounts of booms or panics the one thing 

that strikes you most forcibly is how little either stock speculation or stock 

speculators to-day differ from yesterday. The game does not change and neither 

does human nature.” 

 --Edwin Lefevre, Reminiscences of a Stock Operator (1923)72

 A. Overview 

 In early 2006, it began to be clear that the effects of Hurricanes Katrina and Rita on 

natural gas supplies had dissipated. Due to a warm winter, a large amount of natural gas 

remained in storage, indicating there would be a relatively high level of supply for the upcoming 

summer, and likely an above-average amount of natural gas in storage for the next heating 

season. Despite above-average amounts of natural gas in inventories, the price of natural gas in 

the futures markets remained extremely volatile, and the difference in price—or “spread”—

between natural gas futures contracts for the next winter and the upcoming summer kept 

increasing. The paradox of unusually high winter/summer price spreads in the face of aboveaverage supplies persisted throughout the summer and into early September. Then, in midSeptember, the winter/summer price spreads suddenly collapsed. As these price spreads 

collapsed, so did Amaranth, the largest single trader in the natural gas markets. Reports 

indicated that Amaranth lost more than $2 billion in the natural gas market during the first three 

weeks of September, precipitating the liquidation of the entire $8 billion fund. 

 The Subcommittee began this investigation in October 2006 to understand why certain 

natural gas futures prices, particularly the winter/summer price spreads, had remained so high in 

the face of above-average supplies and whether the large-scale trading conducted by Amaranth 

had contributed to those high prices. To conduct this investigation the Subcommittee 

subpoenaed natural gas trading records from NYMEX, ICE, Amaranth, and other traders.73 The 

Subcommittee’s analysis of this trading data, which includes several million individual trades, 

indicates that the extreme levels of winter/summer price spreads were driven by Amaranth’s 

excessive speculative trading in natural gas contracts on both NYMEX and ICE, persisting over 

several months. 

 Prior to its collapse, Amaranth dominated trading in the U.S. natural gas market. It 

bought and sold thousands of natural gas contracts on a daily basis, and tens of thousands of 

contracts on certain days. All but a few of the largest energy companies and hedge funds 

consider trades of a few hundred contracts to be large trades. Amaranth held as many as 100,000 

natural gas futures contracts at once, representing one trillion cubic feet of natural gas, or 5% of 

the natural gas used in the United States in a year. At times Amaranth controlled up to 40% of 

 

72 J. Wiley & Sons, New York, 1994, at p. 180. 

73 The Subcommittee appreciates the responsiveness of both NYMEX and ICE in providing extensive trading 

records in user-friendly electronic formats in a timely manner. The Subcommittee also appreciates the co-operation 

of Amaranth and its former personnel, and of persons from other firms who provided information to the 

Subcommittee. 
 52 

all of the open interest on NYMEX for the winter months (October 2006 through March 2007). 

Amaranth accumulated such large positions and traded such large volumes of natural gas futures 

that it distorted market prices, widened price spreads, and increased price volatility. 

Amaranth’s fundamental view was that winter natural gas prices would be much higher 

than summer natural gas prices. It pursued its fundamental view largely through two major 

trading strategies: (1) buying futures contracts for January 2007 while selling futures contracts 

for November 2006—the “January/November spread”—representing a bet that January prices 

would be much higher than November prices; and (2) buying futures contracts for March 2007 

while selling futures contracts for April 2007—the “March/April spread”—representing a bet 

that March prices would be higher than April prices, when demand for natural gas for home 

heating diminishes significantly. 

Amaranth pursued these strategies to an extreme. On almost every day from midFebruary through July, Amaranth held more than 50% of the open interest on NYMEX in the 

January 2007 and November 2006 contracts. In late July, Amaranth held a total of more than 

80,000 NYMEX and ICE contracts for January 2007—representing a volume of natural gas that 

equaled the entire amount of natural gas eventually used in that month by U.S. residential 

consumers nationwide. Amaranth’s large-scale trading was a major driver behind the rise of the 

January/November price spread from $1.40 in mid-February to $2.20 in late April, an increase of 

more than 50%. 

Amaranth also held large positions in the March/April spread, meaning it had bought a 

large volume of March contracts and sold a large number of April contracts. Amaranth’s effect 

on this price spread was evident on particular dates when it traded extraordinarily large numbers 

of these contracts. For example, on July 31, Amaranth bought over 10,000 March 2007 futures 

contracts on NYMEX and sold about the same number of April 2007 futures contracts. 

Amaranth’s trading represented almost 70% of the total NYMEX trading volume in each of these 

contracts on that date. Similarly, on July 31, Amaranth bought 13,000 March 2007 natural gas 

swap contracts on ICE, and sold nearly 11,000 April contracts. These trades accounted for about 

60% and 50% of the volume of trading in these contracts on ICE, respectively. Amaranth’s large 

volume of trading was the prime reason the March/April price spread increased by 72 cents on 

July 31. This increase was an extremely large one-day jump in price. 

Amaranth also held large positions in other winter and summer months spanning the fiveyear period from 2006-2010. In aggregate, Amaranth amassed an extraordinarily large share of 

the total open interest on NYMEX. During the spring and summer of 2006, Amaranth controlled 

between 25 and 48% of the outstanding contracts (open interest) in all NYMEX natural gas 

futures contracts for 2006; about 30% of the outstanding contracts (open interest) in all NYMEX 

natural gas futures contract for 2007; between 25 and 40% of the outstanding contracts (open 

interest) in all NYMEX natural gas futures contracts for 2008; between 20 and 40% of the 

outstanding contracts (open interest) in all NYMEX natural gas futures contracts for 2009; and 

about 60% of the outstanding contracts (open interest) in all NYMEX natural gas futures 

contracts for 2010. 
 53 

The current regulatory regime proved ineffective in limiting Amaranth’s excessive 

speculation. Neither the CFTC nor NYMEX had a full view of Amaranth’s trades, positions, or 

overall market presence because Amaranth’s trades on ICE were exempt from regulatory 

oversight and scrutiny. Moreover, unlike NYMEX, ICE had no legal obligation to monitor 

positions held by traders, or to report positions to CFTC. 

Without a view of natural gas trades on ICE, neither the CFTC nor NYMEX had a full 

appreciation or understanding of how speculative trading in natural gas contracts was affecting 

the price of natural gas. NYMEX’s attempts to prevent Amaranth’s large volume of trading 

from disrupting the orderly settlement of the NYMEX futures contract for September 2006 were 

unsuccessful due to Amaranth’s ability to conduct its speculative trading without any limitation 

on ICE. In early August, NYMEX directed Amaranth to reduce its holdings in the September 

and in the October 2006 contracts. Amaranth responded by moving its positions in the 

September and October contracts to ICE. 

After moving its September and October positions from NYMEX to ICE, Amaranth 

placed even more trades on ICE, further increasing its overall positions for these contracts. It 

continued to trade very large volumes of September and October contracts on ICE until just 

before the September contracts expired at the end of August. Amaranth’s large-scale trading in 

the days and hours leading up to the expiration of the September contract increased the price 

volatility of the September contract. 

On August 29, the last day of trading on the September contract, Amaranth repeatedly 

made large-scale trades on ICE, selling the September contract and buying the October contract. 

Its trades were counterbalanced during the day by other traders taking the opposite positions, 

buying the September contract and selling the October contract. Altogether, Amaranth sold 

about 16,000 September contracts on ICE, while the largest opposing trader, a hedge fund called 

Centaurus, bought about 12,000. Due to a request from NYMEX to limit its trading on the 

September contract, Amaranth ceased trading on both NYMEX and ICE an hour before trading 

closed. Centaurus continued to buy the September contract, and its price rose dramatically in the 

final hour. Amaranth suffered substantial losses and, on August 30, charged that it had been the 

victim of a price spike caused by large-scale trading rather than market forces, and requested an 

investigation by regulators. 

 In late August, the market moved sharply against Amaranth. The amount of natural gas 

in storage was very high, and there had been no major hurricanes to disrupt production. The 

winter/summer spread positions that Amaranth had invested in during the spring and summer 

began to fall. Amaranth’s margin requirements grew to over $2 billion, and eventually reached 

nearly $3 billion. As a result, Amaranth no longer had the capital to buy large positions in the 

face of falling prices. As other traders perceived that at long last prices were finally returning 

to their fundamental value, the market began to fall even faster, compounding Amaranth’s losses. 

By mid-September, Amaranth was forced to sell its positions to its clearing firm, JPMorgan 

Chase, and another hedge fund, Citadel, and liquidate the rest of the holdings in the $8 billion 

fund. 
 54 

B. Setting the Stage: Natural Gas Market Fundamentals in Early 2006 

 In mid-summer 2005, U.S. natural gas storage facilities were nearly full, and natural gas 

was plentiful. When Hurricanes Katrina and Rita hit in the late summer, however, they caused 

major damage to natural gas pipelines and wells in the Gulf of Mexico, resulting in a sharp drop 

in natural gas production and a spike in natural gas prices.74 Fortunately, these adverse 

conditions lasted for only a few months. Mild winter temperatures in early 2006, including the 

warmest January on record, greatly reduced the demand for natural gas.75 By the spring of 2006, 

overall U.S. natural gas production had returned to pre-hurricane levels, with increased 

production from new wells offsetting the declines in the Gulf of Mexico. (Figure 19). 

 Figure 19 

U.S. Natural Gas, Monthly Production 

1.00

1.20

1.40

1.60

1.80

Jan-05

Apr-05

Jul-05

Oct-05

Jan-06

Apr-06

Jul-06

Oct-06

trillion cu. ft.

Katrina and Rita

Fig. 19. By spring 2006, natural gas production levels had returned to prehurricane levels. Data source: EIA, Natural Gas Gross Withdrawals and 

Production. 

By April 1, natural gas inventories were nearly 40% above the previous five-year 

average.76 Inventories would remain above the five-year average for the remainder of 2006. 

(Figure 20). The turnaround in the natural gas supply outlook dampened the record high prices 

that followed the hurricanes in 2005. By late spring, near-term futures prices had returned to 

pre-hurricane levels. (Figure 21). 

 

74 According to DOE’s Energy Information Administration, “Hurricane Katrina destroyed 44 [natural gas] platforms 

in the Gulf of Mexico and damaged 20 others, while Hurricane Rita destroyed 69 platforms and damaged 32 others.” 

As of June 2006, almost 1 billion cubic feet per day of production remained off-line – representing about 9% of 

daily production in the Gulf of Mexico and about 5% of total U.S. daily production. EIA, Natural Gas Year-InReview 2006, at p. 3. 

75 EIA, Natural Gas Year-In-Review 2006 (March 2007); FERC, 2006 State of the Markets Report. 

76 FERC, 2006 State of the Markets Report, at p. 8. 
 55 

 Figure 20 

Natural Gas in Storage, By Year

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

A

M

J

J

A

S

O

N

D

J

F

M

2001-2002 2002-2003

2003-2004 2004-2005

2005-2006 2006-2007

trillion cu. ft.

month

Fig. 20. In April 2006, at the start of the 2006-2007 natural gas injection 

(storage) season, the amount of natural gas in inventories was higher than at any 

time in the previous 5 years. Throughout the rest of 2006 inventory levels 

remained higher than in any of the previous five years. Data source: EIA. 

Figure 21

Natural Gas Futures Prices, 2005-06

Next Month Contract, NYMEX

4

6

8

10

12

14

16

Apr-05

Jun-05

Aug-05

Oct-05

Dec-05

Feb-06

Apr-06

Jun-06

Aug-06

 Katrina

Rita

Fig. 21. By spring 2006 natural gas next-month futures prices had returned to 

pre-hurricane levels. Data source: EIA. 
 56 

At the same time that near-term futures prices began falling in early 2006 to prehurricane levels, prices for futures contracts for the months further into the future also were 

much lower. Figure 22 displays forward curves on two dates—reflecting the final prices of 

NYMEX futures contracts on those dates for all of the future months in which NYMEX 

contracts can be traded. The first curve is from October 2005, shortly after the Katrina and Rita 

hurricanes, and the second is from February 2006 toward the end of the mild winter. Figure 22 

shows how the price of every natural gas futures contract from March 2006 through March 2007 

was lower in February 2006 than it had been in October 2005, just after Katrina and Rita. This 

downward adjustment in prices reflected a general belief in early 2006 that the effects from the 

hurricanes would not be as severe on natural gas prices as initially feared. 

Figure 22 

NYMEX Natural Gas Forward Curves

Late 2005 and Early 2006

5

7

9

11

13

15

Nov-05

May-06

Nov-06

May-07

Nov-07

May-08

Nov-08

May-09

Nov-09

May-10

Nov-10

$ per MMBtu

forward curve on 

Oct. 14, 2005

forward curve on

Feb. 15, 2006

Fig. 22. By early 2006, futures prices for the next 12 months had fallen 

significantly from their post-hurricane levels, reflecting a lessening concern 

regarding the long-term effects of those hurricanes on natural gas prices. 

Data source: NYMEX. 

 Some traders, however, thought winter prices would increase. Amaranth, for example, 

told the Subcommittee that, with increasing domestic demand for natural gas, their traders 

expected supply shortages, delivery bottlenecks, and weather-related disruptions to develop 

during the winter and boost prices. In their view, the fundamentals of supply and demand 

justified much higher spreads between the natural gas winter and summer prices, and presented 

Amaranth with a profit-making opportunity. Over the next seven months, Amaranth 

aggressively pursued this market view. 
 57 

 C. The Rise of Amaranth 

“‘But to tell the truth, Sam, I had sort of made up my mind to keep out of 

speculation since my last little deal. A man gets into this game, and into it, and 

into it, and before you know he can’t pull out – and he don’t want to.’” 

 -- Frank Norris, The Pit: A Story of Chicago (1902) 

 Amaranth Advisors, LLC, was created in 2000 as a multi-strategy hedge fund. Nicholas 

Maounis, the founder and Chief Executive Officer of Amaranth, had previously worked at 

another hedge fund, Paloma Partners Management Company (“Paloma”), where he both traded 

and managed teams of traders. Mr. Maounis brought with him a trading team from Paloma, 

consisting of four portfolio managers, eight analysts, five traders, four quantitative analysts, and 

various technical support personnel. Paloma held a minority interest in the newly spun-off fund 

and provided additional back-office and administrative support. Amaranth began operation with 

approximately $600 million in capital and sought to employ “a diverse group of arbitrage trading 

strategies,” particularly featuring convertible bonds, mergers, and utilities.77 

In 2002, Amaranth added energy commodity trading to its slate of strategies and hired 

several former Enron traders to its staff. JPMorgan Chase, which served as Amaranth’s clearing 

firm for its commodity trades, explained: “Due to the bankruptcy of Enron North America and 

its departure as the largest market maker in a number of energy derivatives exchanges and OTC 

markets the Fund manager views this as an expansion/diversification opportunity for 

Amaranth.”78 The clearing firm noted: “Initially only 2% of Amaranth’s capital will be 

allocated to energy related trading.” 

During its first few years Amaranth generated excellent returns, exceeding 29% in 2001, 

15% in 2002, and 21% in 2003. In 2004, however, Amaranth found it increasingly difficult to 

maintain these high returns through its existing arbitrage strategies. Amaranth’s core strategy of 

convertible bond arbitrage had yielded no return at all for the first seven months of 2004, and its 

overall net return across all strategies was just over 3%, well below the fund’s previous 

performance.79 

During this period of low returns Amaranth decided to increase its exposure to potentially 

higher-yielding markets, particularly energy. In mid-2004, Amaranth hired Brian Hunter as a 

natural gas trader; in 2005, Mr. Hunter was promoted to co-head of Amaranth’s commodities 

group. As the convertible bond market continued to falter into 2005, Amaranth shifted more 

capital into energy trading. Whereas in mid-2004 energy trading was a negligible fraction of 

 

77 JPMorgan Chase, CP Leveraged Funds Due Diligence, Annual Review 2001, Bates No. JPM-PSI 00007004; 

Interview with Amaranth officials, December 20, 2006. Convertible bond arbitrage consists of buying a convertible 

bond and short selling the underlying common stock that the bond can be converted into. Merger arbitrage consists 

of investing in securities of companies that may be involved in mergers, takeovers, recapitalizations, or other types 

of corporate restructuring. Utilities arbitrage consists of buying one basket of utility stocks and selling short another 

basket of utility stocks and hoping to profit from the changes in the price differentials between the two baskets. 78 JPMorgan Chase, CP Leveraged Funds Due Diligence, Annual Review 2001, Bates No. JPM-PSI 00007004 . 79 JPMorgan Chase, CP Leveraged Funds Due Diligence, Annual Review 2004, Bates No. JPM-PSI 0007031; 

Interview with Amaranth officials, Dec. 20, 2004. 
 58 

Amaranth’s portfolio, by mid-2005, Amaranth had devoted approximately 30% of its capital to 

energy arbitrage. 

Amaranth employed a variety of energy trading strategies. JPMorgan Chase described 

them as follows: 

The Fund has hired a couple of former Enron energy traders to build an Energy 

Arbitrage desk. Energy arbitrage opportunities can also take a number of forms 

due to the significant amount of available “Energy” products. A generic 

geographical energy arbitrage can be trading the difference of price in a given 

commodity either in the same location or in [a] different geographical location. 

Other arbitrage opportunities include Grade arbitrage which encompasses trading 

the difference in price of two related crude oil based commodities such as the 

spread between WTI and Brent Crude. Generally these arbitrage opportunities are 

created by fundamental news affecting production and inventory. In addition 

trades may also be on the perceived price volatility of crude oil and other crude 

products such as gasoline, jet fuel and heating oil and or the correlation between 

one another. These views have been expressed through calendar spreads. In 

addition, deep out-of-the-money call options are purchased as a cheap way to take 

advantage of price shocks. Leverage ranges from 5-8x.80

Amaranth’s purchase of inexpensive deep out-of-the-money call options paid off 

handsomely when natural gas prices spiked after Hurricanes Katrina and Rita. The purchase of 

these options allowed Amaranth to buy very expensive natural gas futures contracts at a steep 

discount. 

The effect of these options and Amaranth’s other natural gas positions on Amaranth’s 

overall performance in 2005 was dramatic. For the first six months of 2005, Amaranth lost 

money; the net return was negative one percent. In August and September, largely due to 

Amaranth’s natural gas positions, Amaranth’s domestic portfolio gained nearly 15%. By yearend, the portfolio had gained just over 21%. 

JPMorgan Chase reported, “For [the domestic Amaranth funds] the majority of the 

positive performance for 2005 came from profits in the energy book, approximately 98% of the 

funds’ [year-to-date] performance was related to energy trades. Energy trading profits/losses are 

derived primarily from natural gas calendar swaps.”81 Reports indicated that, in 2005, as a result 

of these trades, Mr. Hunter personally made $75 million.82 

 

80 JPMorgan Chase, CP Leveraged Funds Due Diligence, Annual Review 2004, Bates No. JPM-PSI 0007031. 81 JPMorgan Chase, CP Leveraged Funds Due Diligence, Annual Review 2005, Bates No. JPM-PSI 0007051. 82 Ann Davis et al., Hedge-Fund Hardball, Amid Amaranth’s Crisis, Other Players Profited, Wall St. J., Jan. 30, 

2007, at A1. 
 59 

 By 2006, in part due to its energy trading 

successes, Amaranth had grown significantly, both 

in terms of the number of its employees and in net 

asset value. It now had approximately $8 billion 

in assets under management. It employed more 

than 400 people in offices around the world, 

including Greenwich, Connecticut; London; 

Toronto; Singapore; Calgary; and Houston. Its 

staff included a Chief Risk Officer and 12 risk 

“lieutenants” to monitor the risks in the various 

trading books.83 

D. January-April 2006: Amaranth Buys and Profits from Large Spread Positions 

“How are you going to buy a big block of a stock in a bull market without putting 

up the price on yourself? That would be the problem.” 

 --Reminiscences of a Stock Operator, p. 233. 

 According to Amaranth, in January 2006, as the warmer-than-usual weather mitigated the 

post-hurricane concerns over the adequacy of supplies, Amaranth’s traders believed that natural 

gas prices would fall.84 Over the course of January, Amaranth made a series of trades that 

resulted in its acquisition of huge natural gas positions, selling nearly 30,000 natural gas 

contracts for March 2006, and ending the month with a total short position for March of about 

40,000 contracts. Amaranth held about two-thirds of its positions on NYMEX and the other 

third on ICE. 

 

83 Id. 84 All of the data and information in this Report regarding Amaranth’s trading is derived from trading data obtained 

from Amaranth, ICE, and NYMEX and Subcommittee interviews with Amaranth officers and traders. 

Table 5 

Amaranth Returns 

2005

Month Monthly 

Return (%) 

Year-to-Date

Return (%) 

Jun 05 3.03 -0.98 

Jul 05 2.39 1.38 

Aug 05 5.19 6.65 

Sep 05 7.49 14.63 

Oct 05 -0.90 13.60 

Nov 05 3.48 17.53 

Dec 05 3.13 21.21 
 60 

Figure 23 

Amaranth’s Positions in January 2006 

AMARANTH'S POSITIONS 

on JANUARY 3, 2006

Mar-07 Jan-07

Oct-06

May-06

Mar-06

-50000

-40000

-30000

-20000

-10000

0

10000

ICE

NYMEX

 

AMARANTH'S POSITIONS 

on JANUARY 31, 2006

Feb-07

Oct-06

Mar-06

-50000

-40000

-30000

-20000

-10000

0

10000

ICE

NYMEX

Fig. 23. In January 2006, Amaranth built a short position of about 40,000 March 2006 contracts, 

about 2/3 of which were on NYMEX and 1/3 on ICE. Positions beyond May 2007 are not 

displayed. Data source for charts on Amaranth’s positions: NYMEX, ICE, and Amaranth. 

During February 2006, Amaranth shifted its short March positions into April, 

maintaining its bet that natural gas prices would continue to fall. By the middle of the month, as 

the relatively mild weather continued, Amaranth concluded that the growing glut of gas would 

carry through the summer and into the fall. Amaranth began selling futures contracts for the fall 

months and buying futures contracts for the winter months with the expectation that the price of 

winter gas would be at a premium. In particular, Amaranth bought contracts for January 2007 

and sold contracts for November 2006 (the “January/November spread”), in effect betting that 

January prices would rise faster than November prices. Amaranth invested heavily in its trading 

strategy, finishing the month with a short position of more than 25,000 November contracts and 

a long position of more than 25,000 January contracts. 

Figure 24 

Amaranth’s Positions in February 2006 

AMARANTH'S POSITIONS 

on FEBRUARY 14, 2006

Mar-06

Jan-07

Nov-06

-40000

-30000

-20000

-10000

0

10000

20000

30000

40000

ICE

NYMEX

 

AMARANTH'S POSITIONS 

on FEBRUARY 28, 2006

Apr-06

Mar-06

Jan-07

Nov-06

-40000

-30000

-20000

-10000

0

10000

20000

30000

40000

ICE

NYMEX

Fig. 24. In mid-February, Amaranth began building a large spread position between January 

2007 and November 2006. Most of the trading in these contracts occurred on NYMEX.
 61 

 Amaranth pursued a similar strategy in March 2006; it maintained a short position in the 

nearby spring months, shifting 30,000 short April contracts into May. It also maintained its large 

spread position between the upcoming fall and winter months. Although Amaranth began 

building this spread by selling November 2006 contracts and buying January 2007 contracts, in 

March, Amaranth shifted some of its short positions from November 2006 contracts into October 

2006 contracts. To build these positions, Amaranth traded primarily on NYMEX, and to a lesser 

amount on ICE. 

Figure 25 

Amaranth’s Positions in March 2006 

 

AMARANTH'S POSITIONS 

on MARCH 31, 2006

Mar-06 Apr-06

May-06

Oct-06

Jan-07

Nov-06

-40000

-30000

-20000

-10000

0

10000

20000

30000

40000

ICE

NYMEX

Fig. 25 During March Amaranth continued to hold a short spring position and a spread between 

the fall months of October and November 2006, and January 2007. 

 Amaranth continued the same strategies in April. It rolled its short May 2006 contracts 

into short June 2006 contracts and increased its January/November spread position by several 

thousand contracts. By the end of April, Amaranth was short approximately 30,000 contracts for 

November 2006 and long more than 34,000 contracts for January 2007. Amaranth had also 

accumulated significant short positions in the summer and fall months and significant long 

positions in the winter months. All of these positions reflected Amaranth’s fundamental market 

view that the price of natural gas during the winter would be very expensive as compared to the 

summer. 

AMARANTH'S POSITIONS 

on MARCH 10, 2006

Apr-06

Mar-06

May-06

Jan-07

Nov-06

-40000

-30000

-20000

-10000

0

10000

20000

30000

40000

ICE

NYMEX
 62 

Figure 26 

Amaranth’s Positions in April 2006 

AMARANTH'S POSITIONS 

on APRIL 13, 2006

May-06 Jun-06

Jan-07

Mar-07

Nov-06

-40000

-30000

-20000

-10000

0

10000

20000

30000

40000

ICE

NYMEX

 

AMARANTH'S POSITIONS 

on APRIL 28, 2006

Dec-06

Aug-06

Jun-06

May-06

Jan-07

Feb-07

Nov-06

-40000

-30000

-20000

-10000

0

10000

20000

30000

40000

ICE

NYMEX

Fig. 26. In April Amaranth maintained its short position in the nearby spring and summer months 

and slightly increased its winter/fall spread position. 

According to traders interviewed by the Subcommittee, Amaranth’s fundamental market 

outlook in early 2006 was not unreasonable under the circumstances. What was striking about 

Amaranth’s positions, and unknown to other traders, was the size of Amaranth’s natural gas 

holdings. By the end of February, Amaranth held nearly 70% of the open interest in the 

NYMEX natural gas futures contract for November 2006 (Figure 27), and nearly 60% of the 

open interest in the NYMEX natural gas futures contract for January 2007 (Figure 28). In other 

words, Amaranth’s long position in the January contract accounted for about 60% of all of the 

futures contracts for January that had been bought and had not yet been sold back. Similarly, 

Amaranth’s short position in November accounted for about 70% of the November contracts that 

had been sold but had not yet been bought back. These were extremely large positions by any 

measure. 

Figure 27 

Amaranth Open Interest, NYMEX Natural Gas Contract for November 2006 

COMPARED TO TOTAL NYMEX OPEN 

INTEREST

0

20000

40000

60000

80000

100000

120000

Jan-06

Feb-06

Mar-06

Apr-06

May-06

Jun-06

Jul-06

Aug-06

Sep-06

NYMEX Open

Interest

Amaranth Open

Interest

contracts

 

AS % OF NYMEX OPEN INTEREST

0%

20%

40%

60%

80%

100%

Jan-06

Feb-06

Mar-06

Apr-06

May-06

Jun-06

Jul-06

Aug-06

Sep-06
 63 

Figure 28 

Amaranth Open Interest, NYMEX Natural Gas Contract for January 2007 

COMPARED TO TOTAL NYMEX OPEN 

INTEREST

0

10000

20000

30000

40000

50000

60000

70000

Jan-06

Feb-06

Mar-06

Apr-06

May-06

Jun-06

Jul-06

Aug-06

Sep-06

NYMEX total

Amaranth 

contracts

 

AS % OF NYMEX OPEN INTEREST

0%

20%

40%

60%

80%

100%

Jan-06

Feb-06

Mar-06

Apr-06

May-06

Jun-06

Jul-06

Aug-06

Sep-06

Figs. 27 and 28. Amaranth held extremely large shares of open interest in the November 2006 

and January 2007 NYMEX natural gas futures contracts. Data source: Amaranth and NYMEX. 

Although Amaranth traders and 

officers told the Subcommittee that they did 

not consider any of Amaranth’s positions or 

trades to be unusually large or risky, very 

few, if any, other traders appeared to hold 

positions as large as Amaranth or to trade as 

much volume as Amaranth. Generally, 

except for large energy companies and multibillion dollar funds, positions of a few 

thousand contracts are beyond the financial 

capability and risk tolerance of most traders. 

. 

All traders are required to post 

funds—called “margins”—with their clearing 

firms to ensure that they have the financial 

resources to perform under the contract and 

make up for any losses incurred in their 

positions. Large holdings incur large margin 

requirements. An outright position of 10,000 

contracts, for example, requires the posting 

of a margin of over $67 million. Assuming the price of natural gas is about $7.50 per MMBtu, 

an outright position of 10,000 NYMEX futures contracts would be worth $750 million. A 

change of just one cent in a position of 10,000 futures contracts, whether an outright position or a 

spread position, would change that trader’s profit or loss by $1 million. At times, from late April 

through mid-August 2006, Amaranth held more than 100,000 natural gas futures contracts. 

Amaranth’s total margin requirements routinely exceeded $1 billion. 

Table 6 

NYMEX Natural Gas Futures: 

Cost of Position Size 

Number of 

Contracts 

Margin 

Requirement* 

Profit or Loss 

From Price 

Change of 1¢ 

1 $6,750 $100 

10 $67,500 $1,000 

100 $675,000 $10,000 

1000 $6,750,000 $100,000 

10,000 $67,500,000 $1,000,000 

100,000 $675,000,000 $10,000,000 

*Initial Margin requirement for 1st month natural 

gas futures contract for traders not a Member of 

the Exchange. Margin requirements will be less 

for spread positions. 
 64 

How big is 100,000 contracts? 

From late April through mid-August, Amaranth 

had a total open interest on NYMEX of more than 

100,000 natural gas futures contracts – more than 

40% of the total open interest on NYMEX during 

this period. By late summer, Amaranth also had 

built total positions on NYMEX and ICE of nearly 

100,000 contracts in individual months. 

100,000 contracts represent an amount of natural 

gas equivalent to: 

• 1 trillion cubic feet of natural gas; 

• 23% of the amount of natural gas 

consumed by residential users in 2006; 

• 5% of the total amount of natural gas 

consumed in the United States in 2006. 

 Amaranth’s short-term and longterm positions yielded good returns in 

April 2006. The spread between the 

November 2006 contract and the January 

2007 contract widened from $1.59 to 

$2.22. Amaranth’s short June position did 

very well in April too, as the price of the 

June 2006 contract fell from $7.42 to 

$6.55 during the month of April. The 

March/April spread in 2008 increased 

from $1.97 to $2.48, and the March/April 

spread for 2010 increased from $1.99 to 

$2.40. In total, Amaranth’s energy 

portfolio gained more than $1 billion in 

value in April 2006, by far the largest 

contribution to Amaranth’s overall return 

of more than 14% for the month and more 

than 30% for the year-to-date.85 

Amaranth explained its successful 

April in a monthly letter on the fund’s performance sent to Amaranth’s investors86: 

 Our energy and commodities portfolios generated outsized returns due to 

unusual volatility across the crude oil, natural gas, and metals businesses. 

Primary drivers of returns included (1) natural gas spread trades, which benefited 

from the significant increase in crude oil prices and the glut of summer 2006 

natural gas relative to storage capacity and prospective summer demand, and (2) a 

profound increase in base metals prices (copper in particular) with an associate 

volatility spike. As volatility increased during the month, we took the opportunity 

to reduce exposure in our natural gas and metals portfolios and realized profits. 

 

85 Amaranth, Performance and Net Asset Value Report—September 2006 YTD, provided to JPMorgan Chase, Bates 

No. JPM-PSI 00006995. 

86 Amaranth investor letter in April 2006 monthly update to JPMorgan Chase, Bates No. JPM-PSI 00006978. 

Table 7 

Amaranth Returns – January – April 2006

Month Monthly Return (%) Year-to-Date Return (%) 

Jan 6.45 6.45 

Feb 4.30 11.03 

Mar 2.91 14.26 

Apr 14.42 30.73 
 65 

 Upon closer analysis, Amaranth itself appears to have been a significant contributor to 

the “unusual volatility” in the natural gas market that added so much to its “outsized returns” for 

April. Amaranth purchased large numbers of January contracts, coupled with large sales of the 

November contract, a trading strategy called “buying a spread position.” By buying one contract 

and selling the other in linked transactions, Amaranth helped to widen the difference in price 

between these two contracts. Amaranth was the predominant buyer of the January contract 

during this period; its long January position constituted as much as 60% of the amount of open 

interest in that contract on NYMEX. At the same time, Amaranth was the predominant seller of 

the November 2006 contract; its short November position constituted as much as 75% of the 

amount of open interest in that contract on NYMEX. As Figure 29 shows, Amaranth’s large 

purchases of NYMEX natural gas futures contracts for January 2007 are highly correlated with 

movements in the price spread between the January 2007 and November 2006 contracts (the 

January/November price spread). 

 Figure 29a 

Amaranth's Purchases of January 2007 Contracts 

Are Highly Correlated with Spread Prices

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

3-Jan 18-Jan 1-Feb 15-Feb 2-Mar 16-Mar 30-Mar 13-Apr 28-Apr

0.80

1.00

1.20

1.40

1.60

1.80

2.00

2.20

2.40

Amaranth ICE Positions

Amaranth NYMEX Positions

Jan 07-Nov 06 Price Spread

contracts $ per MMBtu

Fig. 29a. From mid-February through April, Amaranth’s large sales of November 2006 futures 

contracts and purchases of roughly the same number of January 2007 futures contracts 

increased the price spread between the two contracts. Data source: NYMEX and ICE. 
 66 

Figure 29b 

Amaranth's Purchases of January 2007 Contracts and 

January-November Spread Prices

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

100000

3-Jan

1-Feb

2-Mar

30-Mar

28-Apr

26-May

26-Jun

26-Jul

23-Aug

0.50

1.00

1.50

2.00

2.50

3.00

Amaranth ICE Positions

Amaranth NYMEX Positions

Jan 07-Nov 06 Price Spread

contracts $ per MMBtu

Fig. 29b. The size of Amaranth’s position in the January-November spread (and the 

January-October spread) was highly correlated with the January-November prices spread 

during the winter, spring, and summer of 2006. Data sources: NYMEX and ICE. 

 Statistically, there is also a high 

degree of correlation between 

Amaranth’s spread positions and the 

price of the January/November spread. 

For the time period from January 3, 

2006 through April 28, 2006, the 

correlation coefficient between the 

January/November price spread and 

Amaranth’s net long position in 

NYMEX futures and ICE swaps for 

January 2007 equals 0.93. 

 A high degree of statistical 

correlation between two variables does not, by itself, establish a causal relationship between the 

two. Two highly correlated variables may each be caused or partially explained by an 

independent third variable and thus bear no causal relationship to each other.87 

 

87 For example, the day after Thanksgiving is usually the busiest shopping day of the year. Although there is a high 

correlation between the consumption of turkey and consumer spending in late November, it would be incorrect to 

conclude that eating lots of turkey in late November causes people to buy gifts. Rather, there is a high correlation

Table 8 

Correlations Between 

Amaranth Positions in the Jan 07 Natural Gas 

Contract and the Jan 07-Nov 06 Price Spread 

 Correlation Between: 

NYMEX 

Positions and 

Spread Price 

ICE Positions 

and Spread 

Price 

Total 

Positions and 

Spread Price 

1/3-4/28 0.86 0.90 0.93 

1/1-8/31 0.78 0.75 0.87 
 67 

 Several factors, however, support the conclusion that Amaranth’s trades were a major 

cause of the increase in these price spreads. First, the nature of a commodity market dictates that 

the price is the dependent variable. The interactions between buyers and sellers through bids and 

offers immediately determine the price of the commodity. When there are more buyers than 

sellers prices rise, and when there are more sellers than buyers prices fall. 

 Because Amaranth was overwhelmingly the predominant buyer of January contracts and 

the predominant seller of November contracts during this period, meaning the predominant buyer 

of the January/November spread, Amaranth’s actions must be considered to be the predominant 

cause of the increase in the January/November price spread. Amaranth’s predominant buying of 

the January contract is reflected in the open interest percentages for that contract—Amaranth 

held more than half of all outstanding contracts that had been bought. Amaranth’s predominant 

selling of the November contract is reflected in the open interest percentages for that contract—

Amaranth had sold more than half of all outstanding contracts that had been sold.88 

 Other traders who bought or sold this spread position also would have contributed to the 

price of the spread. However, since Amaranth acquired and held the majority of long open 

interest in the January 2007 contract and the majority of short open interest in the November 

contract, it follows that Amaranth alone contributed more to the increase in the price of these 

spreads than all of the other buyers of this spread combined. 

 Moreover, Amaranth did not confine its natural gas trading to just November and January 

contracts. It also acquired a large share of the open interest in the surrounding months. From 

mid-February through mid-September, Amaranth always held at least 30%, and on occasion as 

much as 45%, of the total open interest in the NYMEX futures contracts for the 2006-07 heating 

season (October through March). Until its September collapse, Amaranth had by far the largest 

positions of any single trader in the 2006 U.S. natural gas financial markets. 

 between the two variables because another independent variable – the end-of-year holiday season – causes both 

results. 88 Open interest reflects not just past activity—who has bought and held the most contracts, for example—but also 

gives an indication of who must do most of the selling and buying in the future, before the contract expires. A trader 

that acquires a large share of open interest not only may have had a significant effect on the current price structure, 

but can have a significant effect on future prices depending on how it reduces its open interest. For example, if a 

trader with a large share of long open interest suddenly decides to sell its contracts, it likely will push down the price 

of the contract. On the other hand, if a trader with a large share of open interest decides to hold onto those contracts 

and wait for a higher price before selling, the price will move down more slowly, if at all, because there will be 

much less selling pressure. 
 68 

Figure 30 

Amaranth Open Interest, NYMEX Natural Gas Contracts for Winter, 2006-07 

AS % OF NYMEX OPEN INTEREST

0%

20%

40%

60%

80%

100%

Jan-06

Feb-06

Mar-06

Apr-06

May-06

Jun-06

Jul-06

Aug-06

Sep-06

Fig. 30. Amaranth held nearly 40% of the total open interest in NYMEX futures contracts for the winter of 

2006-07 (October through March). Data source: Amaranth and NYMEX. 

Table 9, which provides selected data from these figures, shows how Amaranth’s open 

interest in natural gas contracts increased from February to April 2006. The significant growth 

in Amaranth’s positions in other winter and summer contracts during this period is further 

evidence that Amaranth’s large buys of winter contracts and large sales of summer contracts 

were the major cause of the widening difference in price between the winter and summer 

contracts. 

Table 9 

Growth in Amaranth Positions in Early 2006

NYMEX Contract Month 

Jun 

06 

Jul 

06 

Aug 

06 

Sep 

06 

Oct 

06 

Nov 

06 

Dec 

06 

Jan 

07 

Feb 

07 

Mar 

07 

% of NYMEX 2/1/06 9 2 12 0 1 9 5 12 53 20 

open interest 

held by 

Amaranth on: 4/28/06 32 14 27 18 3 61 16 45 40 38 

 Amaranth’s trades were not the sole cause of the increasing price spreads between the 

summer and winter contracts; rather they were the predominant cause. This analysis does not 

draw any conclusions regarding whether the underlying market conditions provided a sound 

rationale for investing in the January/November price spread; rather it focuses on how large buys 

and sells of futures contracts by a single trader, whatever the underlying market conditions and 

regardless of the trader’s motivation, were responsible for producing most of the price variation 

in that spread. The trading data show, in short, that the sheer volume of Amaranth’s trades and 

size of its positions affected the November and January contract prices and the resulting price 

spread. 

COMPARED TO 

TOTAL NYMEX OPEN INTEREST

0

100,000

200,000

300,000

400,000

500,000

Jan-06

Feb-06

Mar-06

Apr-06

May-06

Jun-06

Jul-06

Aug-06

Sep-06

NYMEX Open

Interest

Amaranth Open

Interest

contracts
 69 

 The trading data also indicate that Amaranth’s 

effect on the January/November price spread affected 

other key price spreads. For example, because the 

fundamentals of natural gas supply and demand for 

October are so closely related to the supply and 

demand fundamentals for November, the price of the 

October contract is typically closely related to the 

price of the November contract. Hence, the 

difference in price between the January contract and 

the November contract is closely related to the 

difference in price between the January contract and 

the October contract. Because October is warmer 

than November, the January/October spread will 

generally be larger than the January/November 

spread, and changes in the January/October spread 

will generally be larger than the corresponding 

changes in the January/November spread. 

 In early 2006, as the price spread between the November futures contract and the January 

futures contract widened, the spread between the January futures contract and the October 

futures contract also widened. There is an extremely high correlation between the behavior of 

these two price spreads in 2006, as reflected in Table 10.89 As Amaranth’s trades increased the 

January/November price spread, the January/October price spread increased too. (Figure 31). 

 Figure 31 

Prices of Related Spreads 

Are Closely Linked

0

1

2

3

4

5

Jan-06

Feb-06

Mar-06

Apr-06

May-06

Jun-06

Jul-06

Aug-06

Sep-06

Jan 07-Oct 06

Jan 07-Nov 06

$ per MMBtu

Fig. 31. The large increases in the January/November price spread contributed to even larger 

increases in the January/October price spread. Data source: NYMEX. 

 

89 Correlations are calculated for the time period preceding the October contract from the first trading day in January 

through the date in August of expiry of the September contract. 

Table 10 

Correlations Between 

January/October and 

January/November 

Price Spreads

Year 

(of Nov 

contract) 

Correlation 

Between 

Spreads 

2002 0.97 

2003 0.97 

2004 0.89 

2005 0.98 

2006 0.89 
 70 

 Moreover, a significant change in just one price spread can have a cascading effect on a 

whole suite of price spreads. Indeed, the data show that, as both the January/November and the 

January/October spreads widened, a variety of other spreads involving the months close to 

October, November, and January also widened.90 The increases caused by Amaranth in the 

January/November price spread thus appear to have contributed to increases in other related 

price spreads as well. 

 The behavior of the two price spreads in early 2006 differed dramatically from previous 

years. Figure 32, which depicts the historical behavior of January/November price spreads, and 

Figure 33, which depicts the same information for the January/October price spreads, show how 

the 2006 price spreads were significantly greater and displayed more volatility than previous 

years.91 Many traders told the Subcommittee they attributed the increased price spreads to 

heightened concerns about the vulnerability of natural gas production to hurricanes or other 

disruptions. Many traders interviewed by the Subcommittee also stated that they considered both 

spreads to be overpriced and that they did not reflect a rational market response to the hurricane 

risk. 

 Figure 32 

January/November Price Spreads

2002-2006 

0

0.5

1

1.5

2

2.5

3

J FM A M J J A S

2006 2005

2004 2003

2002

$ per MMBtu

 

90 Arbitrage trading between futures contracts for different months strengthens these relationships. 

91 Amaranth acquired the majority of the long open interest in the January 2007 contract as a result of its purchases 

of the January/November spread. On several occasions, Amaranth switched some of its short positions from the 

November 2006 contract to the October 2006 contract. For the purposes of this analysis, it does not make a 

difference whether the short leg of the spread was in the October or November contract. 
 71 

 Figure 33 

January-October Price Spreads

2002- 2006

0

1

2

3

4

5

J FM A M J J A S

2006 2005

2004 2003

2002

$ per MMBtu

Figs. 32 and 33. Amaranth’s trading in early 2006 caused extreme volatility in 

the price spreads for natural gas for the winter of 2006-2007. Data source: 

NYMEX. 

In sum, in early 2006, Amaranth accumulated tens of thousands of natural gas contracts 

in multiple months, primarily on NYMEX but also on ICE. In late spring, this strategy looked 

extremely successful; Amaranth’s books showed that its energy trading gains in April alone 

exceeded $1 billion. 

 E. May 2006: Liquidity Evaporates 

“There is no sense in marking up the price to a very high level if you cannot 

induce the public to take it off your hands later.” 

--Reminiscences of a Stock Operator, p. 245. 

Amaranth’s natural gas trading strategy was highly profitable in April 2006. In 

May, the market took all those profits back. 

 In May, Amaranth increased the size of its position in the January/November price spread 

to nearly 60,000 contracts. It also increased its total short position for the next few summer 

months to nearly 70,000 contracts. (Figure 34). During this period, Amaranth continued to hold 

between 60 and 70% of the open interest for the NYMEX natural gas futures contract for 

November 2006, and between 50 and 60% of the open interest for the NYMEX natural gas 

futures contract for January 2007. (Figures 27 and 28, supra). 
 72 

Figure 34 

Amaranth’s Positions in May 2006 

AMARANTH'S POSITIONS 

on MAY 4, 2006

Jun-06

Jan-07

Mar-07

Nov-06

-60000

-40000

-20000

0

20000

40000

60000

ICE

NYMEX

 

AMARANTH'S POSITIONS 

on MAY 15, 2006

Jun-06

Jul-06

Jan-07

Mar-07

Nov-06

Oct-06

-60000

-40000

-20000

0

20000

40000

60000

ICE

NYMEX

AMARANTH'S POSITIONS 

on MAY 21, 2006

Jun-06

Jul-06

Jan-07

Mar-07

Nov-06

Oct-06

-60000

-40000

-20000

0

20000

40000

60000

ICE

NYMEX

 

AMARANTH'S POSITIONS 

on MAY 31, 2006

Aug-06 Apr-07

Jul-06

Jan-07

Mar-07

Nov-06

Oct-06

-60000

-40000

-20000

0

20000

40000

60000

ICE

NYMEX

Fig. 34. In May 2006, Amaranth increased the size of its position in the January/November price spread 

while simultaneously increasing its short position for the next few summer months. Following its losses 

during the last week of May, Amaranth switched its positions on ICE to NYMEX to reduce its margin 

requirements.92 

 In mid-May Amaranth tried to reduce some of its positions and realize some of the gains 

in the value of its holdings. Amaranth found it difficult to find enough buyers willing to pay the 

prevailing market prices for these positions. Additionally, toward the end of the month a number 

of other large traders sold futures contracts while prices were high. This pushed prices down, 

making it even harder for Amaranth to find buyers at the prices it wanted to lock in its profits. 

Amaranth’s traders debated whether to hold their positions and wait for buyers at higher prices, 

or to begin selling its positions and give back some of their previous gains. 

 

 During the last week of May the market turned sharply against Amaranth. All of the 

winter/summer price spreads fell sharply. The January/November price spread, for example, fell 

from $2.15 to $1.73, a drop of about 20%. In total, Amaranth lost more than $1.16 billion in the 

value of its energy contracts during the last week of May. Nevertheless, due to its large gains in 

 

92 E-mail from Damir Durkovic to Jim Glynn, David Chasman, Jeff Baird, Brian Hunter, May 30, 2006, Bates No. 

AALC_REG0154959. 
 73 

the previous months, Amaranth was able to report to its investors a net return of more than 15% 

for the first five months of the year. 

 

 In its monthly letter to investors Amaranth described May 2006 “as the worst month 

since inception.” Amaranth’s officers explained that after the successful month of April the fund 

had tried to reduce its positions and capture some of its gains but was unable to do so: 

Historically, the market has provided sufficient liquidity and opportunity for us to 

tailor the portfolio as desired despite rapidly changing market dynamics. This 

“expansion/contraction” approach has enabled us to generate more profits than if 

we had required the team to unwind trades aggressively whenever markets moved 

in our favor. In this case, as we endeavored to monetize gains (and reduce risk) 

within the portfolio, liquidity in the market seized up due to high volumes of 

producer hedging that oversaturated market demand for forward natural gas. 

While this was a humbling experience that has led us to recalibrate how we assess 

risk in this business, we believe certain spread relationships remained 

disconnected from their fundamental value drivers.93 

 It is not surprising that Amaranth had difficulty finding buyers when it tried to sell its 

high-priced spread positions. Generally, a buyer will be able to build a large position if he or she 

is willing to pay escalating prices to do so. As prices are rising, there will be plenty of sellers. 

The presence of many sellers at high prices, however, does not mean there will be many buyers 

at high prices. If a very few or only one trader had been doing all the buying as prices were 

rising, there may be even fewer or no buyers at all at the resulting high prices. 

 In addition, there is an inherent imbalance between buyers and sellers in the natural gas 

futures market. Generally, the producers of natural gas use the futures market to hedge their 

future sales and thus are generally sellers of futures contracts. Many end users, such as 

residential customers and even some LDCs, do not use the futures market to hedge their future 

purchases. The end result is that the natural gas market consists of more “natural” sellers than 

buyers. 

 Speculators in the natural gas market help balance out the buyers and sellers. By 

purchasing futures when they believe them to be under-priced, speculators help make up for the 

structural shortage of buyers and help producers hedge their future sales. 94 Amaranth had no 

difficulty finding sellers when it was buying contracts for the winter months while spread prices 

were high. In this instance, the presence of more sellers than buyers worked to Amaranth’s 

advantage. When Amaranth decided to try to sell those high-priced positions, however, it could 

not find nearly enough buyers who were willing to pay even higher prices to take those positions 

from Amaranth. In this instance, the natural shortage of buyers worked against Amaranth. 

 

93 Amaranth letter to investors from JPMorgan Chase, May 2006 Update, Bates No. JPM-PSI 00006981. In 

interviews with the Subcommittee, Amaranth traders provided similar explanations for their May losses. 

94 For a more detailed discussion of the financial strategies of producers and speculators, see also Hillary Till, 

EDHEC Comments on the Amaranth Case: Early Lessons from the Debacle (2006). 
 74 

 Amaranth’s inability to find buyers at the prevailing prices is additional evidence that 

most traders considered the market to be overpriced. Winter/summer spread prices were at 

unusually high levels compared to past years. Although Amaranth may have believed that its 

positions reflected fundamental values, few other traders appear to have shared that view. One 

hedge fund trader told the Subcommittee that the level of the January/October spread at that 

point in time was “totally out-of-whack;” another trader said that it was “ridiculous.” 

 

 The sheer size of Amaranth’s positions made it difficult to find enough buyers to 

purchase its holdings. On 18 of 21 trading days in May, Amaranth’s positions accounted for 

more than 50% of the open interest in the January 2007 NYMEX natural gas futures contract. 

On all trading days in May, Amaranth accounted for at least 55% of the open interest in the 

November 2006 contract. Amaranth’s open interest in the November contract was greater than 

the total open interest in each of the NYMEX November contracts during the month of May in 

each of the preceding three years. (Figure 35a). Similarly, in May 2006, Amaranth held as 

much or more open interest in the NYMEX January contract than all NYMEX traders combined 

in the month of May in each of the prior three years. (Figure 35b). In other words, in 2006, 

Amaranth’s positions in each of these two contracts was about as large as the entire NYMEX 

market for these contracts over a similar time period in each of the three previous years. Put 

simply, Amaranth was too big for the market it had created. 

 Figure 35a 

NYMEX Futures Contracts for November:

Open Interest from January-May

0

20000

40000

60000

J FM A M

Total NYMEX, 2003

Total NYMEX, 2004

Total NYMEX, 2005

contracts

Total, 2006

Amaranth, 2006
 75 

 Figure 35b 

NYMEX Futures Contracts for January:

Open Interest from January-May

0

20000

40000

60000

J FM A M

Total NYMEX, 2003

Total NYMEX, 2004

Total NYMEX, 2005

contracts

Total, 2006

Amaranth, 2006

Figs. 35a and 35b. From March through May 2006, Amaranth held more open interest in 

the November NYMEX futures contract than was held by all other traders combined in 

the November contract in a similar time period in previous years. Amaranth also held as 

much or more open interest in the January contract than all other traders combined in 

previous years. Data source: NYMEX. 

 The box that Amaranth built and found itself inside of—buying up the market, bidding up 

the prices, and then finding a lack of other persons to sell those positions to—had detrimental 

consequences for many other market participants too. The prevailing price levels, especially the 

extraordinary price spreads that arose in the spring of 2006, did not arise from the interaction of 

many buyers and sellers or reflect the “consensus” market view of the fundamentals of supply 

and demand. Rather, the market largely reflected the actions of a single trader whose steady 

buying and accumulation of very large positions exerted a continuing upward push on prices 

over this time period. 

 On the last trading day in April before the May futures contract expired, Amaranth made 

a sizeable last-minute sale that caught the attention of the NYMEX market surveillance program. 

The last day of trading for the May 2006 NYMEX futures contract was on April 26, 2006. On 

that day, Amaranth sold just over 3,000 May futures contracts, 2,527 of which were sold during 

the final 30 minutes of regular trading, the period in which the final settlement price for the 

expiring May contract was determined. According to NYMEX, “Of these 2,527 contracts, 

Amaranth sold 99%, or 2,517 contracts, during the final four minutes of regular trading hours. 

Of these 2,517 contracts, Amaranth sold 75%, or 1,897 contracts, during the final minute of 

regular trading hours. Amaranth further sold 517 contracts during the ‘post-close’ trading 

session.”95 

 

95 Letter from Anthony V. Densieski, Senior Director, Market Surveillance, NYMEX, to Mike Carrieiri, Chief 

Compliance Officer, Amaranth, August 2, 2006, Bates No. NX-USSEN-00096. Post-close trading refers to a twominute period of trading that occurs after natural gas trading has ended for the day. NYMEX reopens the markets to 
 76 

 Amaranth was the largest seller of contracts during the final minutes of the settlement 

period, accounting for about 15% of the trading volume during the last eight minutes of trading. 

During that period, the price of the May contract fell significantly. At 2:00 p.m., the start of the 

settlement period for the May contract, the price of the May contract was around $7.15 per 

MMBtu. Over the next 10 minutes the price rose about 12 cents to around $7.27. The price 

remained at that level for about 12 minutes. During the last eight minutes of trading, the price 

fell 17 cents to around $7.10. The final settlement price for the May contract, which is 

calculated to be the volume-weighted average of the prices during the 30-minute settlement 

period, was fixed at $7.198. 

 After noting Amaranth’s large volume of trading near the close of this contract, NYMEX 

asked Amaranth to “provide a written explanation of the commercial need and justification for 

their trading.” 96 In its response, Amaranth stated that in early 2006 its “primary natural gas 

trading strategy was to hold long winter month positions and short summer month (which 

consisted of NG, ICE OTC Cleared, OTC and ClearPort Contracts).”97 After its gains in April, 

Amaranth wrote, it began to develop strategies to reduce these positions. 98 

 Amaranth told NYMEX that on the date of the expiration of the May 2006 contract it was 

waiting to see how many long winter contracts it could sell before deciding how to dispose of its 

summer 2006 contracts. “Amaranth monitored the winter natural gas market on April 26 hoping 

to sell winter, and roll the long May NG to June on a spread. Towards the end of the trading day 

it became apparent that Amaranth would not be able to sell the winter contracts at attractive 

prices. Thus, Amaranth decided (to the best of its recollection), at some time between 

approximately 2:17-2:23 p.m., to sell the May NG contracts outright.”99 Amaranth explained 

that its trading of May 2006 contracts during the settlement period “was motivated by the desire 

to achieve an aggregate reduction in the risk of its portfolio.” The CFTC has an ongoing 

investigation into Amaranth’s trading activities on that date. 

 Amaranth’s energy portfolio showed a loss of $1 billion during the month of May. 

Reports of Amaranth’s large losses spread through the natural gas market. One trader told the 

Subcommittee: “Bad news travels fast in this industry. You can’t lose a billion dollars and not 

have a lot of people find out about it.” The size of the losses also alerted the market to the 

potential size of Amaranth’s natural gas holdings. “A big hedge fund that shows big losses must 

have big positions that were losing money,” a trader told the Subcommittee. “It didn’t take 

rocket science to figure out there was one player in the market, and who that player was. No one 

else could have taken positions of this size.” 

 trading during this time, but does not count trading during this period toward that day’s settlement price. See 

NYMEX Rule 6.57, “Post-Close Trading Session.”

96 Id. 97 Letter from Mike Carrieiri, Chief Compliance Officer, Amaranth, to Anthony V. Densieski, Senior Director, 

Market Surveillance, NYMEX, August 15, 2006, Bates No. NX-USSEN-001208-10. 

98 Amaranth wrote that “One effective strategy had been to sell winter positions and cover short summer positions 

by allowing financially settled swaps to expire and by either selling or rolling futures prior to their expiration.” Id. 99 Letter from Amaranth to NYMEX, August 15, 2006, Bates No. NX-USSEN-001209The term “NG” refers to 

natural gas. 
 77 

 This same trader told the Subcommittee that, based on the size of the losses and the 

volume of trading activity, it was not difficult to discern what Amaranth’s positions were. He 

guessed that Amaranth was behind the unprecedented price spread between the October and 

January contracts. He observed that, “The October-January spread had never done anything like 

this.” This trader also concluded that Amaranth was long on the March 2007/April 2007 price 

spread, and long on the November/January spread, since both those price spreads were out of 

proportion to historical norms. “It was naïve to think that they could get out of the market with a 

size of 100,000 positions,” the trader added. “I knew Amaranth would eventually implode. It 

was just a question of when.” 

 F. June and July 2006: Amaranth Increases its Positions 

“Who cares about the fundamentals?” 

 --James J. Cramer, 2007100

“It is not wise to disregard the message of the tape, no matter what your opinion 

of crop conditions or of the probable demand may be.” 

 --Reminiscences of a Stock Operator, p. 124. 

By the end of May, at least some of Amaranth’s traders and officers were aware of the 

firm’s predicament – that it had accumulated larger natural gas positions than it could sell 

profitably. According to Amaranth traders interviewed by the Subcommittee, the firm decided to 

wait and see if more liquidity would develop for Amaranth to be able to reduce the size of its 

winter/summer spread positions at favorable prices. The alternative would have been to unwind 

some of its positions and take the loss that would result from selling those positions in a falling 

market. “We thought about pulling the trigger and taking the loss,” an Amaranth trader said. 

“We had many discussions about it. We figured we could get out for maybe a billion dollars. 

But we decided to ride it out and see if the market would come around,” he explained. 

(1) Increasing Summer and Winter Positions 

In June and July 2006, Amaranth did not, however, pare down its spread positions; it 

enlarged them. At the beginning of June, Amaranth held around 53,000 January 2007 contracts, 

virtually all of which were on NYMEX. Over the course of the month, Amaranth increased its 

January 2007 position by about 13,000 contracts, mostly by trading on ICE. By the end of June, 

Amaranth held short positions of about 44,000 contracts for August 2006, 46,000 contracts for 

September 2006, and 51,000 contracts for November 2006. It was long about 26,000 contracts 

for October 2006, and 60,000 contracts for January 2007. These positions were the largest 

Amaranth had held to date. 

 

100 Interview from TheStreet.com, December 2006. 
 78 

Figure 36 

Amaranth Positions in June 2006 

AMARANTH'S POSITIONS 

on JUNE 5, 2006

Aug-06 Apr-07

Jul-06

Oct-06

Jan-07

Mar-07

Nov-06

-80000

-60000

-40000

-20000

0

20000

40000

60000

80000

ICE

NYMEX

 

AMARANTH'S POSITIONS 

on JUNE 15, 2006

Aug-06

Apr-07

Jul-06

Oct-06

Jan-07

Mar-07

Nov-06

-80000

-60000

-40000

-20000

0

20000

40000

60000

80000

ICE

NYMEX

AMARANTH'S POSITIONS 

on JUNE 21, 2006

Sep-06

Aug-06

Apr-07

Jul-06

Oct-06

Jan-07

Mar-07

Nov-06

-80000

-60000

-40000

-20000

0

20000

40000

60000

80000

ICE

NYMEX

 

AMARANTH'S POSITIONS 

on JUNE 29, 2006

Aug-06 Sep-06

Apr-07

Oct-06

Jan-07

Mar-07

Nov-06

-80000

-60000

-40000

-20000

0

20000

40000

60000

80000

ICE

NYMEX

Fig. 36. In June 2006, Amaranth continued to increase the size of its position, mostly by 

trading on ICE. 

Amaranth continued to build these positions throughout July. By the end of July, for 

example, Amaranth had increased its long position for January 2007 to nearly 80,000 contracts. 

The amount of natural gas represented by a position size of 80,000 natural gas contracts for 

January 2007 is nearly equal to the entire amount of natural gas that was actually used by U.S. 

residential consumers nationwide during January 2007. It was an extraordinary large position in 

a single futures month. 
 79 

Figure 37 

Amaranth Positions in July 2006 

 

AMARANTH'S POSITIONS 

on JULY 12, 2006

Aug-06 Apr-07

Oct-06

Jan-07

Mar-07

Nov-06

Sep-06 -80000

-60000

-40000

-20000

0

20000

40000

60000

80000

ICE

NYMEX

 

AMARANTH'S POSITIONS 

on JULY 26, 2006

Sep-06 Apr-07

Oct-06

Jan-07

Mar-07

-80000

-60000

-40000

-20000

0

20000

40000

60000

80000

ICE

NYMEX

Fig. 37. Amaranth continued to increased the size of its position during July 2006, ending 

the month with 80,000 contracts for January 2007, approximately the amount of natural 

gas that was eventually used by U.S. residential consumers nationwide in January 2007. 

In addition to building its long position for the winter months, Amaranth added to its 

short position for the upcoming summer and fall months. For example, Amaranth rolled short 

positions in the August contract that was expiring into the contract for the following month of 

September.101 By the end of July, Amaranth held a short position for September of about 63,000 

contracts. 

 

101 “Rolling” a position consists of shifting a position from one month to the next. Rolling a short position requires 

purchasing futures contracts for the first month and then selling an equivalent number of contracts for the second 

month, thereby finishing with no net position for the first month and a net short position in the second month. 

Rolling a long position requires selling futures contracts for the first month and then buying an equivalent number of 

contracts for the second month, effectively shifting the long position from the first month to the second month. 

AMARANTH'S POSITIONS 

on JULY 5, 2006

Aug-06

Apr-07

Oct-06

Jan-07

Mar-07

Nov-06 Sep-06

-80000

-60000

-40000

-20000

0

20000

40000

60000

80000

ICE

NYMEX

AMARANTH'S POSITIONS 

on JULY 19, 2006

Sep-06

Aug-06

Apr-07

Oct-06

Jan-07

Mar-07

Nov-06

-80000

-60000

-40000

-20000

0

20000

40000

60000

80000

ICE

NYMEX
 80 

(2) March/April Price Spread 

 Throughout June and July, Amaranth added to another spread position as well, this time 

between two consecutive months, March 2007 and April 2007. By the end of July, Amaranth 

was long approximately 59,000 contracts for March, and short about 80,000 contracts for April. 

By any measure, both positions were substantial. 

 Natural gas futures prices for two consecutive months are normally similar, since the two 

months are likely to share similar weather and be subject to similar supply and demand trends. 

The months of March and April, however, are an exception. March is the last month of the 

winter heating season, when natural gas supplies are low but gas is still being withdrawn from 

storage, and April is considered the first month of the summer season, when gas storage facilities 

begin to be refilled. The price difference between March and April contracts, therefore, is one 

of the most volatile natural gas price spreads. As a result of this unpredictability, taking a 

position in the March/April spread is sometimes referred to as “the widowmaker” bet.102 

 Amaranth’s pattern of trading with respect to the March and April contracts differed from 

its trading pattern with respect to the January and November contracts. Amaranth steadily built 

its positions in the January/November spread over the course of a number of weeks, and the price 

spread steadily rose over a similar period of time. (Figure 29b). In contrast, the March/April 

spread already was at a relatively high level when Amaranth began taking positions in those 

contracts. On several specific dates, Amaranth increased its positions in both contracts by huge 

amounts, which significantly boosted the price spread on those dates. These spikes not only 

resulted in higher prices on the specific dates on which Amaranth made large purchases, but also 

resulted in higher prices than otherwise would have been the case in the days following those 

spikes. These price spikes, which all traders could see had been driven by large scale trading, 

deterred some traders from pursuing their view that prices should fall. Traders feared that 

additional price spikes resulting from this large-scale trading would prevent prices from falling, 

despite market fundamentals. 

Trading data show that Amaranth’s purchases of the March/April 2007 spread 

significantly affected the price of the spread. On two dates in particular, May 26 and July 31, 

Amaranth purchased very large amounts of this spread. On these dates, the price spread 

increased significantly as a direct result of Amaranth’s trading. 

 

102 Davis, Hedge Fund Hardball, supra note 83. 
 81 

 On May 26, Amaranth’s 

purchases of the March 2007 NYMEX 

natural gas futures contract accounted for 

nearly 50% of the total volume of the 

March 2007 contract on that date. On the 

same date, Amaranth’s sales of the April 

2007 futures contract accounted for just 

over 50% of the volume of the NYMEX 

April contract. As Table 11 indicates, 

Amaranth also accounted for the vast 

majority of trading in natural gas swap 

contracts for March 2007 and April 2007 

on ICE and on NYMEX Clearport. 

 Amaranth’s large trades were a 

major factor in the 25-cent increase in the 

price spread that occurred on that date. 

As reflected in Figure 35, this was the 

third-largest increase in this price spread 

during 2006. 

 

Table 11 

Amaranth Purchases 

of March/April 2007 Spread Positions 

on May 26, 2006 

 Mar 07 Apr 07 

Total volume 5,423 4,816 

Amaranth volume +2,599 -2,605 

Amaranth volume 

(% of total) 48% 54% 

NYMEX 

 NG 

Amaranth open 

interest (% of total) 27% 14% 

Total volume 5,444 6,161 

Amaranth volume +4,900 -4,900 

Amaranth volume 

(% of total) 90% 80% 

Clearport 

NN 

Amaranth open 

interest (% of total) 4% 21% 

Total volume 14,051 11,738 

Amaranth volume +8,347 -8,284 

ICE 

Electronic 

Amaranth volume 

(% of total) 59% 71% 

ICE 

OTC 

Amaranth volume +125 -125 
 82 

Figure 38 

March/April 2007 Price Spread

5/26

0.00

0.50

1.00

1.50

2.00

2.50

3.00

Jan-06

Feb-06

Mar-06

Apr-06

May-06

Jun-06

Jul-06

Aug-06

Sep-06

 4/18

6/15

$ per MMBtu 7/31

Fig. 38. From January through August, the March/April spread for 2007 ranged 

between $1.50 and $2.50. The price curve of this spread was punctuated by 

several price spikes. Data source: NYMEX. 

 Figure 39 

March/April 2007 Price Spread

Daily Change

7/31

 6/15

5/26 4/18

-0.60

-0.40

-0.20

0.00

0.20

0.40

0.60

0.80

Jan-06

Feb-06

Mar-06

Apr-06

May-06

Jun-06

Jul-06

Aug-06

Sep-06

$ per MMBtu

Fig. 39. Three of the four largest spikes in the March/April 2007 price spread 

occurred on days of large-scale trading by Amaranth. Data sources: Amaranth, 

NYMEX, and ICE. 
 83 

As Figure 39 shows, another spike in the price spread between the March and April 

contracts occurred on June 14 and 15. Over the course of these two dates, the price spread 

between these contracts increased by 51 cents. This increase is also, in large part, attributable to 

Amaranth’s large trading on these dates. 

 

 Amaranth’s trades on July 31 had a significant effect upon the March/April spread price. 

These purchases followed a record-setting heat wave in July that caused the first-ever 

summertime withdrawal of natural gas from storage. From mid- through late-July, intense heat 

waves in the West, Midwest, and East led to a large spike in the demand for electricity for air 

conditioning, prompting a surge in demand for natural gas. “Conditions seen last week were the 

most extreme in many years, shattering previous records for U.S. electricity production and 

power sector consumption of natural gas,” one analyst noted.103 “For the first time in the weekly 

 

103 Energy Trader, “Cooling demand prompts first-ever drawdown of gas in storage during summer months: EIA,” 

July 28, 2006. 

Table 12 

Amaranth Purchases 

of March/April 2007 Spread Positions 

on June 14 and 15, 2006 

June 14 June 15 

 Mar 07 Apr 07 Mar 07 Apr 07 

Total volume 6,281 6,140 4,271 2,731 

Amaranth volume +3,699 -3,699 +2,325 -200 

Amaranth volume 

(% of total) 59% 60% 54% 7% 

NYMEX 

NG 

Amaranth open 

interest (% of total) 42% 25% 44% 24% 

Total volume 823 426 2,312 1,414 

Amaranth volume -16 0 +1,169 -30 

Amaranth volume 

(% of total) 0% 0% 51% 2% 

Clearport 

 NN 

Amaranth open 

interest (% of total) 32% 40% 36% 40% 

Total volume 4,705 4,540 3,156 2,896 

Amaranth volume +1,217 -841 +752 -376 

ICE 

Electronic 

Amaranth volume 

(% of total) 26% 19% 24% 13% 

 ICE 

OTC 

Amaranth volume -- -- -- -- 
 84 

data for the warmer months of May through September from 1994 to the present,” DOE’s EIA 

reported, “[last week’s data] showed a net withdrawal of 7 Bcf [Billion cubic feet] for the week, 

contrasting sharply with the 5-year average net injection of 65 Bcf and last year’s net injection of 

41 Bcf. This week’s net withdrawal was driven largely by higher temperatures and price 

incentives prevailing during much of the week.”104

Figure 40 

Amaranth’s Purchases of the March/April 2007 Spread on July 31, 2007 

 

AMARANTH'S POSITIONS 

on JULY 31, 2006

Sep-06

Apr-07

Jan-07

Mar-07

-90000

-60000

-30000

0

30000

60000

90000

ICE

NYMEX

(+59172)

(-80149)

Fig. 40. On July 31, Amaranth bought nearly 26,000 natural gas contracts for March 

2007 and sold about 24,000 contracts for April 2007. 

 

104 EIA, Natural Gas Weekly Update, July 27, 2006. 

AMARANTH'S POSITIONS 

on JULY 28, 2006

Mar-07 

Jan-07

Apr-07 Sep-06

-90000

-60000

-30000

0

30000

60000

90000

ICE

NYMEX

(+33379)

(-56062)
 85 

As Table 13 shows, Amaranth’s 

purchases of the March/April contracts 

on July 31 dominated the trading of both 

natural gas contracts on NYMEX and 

ICE for that date. On July 31, the 

difference in the prices of the March and 

April contracts increased by 72 cents, an 

extraordinarily large jump in the price 

spread between these two contracts. 105 

 Figure 41 shows how 

Amaranth’s purchases of the March 

contract increased its share of the open 

interest in that contract to about 60%. 

Figure 42 shows how Amaranth’s sales 

of the April contract increased its share 

of the short open interest in that contract 

to nearly 50% of the open interest in the 

April contract. 

 

105 Statistically, the 72-cent increase on July 31 was a seven-standard deviation event, in relation to the changes in 

the price of this spread between January 3 and August 31, 2006. If the market were truly an efficient market, in 

which price movements were random and no single trader had the ability to move the price, a daily price change of 

seven-standard deviations would be expected once every several hundred million years. Several market experts told 

the Subcommittee, however, that the natural gas market does not conform to any simple statistical model. One 

trader said, “Seven-standard deviations events happen all the time in this market.” 

Table 13 

Amaranth Purchases 

of March/April 2007 Spread Positions 

on July 31, 2006 

 Mar 07 Apr 07 

Total volume 15,594 15,541 

Amaranth volume +10,670 -10,613 

Amaranth volume 

(% of total) 68% 68% 

NYMEX 

NG 

Amaranth open 

interest (% of total) 58% 47% 

Total volume 2,836 1,943 

Amaranth volume +541 -478 

Amaranth volume 

(% of total) 19% 25% 

Clearport 

NN 

Amaranth open 

interest (% of total) 16% 52% 

Total volume 22,087 21,265 

Amaranth volume +13,000 -10,931 

ICE 

Electronic 

Amaranth volume 

(% of total) 59% 51% 

ICE OTC 

Amaranth volume +562 -560 
 86 

Figure 41 

Amaranth Open Interest, NYMEX Natural Gas Futures Contract for March 2007 

COMPARED TO TOTAL NYMEX OPEN 

INTEREST

0

20000

40000

60000

80000

100000

Jan-06

Feb-06

Mar-06

Apr-06

May-06

Jun-06

Jul-06

Aug-06

Sep-06

NYMEX Open Interest

Amaranth Open Interest

contracts

7/31

 

% OF NYMEX OPEN INTEREST

0%

20%

40%

60%

80%

100%

Jan-06

Feb-06

Mar-06

Apr-06

May-06

Jun-06

Jul-06

Aug-06

Sep-06

 7/31

Fig. 41. By July 31, Amaranth held around 60% of the open interest in the March 2007 contract. Data 

source: NYMEX. 

 

Figure 42 

Amaranth Open Interest, NYMEX Natural Gas Futures Contract for April 2007 

COMPARED TO TOTAL NYMEX OPEN 

INTEREST

0

20000

40000

60000

80000

Jan-06

Feb-06

Mar-06

Apr-06

May-06

Jun-06

Jul-06

Aug-06

Sep-06

NYMEX Open Interest

Amaranth Open Interest

contracts

 7/31

 

% OF NYMEX OPEN INTEREST

0%

20%

40%

60%

80%

100%

Jan-06

Feb-06

Mar-06

Apr-06

May-06

Jun-06

Jul-06

Aug-06

Sep-06

7/31

Fig. 42. By July 31, Amaranth held nearly 50% of the open interest in the April 2007 contract. Data 

source: NYMEX. 
 87 

 The clearest explanation for the extreme magnitude of the price spread increase on July 

31 is Amaranth’s large volume of trading in the March and April contracts. Amaranth was the 

largest trader on both NYMEX and ICE.106 Figure 43 shows the relationship between 

Amaranth’s long positions in March 2007 natural gas futures contracts on NYMEX and 

corresponding ICE natural gas swaps. Figure 43 shows how the large increases in the 

March/April price spread during the summer of 2006 tracks the changes in Amaranth’s position 

in that spread 

 Figure 43 

Amaranth's Purchases of March 2007 Contracts 

and March/April Spread Prices

0

10000

20000

30000

40000

50000

60000

70000

80000

3-Jan 1-Feb 2-Mar 31-Mar 1-May 30-May 27-Jun 27-Jul 24-Aug

0.50

1.00

1.50

2.00

2.50

3.00

Amaranth ICE Positions

Amaranth NYMEX Positions

March/April Price Difference

contracts

5/26

5/26

7/31

6/15

6/15

Fig. 43. Amaranth’s large purchases of the March and April 2007 contracts on May 26, June 14-

15, and July 31, 2006, were a major cause of the price spread increases on those dates. Data 

Sources: NYMEX and ICE. 

The trade publication Inside FERC interviewed several traders who explained the price 

rise at the end of July as being driven by speculation rather than market fundamentals. One 

analyst was quoted: “You don’t move $1 in a day without the hedge funds in it. You just don’t. 

No change in weather can take credit for a $1 change in pricing.”107

 

 

106 In instant message obtained by the Subcommittee, a trader wrote Brian Hunter on the afternoon of July 31, 2006: 

“Brian, u busy...what the hell is going on out there, rumour is you are getting even more rich!!! ...I heard March 

April swap spd [spread?] you made a killing... so according to the market you are brilliant!!!!!! Can do no wrong... 

ever!” Message obtained by Subcommittee from Amaranth, Bates No. AALLC_0627973. 

107 Inside FERC, Hedge fund headed by ex-NYMEX chief folds amid sizeable gas market losses, Gas Market Report, 

August 11, 2006. 
 88 

By the end of July, Amaranth was short nearly 60,000 contracts for September, 42,000 

contracts for October, and 80,000 contracts for April 2007; it was long 80,000 contracts for 

January 2007, 60,000 contracts for March 2007, and 29,000 contracts for December 2007. 

Amaranth held about 40% of the total open interest in the NYMEX natural gas market for all of 

the winter months (October 2006 through March 2007). 

G. Early August 2006: NYMEX Limits Amaranth; Amaranth Moves to ICE 

“It is obviously better in every way for a stock to be held by a thousand people 

than by one man—better for the market in it.” 

 --Reminiscences of a Stock Operator, p. 245. 

During 2006, NYMEX repeatedly reviewed Amaranth’s natural gas holdings to 

determine whether they exceeded NYMEX’s established position limits or accountability levels. 

On several occasions, Amaranth traded large numbers of contracts near their expiration date, 

triggering NYMEX notices that the firm had violated NYMEX position limits; a CFTC 

investigation of one of these instances is still ongoing. 

 In August 2006, NYMEX took more forceful action to limit Amaranth’s trading, 

directing Amaranth to reduce its positions in the NYMEX futures contracts not just for the 

September contracts that were about to expire, but also for its contracts in the following month of 

October. In response, Amaranth reduced its positions in those contracts on NYMEX, but at the 

same time increased its positions in the corresponding contracts on ICE. The end result was that 

Amaranth maintained and even increased its positions in contracts for September and October 

and preserved its ability to engage in large-scale trading as the September contract neared 

expiration. In fact, Amaranth’s move enhanced its ability to conduct large-scale trading near the 

contract expiration, because, under current law, no market surveillance or position limits apply to 

trading on ICE. 

1. Position Limits and Accountability Levels

 As explained earlier, NYMEX officials are responsible for conducting day-to-day 

oversight of the exchange to ensure orderly trading and prevent fraud, manipulation, and 

excessive speculation. The CFTC is also responsible for reviewing the trading on regulated 

exchanges to prevent trading abuses, but it relies on the exchanges themselves to be the first line 

of defense against misconduct and to alert them to any concerns. 

 

As part of its monitoring efforts, NYMEX compliance officials routinely review the 

positions of NYMEX traders to ensure they fall within NYMEX position limits and 

accountability levels. With respect to energy commodities, NYMEX has established a fixed 

position limit that applies during the last three days of trading of a futures contract. The 

NYMEX rule states: “No person may own or control a net long position or a net short position 

in the expiration or current delivery month in excess of [1,000 contracts].”108 

 

108 NYMEX Exchange Rulebook, 9.27 and Chapter 9, Appendix A. 
 89 

 For all months other than the expiration month, neither the CFTC nor NYMEX has 

chosen to establish any fixed position limits. Instead, for energy commodities, the CFTC has 

directed approved exchanges to establish “accountability levels” which, when exceeded, require 

a trader, upon request of the exchange, to provide information about its positions and, if ordered 

by the exchange, to reduce those positions. NYMEX has established three accountability levels 

for positions held by natural gas traders: (1) a net position of 12,000 natural gas contracts in a 

single month (called the “Any One Month Accountability” level);109 (2) a net position of 12,000 

natural gas contracts across all months (called the “All Month Accountability” level);110 and (3) a 

net position of 1,000 NYMEX natural gas swaps within the last three trading days of the related 

physically settled futures contract (called the “Expiration Position Accountability” level).111 

Traders are not prohibited from exceeding the NYMEX accountability levels, but 

NYMEX has the authority to require traders who exceed the levels to reduce those positions. 

Alternatively, NYMEX can temporarily increase the accountability levels for a particular trader 

if NYMEX concludes the trader’s overall position in the market is not excessively concentrated 

in a particular commodity or contract. In making the determination of whether a trader’s 

position is excessively concentrated, NYMEX considers only the trader’s positions on the 

NYMEX exchange. NYMEX has no legal authority to place trading limits on another exchange, 

particularly an exempt commercial market like ICE.112 

 NYMEX surveillance officials routinely review the positions of NYMEX traders in 

relation to the accountability levels. Once a trader’s futures contracts exceed an accountability 

level, NYMEX will review the trader’s position in relation to the overall open interest in the 

contract to determine whether to allow the trader to maintain or increase its position, or whether 

to direct the trader to reduce its position. 

Evaluating a trader’s positions in relation to the NYMEX accountability levels may entail 

a detailed analysis of the trader’s positions and the size of the market in a variety of related 

contracts. CFTC and NYMEX rules provide, for example, that, in addition to reviewing a 

trader’s long and short futures contracts, NYMEX may consider the trader’s positions in related 

NYMEX options and swaps. For example, if a trader has more than 12,000 futures contracts in 

one month, but also holds an offsetting position in NYMEX options for the same month, 

NYMEX may—and probably will—permit that trader to continue to hold that number of futures 

contracts, since the trader’s overall position in the market is neutral. Another key factor in the 

NYMEX analysis is the trader’s position relative to the whole market. A position of 12,000 

contracts may be of extreme concern if the contract is near expiration and the total open interest 

in the contract is fewer than 20,000 contracts—in that instance, the trader’s position is dominant 

relative to the rest of the market. On the other hand, a position of 12,000 contracts when 

expiration is several months away and the total open interest is over 100,000 contracts will be of 

 

109 NYMEX Exchange Rulebook, 9.26 and Chapter 9, Appendix A. 110 Id. 111 NYMEX Exchange Rulebook, 9.27A and Chapter 9, Appendix A. The trader’s net position is determined by 

adding up all the long positions and subtracting all the short positions. 

112 Section 2(h)(3) of the CEA specifically states that “nothing in this Act shall apply to an agreement, contract, or 

transaction in an exempt commodity” entered into on an electronic trading facility, other than specifically provided 

in the following paragraph. Section 2(h)(4) does not confer any authority, or authorize the CFTC to delegate any 

authority, to a designated contract market over trading on an exempt commercial market. 
 90 

much less concern. It is also not unusual for futures contracts that will not expire for several 

years to have contracts held by only a handful of traders, and therefore some will hold a high 

percentage of the open interest. In many cases, NYMEX will determine that these traders’ 

holdings do not constitute excessive market concentration. 

 After conducting this market analysis, NYMEX has frequently permitted individual 

traders to trade in excess of the Any and All position accountability levels set forth in its rules. 

In doing so, NYMEX has concluded, in effect, that these traders’ holdings do not pose a 

sufficient risk of excessive speculation to harm the market. NYMEX accountability levels thus 

function, not as bright lines that no one may cross, but as triggers for further review. 

 Given the importance of the individualized market analysis that NYMEX performs in 

deciding how to apply its accountability limits to a particular trader, it is important to note that, 

when evaluating that trader’s positions, NYMEX compliance personnel cannot obtain a complete 

view of the market and are forced to act with incomplete information. In particular, NYMEX 

personnel have no routine access to trading data on ICE, the other leading U.S. commodities 

market whose swaps and options have a direct impact on NYMEX prices.113 This lack of access 

means that NYMEX personnel have no information on the trader’s positions on ICE and no 

information on how those positions relate to the rest of the natural gas financial market. Despite 

the fact that many energy traders use both NYMEX and ICE, current law places NYMEX and 

the CFTC in the untenable position of having to evaluate traders’ positions based upon their 

holdings on NYMEX, while blind to their holdings on ICE. Furthermore, even if the CFTC were 

to obtain information about a trader’s positions on both exchanges showing that the trader’s 

aggregate positions were excessive, under current law the CFTC has no authority to limit that 

trader’s positions on ICE. 

2. NYMEX Reviews of Amaranth’s Positions

 In 2006, Amaranth exceeded the NYMEX position limit for natural gas contracts on 

several occasions and repeatedly exceeded its natural gas accountability limits. During the year, 

NYMEX sent two warning letters to Amaranth regarding specific position limit violations, and 

repeatedly considered whether to require Amaranth to reduce its positions. As a result of 

information produced from NYMEX surveillance, the CFTC initiated an investigation into one 

incident involving Amaranth’s trading near the expiration of the May 2006 contract. Apart from 

 

113 Recently, in an effort to strengthen the enforceability of its position limit during the contract expiration month, 

NYMEX issued a new policy that requires any trader seeking an exemption from the position limit to disclose all of 

its positions over 1,000 contracts, including on other exchanges. NYMEX Compliance Advisory #01-07 – Policy 

Statement Related to Exemptions from Position Limits in NYMEX Natural Gas (NG) Futures Contracts, Notice No. 

07-91, February 16, 2007. This policy, however, does not apply to any of NYMEX’s accountability levels and so 

will not provide NYMEX with the information about a trader’s positions that are not on NYMEX when evaluating 

whether to increase a trader’s accountability levels. As of June 19, 2006, NYMEX has received only two 

applications for a position limit exemption in which a trader has disclosed positions outside of NYMEX. NYMEX’s 

experience to date with its new policy suggests that absent a legal obligation upon a trader to disclose all of its 

positions to an exchange or to the CFTC, an exchange like NYMEX may, in fact, have no practical ability to obtain 

such information. Moreover, it is possible that additional NYMEX disclosure requirements may simply lead traders 

to increase their trading on other venues where such disclosure is not requested. 
 91 

attempting to limit Amaranth’s positions in contracts that were about to expire, however, 

NYMEX did not attempt to limit Amaranth’s overall speculative size. 

 Amaranth first attracted the attention of NYMEX compliance personnel in 2005, when it 

exceeded the NYMEX accountability levels several times. Each time NYMEX became aware of 

Amaranth’s large holdings in a particular contract, it reviewed Amaranth’s position and 

determined that the size of the position in relation to the overall open interest on the contract was 

acceptable. NYMEX accordingly temporarily increased the firm’s accountability level on 

several occasions. 

 This pattern continued into 2006. Virtually every month Amaranth exceeded the 

NYMEX accountability levels, triggering a NYMEX review of its positions. NYMEX records 

indicate that Amaranth was one of many traders who exceeded the NYMEX accountability 

levels during this period. During the first few months of 2006, NYMEX did not take any action 

to limit Amaranth. By the end of the spring, however, following several violations of the 

expiration position limits, and as Amaranth’s size kept growing larger, NYMEX began to 

scrutinize Amaranth’s positions more closely. 

 Amaranth’s first position limit violation occurred at the end of February 2006. On March 

13, NYMEX cited Amaranth for violating the expiration position limit on trading near the 

expiration of the March contract. In a letter of violation sent to Amaranth, NYMEX wrote: “At 

the close of business on February 23, 2006, Amaranth maintained an open commitment of 3,646 

short contracts, 1,146 contracts over its spot month hedge exempt position limit. . . . Owing to 

your firm’s violation of the spot month NG position limit, and in accordance with the provisions 

of Exchange Rule 9.36, this letter shall constitute a warning to your firm.”114 

 Several weeks later, on April 7, 2006, NYMEX personnel reviewed Amaranth’s short 

position of about 32,000 May contracts, which exceeded the elevated accountability level of 

25,000 contracts that NYMEX had previously granted to Amaranth. The NYMEX compliance 

officer determined that Amaranth should not be allowed to increase its position in the expiring 

May contract. “I do not think that Amaranth ANY month level should be increased any further 

in this case because May06 is the front month contract,” the NYMEX compliance officer 

wrote.115 He recommended contacting Amaranth or its clearing firm to reduce Amaranth’s 

position. Trading records indicate that Amaranth began reducing its position in the May futures 

contract after the NYMEX review. 

 On April 26, the last day of trading on the May futures contract, Amaranth sold more 

than 3,000 contracts in the final minutes of trading. As described earlier, this last-minute sale 

eventually triggered not only a NYMEX letter asking Amaranth to explain its trading, but also an 

investigation by the CFTC. 116 

 

114 Letter from Nancy M. Minett, Vice President, Compliance Division, NYMEX, to Mike Carrieri, Chief 

Compliance Officer, Amaranth LLC, March 13, 2006, Bates No. NX-USSEN 081909. 115 Memo from Corey Traub to Anthony Densieski, April 7, 2006, Bates NX-USSEN 081782. 116 From NYMEX records, it is unclear when NYMEX first observed Amaranth’s violation of the expiration limits 

on April 26. 
 92 

 In May, NYMEX sought to limit Amaranth’s trading at the expiration of the June 

contract. In this instance, after reviewing Amaranth’s positions in the June contract, NYMEX 

contacted Amaranth’s clearing firm, JPMorgan Chase, to remind it that Amaranth needed to 

comply with its expiration position limits. After receiving this message from NYMEX, one 

JPMorgan Chase official wrote to another, “Would you please remind Amaranth that they need 

to be at/below their NYMEX Nat Gas exempt level COB May 23.”117 

 Amaranth did not heed these instructions. On May 31, following the expiration of the 

June contract, NYMEX sent a second warning letter to Amaranth. NYMEX wrote: 

The records of the Exchange show that Amaranth, LLC (“Amaranth”) exceeded 

its current delivery month (“spot month”) hedge exempt position limit of 2,500 

contracts on two trade dates. At the close of business of May 23 and May 26, 

2006, Amaranth maintained open commitments of 8,488 short and 3,363 long 

contracts, respectively. These open commitments exceeded your firm’s spot 

month hedge exempt position limit by 5,988 and 863 contracts, respectively. 

Owing to your firm’s violations of the spot month NG position limit, and in 

accordance with the provisions of Exchange Rule 9.36, this letter shall constitute 

a warning to your firm. Please note that a previous violation of this rule was 

addressed in a warning letter issued to your firm on March 13, 2006. Any further 

violation of the Exchange’s position limit rules will be handled pursuant to Rule 

9.36 and may ultimately result in extraordinary sanctions as specified by this 

rule.118

 The next day, June 1, Amaranth yet again appeared on the list of traders exceeding 

NYMEX accountability levels. On this occasion, the reviewing official recommended increasing 

Amaranth’s All Month Accountability levels which, at this time were fixed at 23,000 long 

contracts and 35,000 short contracts. Specifically, the reviewing official recommended that 

Amaranth’s accountability level be increased from 23,000 to 40,000 for long contracts, while 

 

117 E-mail from Vincent J. Leale to Aldo J. Solares, May 19, 2006, Bates # NX-USSEN 028552. 118 Letter from Nancy M. Minett, Vice President, Compliance Division, NYMEX, to Mike Carrieri, Chief 

Compliance Officer, Amaranth LLC, May 31, 2006, Bates No. NX-USSEN 081734. In issuing these two warning 

letters, NYMEX was acting pursuant to the procedures specified in the rules of the exchange for violations of 

position limits. NYMEX Rule 9.36(B) provides that a first violation “will not be deemed a rule violation, however, 

it will result in a warning letter being issued by the Compliance Staff to the customer.” Rule 9.36(C) states “The 

occurrence of a second speculative position limit by a customer will subject the customer to a warning letter issued 

by the Compliance Staff stating that any future violation by the customer of the speculative position limits rules may 

result in extraordinary sanctions, including, but not limited to, conditioning, limiting, or denying access of such 

customer to the market.” On July 11, 2006, NYMEX rescinded the violation pertaining to trading on May 23, but 

retained the violation and warning regarding Amaranth’s positions on May 26. Letter from Anthony V. Densieski, 

Senior Director, Market Surveillance, NYMEX, to Mike Carrieri, Chief Compliance Officer, Amaranth LLC, July 

11, 2006. Bates # NX-USSEN 081736. See also instant message, Bates. No. AALLC_REG0595133 (Brian Hunter 

sends a message to another trader. “thanks for the Nymex/ICE... we were kind of hung...[Amaranth trader Matt] 

Donohoe messed up.” Other trader responds, “what is that about... ar [are] they not the same thing?” Hunter says, 

“we have exachnge [exchange] limits.” Trader: “u got me very confused.” Hunter: “on Nymex not on ICE... for 

June expiry... they settle the same... but Nymex sends out warning letter... which is bad for fund.”). 
 93 

maintaining the limit on short positions at 35,000 contracts. At the time, Amaranth had a net 

long position of about 34,000 contracts. 

The NYMEX official also recommended increasing Amaranth’s Any Month 

Accountability levels to 40,000 contracts, both for long and short positions. In making this 

determination, the official reviewed Amaranth’s large positions in the July 2006, November 

2006, January 2007, March 2007, and March 2008 contracts, and compared Amaranth’s total 

position in NYMEX futures, options, and swap contracts to the overall open interest in futures, 

options, and swaps in those contracts. Although the official recommended a temporary increase 

for Amaranth in the accountability levels, he also noted: “***This customer holds a very large 

percentage of open interest in floor traded NG futures (Not FEQ) in outer months.*** Please let 

me know if you want more (Non-FEQ) figures.”119

 A couple weeks later, the NYMEX compliance officer provided senior NYMEX 

compliance officials with the futures-only data mentioned in his previous e-mail. This data 

indicated that Amaranth held 46% of the open interest in the August 2006 NYMEX natural gas 

futures contract, and high percentages of open interest in other futures contracts, ranging from 

41% to 79%.120 (Table 14). However, when NYMEX again compared all of Amaranth’s 

natural gas positions, including NYMEX options and swaps, to the entire market open interest in 

those contracts, Amaranth’s share of the market appeared less. NYMEX therefore did not take 

any action to require Amaranth to reduce its positions. 

Table 14 

NYMEX Review of Amaranth Market Concentration 

June 13, 2006

Contract Month 

Amaranth’s Futures 

Contracts as % of 

NYMEX Open 

Interest, Futures 

Contracts Only 

Amaranth’s Total 

NYMEX Position 

(Futures, Options, and 

Swaps) as % of 

NYMEX Open Interest, 

All NYMEX Contracts 

August 2006 46% 22% 

November 2006 57% 23% 

January 2007 52% 26% 

March 2007 41% 16% 

March 2008 79% 39% 

 

119 Memo from Corey Traub to Anthony Densieski, June 1, 2006. Bates No. NX-USSEN 081586. NG is an 

abbreviation for natural gas. FEQ is an abbreviation for “Futures Equivalent.” Positions in options and swaps can 

be represented by an “equivalent” number of futures positions, so these positions can be measured against each 

other. 

120 Memo from Corey Traub to Anthony Densieski, June 14, 2006, Bates No. NX-USSEN 081583. This memo does 

not indicate, other than for August 2006, to which futures months the open interest data applies. Comparing this 

data to the Subcommittee’s data, it appears that the months are the same months that are referenced in the previous 

memo—November 2006, January 2007, March 2007, and March 2008. 
 94 

 In mid-July, Amaranth’s increasing size triggered still another NYMEX review. 

NYMEX compliance officials conducted another analysis of Amaranth’s share of the open 

interest in several NYMEX futures contracts and another analysis of Amaranth’s share of the 

total open interest in all NYMEX futures, options, and swaps for that contract month. The results 

of this analysis are shown in Table 15. 

Table 15 

NYMEX Review of Amaranth Market Concentration 

July 24, 2006

Contract Month 

Amaranth’s Futures 

Contracts as % of 

NYMEX Open Interest, 

Futures Contracts Only 

Amaranth’s Total 

NYMEX Position 

(Futures, Options, and 

Swaps) as % of 

NYMEX Open Interest, 

All NYMEX Contracts 

September 2006 41% 15% 

October 2006 22% 7% 

January 2007 50% 21% 

March 2007 48% 16% 

April 2007 41% 30% 

December 2007 81% 41% 

 When NYMEX performed its market analysis of Amaranth’s positions in June and July, 

however, it did not have a complete view of Amaranth’s positions in the natural gas financial 

market. NYMEX officials reviewed and addressed only Amaranth’s positions on NYMEX. As 

shown in Table 16 and Figure 44, Amaranth also had extensive positions on ICE, which were 

significant components of Amaranth’s total positions in the contract months addressed by 

NYMEX, but NYMEX officials did not have access to this data. NYMEX’s analysis and 

determinations were based upon incomplete information. 

Figure 44 

AMARANTH'S POSITIONS 

on JULY 24, 2006 

Apr-07

Mar-07

Jan-07

Oct-06

Nov-06

Sep-06

-90,000

-60,000

-30,000

0

30,000

60,000

90,000

ICE

NYMEX

contracts

 

Table 16 and Figure 44. On July 24, when NYMEX reviewed Amaranth’s positions, it did not have a 

complete view of Amaranth’s market size. Data sources: NYMEX and ICE. 

Table 16 

Amaranth Positions 

NYMEX, ICE, and Total 

on July 24, 2006

 Amaranth Positions 

Contract NYMEX ICE Total 

Sep06 -54074 -16879 -70953

Oct06 24136 -21881 2255

Jan07 48692 25605 74297

Mar07 32549 2459 35008

Apr07 -46210 -4047 -48893
 95 

 About ten days later, on August 4, NYMEX examined Amaranth’s positions once again, 

and calculated that Amaranth then held about 51% of the open interest in the September natural 

gas futures contract, which would expire at the end of the month. (See Figure 45). NYMEX 

determined that this level of open interest in an expiring contract was too large and decided to 

tell Amaranth to reduce its positions. 

Table 17 

NYMEX Review of Amaranth Market Concentration 

August 4, 2006

Contract Month 

Amaranth’s Futures 

Contracts as % of 

NYMEX Open Interest, 

Futures Contracts Only 

Amaranth’s Total 

NYMEX Position 

(Futures, Options, and 

Swaps) as % of 

NYMEX Open Interest, 

All NYMEX Contracts 

September 2006 51% 18% 

December 2006 16% 18% 

January 2007 48% 21% 

March 2007 64% 19% 

April 2007 49% 29% 

Figure 45 

Amaranth Open Interest, NYMEX Natural Gas Futures Contract for September 2006 

COMPARED TO TOTAL NYMEX OPEN 

INTEREST

0

20000

40000

60000

80000

100000

120000

140000

Jan-06

Feb-06

Mar-06

Apr-06

May-06

Jun-06

Jul-06

Aug-06

Sep-06

NYMEX Open Interest

Amaranth Open Interest

contracts

8/7

 

% OF NYMEX OPEN INTEREST

0%

20%

40%

60%

80%

100%

Jan-06

Feb-06

Mar-06

Apr-06

May-06

Jun-06

Jul-06

Aug-06

Sep-06

 8/7

Fig. 45. On August 9, Amaranth had a short position of more than 60,000 futures contacts in the 

expiration month. This represented nearly 60% of the expiring contract. As a result, NYMEX directed 

Amaranth to reduce these positions. Data source: NYMEX. 
 96 

 On August 8, NYMEX compliance officials told Amaranth “of the Exchange’s concern 

with their % of September open interest and outright Natural Gas futures positions of -49,616, 

specifically its potential weight in the marketplace based on 44.95% of open interest.”121 A 

NYMEX official wrote a contemporaneous account of this telephone conversation with 

Amaranth’s compliance officer, Mr. Carrieri. According to this account: 

[NYMEX] accentuated the fact that we expect him to begin bringing the position 

down in a commercially reasonable manner to a more comfortable figure below 

his current percentage. Told him that we are generally comfortable with a 

customer not exceeding about 1/3 of the market, and expect trading to be 

orderly.122 

 The next day, August 9, NYMEX held two conference calls with Amaranth. During the 

first call, at 9:15 a.m., Mr. Tom LaSala, NYMEX’s Chief Regulatory Officer told Mr. Michael 

Carrieri, Amaranth’s Chief Risk Officer, that he was “extremely uncomfortable with September 

position of -44,285 Natural Gas futures and current 44.34% of open interest. . . Tom 

accentuated his extreme concern with the percentage portion of the front month position, 

specifically in the natural gas futures, and informed Amaranth of our general comfort levels 

between the 30-40% of open interest range.” NYMEX directed Amaranth to be “mindful that it 

is carrying weight in the marketplace and to trade in an orderly fashion.” 

 During a second call on August 9, NYMEX cautioned Amaranth that it should not reduce 

its September position simply by shifting those positions into October contracts. It told 

Amaranth that their October position “represented 51.87% of open interest in that natural gas 

futures, was too large, and we were concerned that as he brought down the September position, 

Amaranth would further increase the October position.” 

 

121 Memo to Files From Bonnie Yerga, Re: Amaranth LLC September 2006 and October 2006 Natural Gas Open 

Positions, Bates No. NX-USSEN 081835-37. 122 Id.
 97 

Figure 46 

Amaranth Open Interest, NYMEX Natural Gas Futures Contract for October 2006 

COMPARED TO TOTAL NYMEX OPEN 

INTEREST

0

20000

40000

60000

80000

100000

120000

140000

Jan-06

Feb-06

Mar-06

Apr-06

May-06

Jun-06

Jul-06

Aug-06

Sep-06

NYMEX Open Interest

Amaranth Open Interest

contracts 8/9

% OF NYMEX OPEN INTEREST

0%

20%

40%

60%

80%

100%

Jan-06

Feb-06

Mar-06

Apr-06

May-06

Jun-06

Jul-06

Aug-06

Sep-06

8/9

Fig. 46. In early August 2006, Amaranth held 40-60% of the open interest (short) in the October 2006 

NYMEX futures contract. As a result, NYMEX directed Amaranth to reduce these positions. Data source: 

NYMEX. 

 Amaranth told NYMEX it had “understood [NYMEX’s] concern to be the spot month 

only,” and so had “brought its September 2006 position down through rolls into the October 

[contract], so that its October position is higher at this point.” Amaranth also told NYMEX that 

it was “almost net-flat insofar as risk.” Mr. LaSala “informed [Mr. Carrieri] that the outright 

natural gas future position of -51,615 was a concern in addition to the earlier stated September 

position.”123

 On August 10, Mr. LaSala told Mr. Carrieri of his “alarm at 

Amaranth’s position of -66,837 natural gas futures in the October 

2006 contract, 63.47% of open interest. Mike was informed that 

this percentage was unacceptable and that it must begin bringing 

the position down immediately. Once again, Tom stressed 

commercially reasonable trading manner.” Mr. Carrieri replied that 

Amaranth would comply with NYMEX’s directives, noting that 

“the increase in the October position was due to traders rolling the 

September position to bring the percentage of September positions 

into line and that those trades occurred prior to our midday 

conversation on August 9.”124 

 On August 11, Mr. LaSala and Mr. Carrieri again spoke. Based on Amaranth’s reduction 

to a short position of about 22,000 natural gas futures contracts for September 2006, which 

represented about 29% of the NYMEX open interest, and an overall short position on NYMEX 

of about 14,000 contracts, NYMEX told Amaranth its revised position “was a comfortable 

percentage of open interest.” Mr. LaSala cautioned Amaranth “to be mindful of his open 

 

123 Id. 124 Id.

Table 18 

Amaranth: NYMEX 

Natural Gas Futures 

Sep 06 Oct 06 

8/7 -53,979 -47,995 

8/8 -48,600 -55,650 

8/9 -24,290 -73,210 

8/10 -24,277 -63,994 
 98 

interest percentage as the spot open interest begins dropping and to manage his position 

accordingly in line with the figures of 30-40% of open interest as discussed with Tom”125 

 Amaranth complied with NYMEX’s directions and reduced its positions on NYMEX in 

the September and October futures contracts. At the same time, however, Amaranth increased 

its positions in the corresponding September and October swaps on ICE. Although NYMEX 

succeeded in reducing Amaranth’s positions in the expiring natural gas futures contract, 

Amaranth maintained a comparable number of positions in the expiring ICE swaps. Soon 

afterwards, Amaranth even increased those positions on ICE. By switching its positions to ICE, 

Amaranth preserved its ability to trade large volumes of an expiring contract near the expiration 

of that contract. 

 Indeed, it is clear from Amaranth’s records that Mr. Hunter viewed the absence of 

position limits as a major reason to trade on ICE rather than on NYMEX. In an instant message 

conversation on April 25, 2006—the day prior to the expiration of the May contract—another 

trader wrote to Mr. Hunter, “everyone is high on ICE these days. You think its had its day or 

more to go?” Mr. Hunter replied: “one thing that’s nice is there are no expiration limits like 

Nymex clearing.”126

Figure 47 

Amaranth Positions Before and After NYMEX Directed Amaranth to Reduce Positions 

 

 Before: After: 

AMARANTH'S POSITIONS 

on AUGUST 7, 2006

Dec-06

Sep-06

Apr-07

Jan-07

Mar-07

Oct-06

Nov-06

-100000

-75000

-50000

-25000

0

25000

50000

75000

100000

ICE

NYMEX

 

AMARANTH'S POSITIONS 

on AUGUST 11, 2006

Sep-06 Dec-06

Apr-07

Jan-07

Mar-07

Oct-06

Nov-06

-100000

-75000

-50000

-25000

0

25000

50000

75000

100000

ICE

NYMEX

Fig. 47. On August 8, NYMEX instructed Amaranth to reduce its NYMEX positions in the September and 

October futures contracts. Amaranth complied with the NYMEX order but increased its positions in the 

related ICE swap contracts, thereby maintaining—and even increasing—its position and risk profile for 

those months. Data sources: NYMEX and ICE. 

 

125 Id. 126 Instant Message between Brian Hunter and another trader, April 25, 2006, Bates No. AALLC_REG0592988. 
 99 

 Looking back upon the series of NYMEX reviews of Amaranth’s positions, it is possible 

to conclude, with hindsight, that NYMEX should have acted sooner to reduce Amaranth’s huge 

natural gas positions. Certainly, by the end of May NYMEX officials recognized that Amaranth 

had very large concentrations in multiple natural gas futures contracts, holding tens of thousands 

of contracts and controlling up to 40% of the open interest in a variety of months. These 

concentration levels alone provided sufficient justification for NYMEX to require Amaranth to 

reduce its positions. Instead, after reviewing Amaranth’s positions on NYMEX, NYMEX 

repeatedly raised Amaranth’s accountability levels and chose not to limit Amaranth’s overall 

speculative position except in contracts nearing expiration. It is important to acknowledge, 

however, that, in making these decisions, NYMEX never had an accurate view of Amaranth’s 

overall positions and, due to the limitations in the law, never had the legal authority to obtain the 

information necessary to acquire a complete view of the market and of Amaranth’s holdings. 

NYMEX was required to make significant decisions based upon incomplete information. 

 The Amaranth case history demonstrates that, for regulators to make informed decisions 

to protect energy markets against trading abuses and unfair pricing, they need comprehensive 

information about trader positions. It is not reasonable to expect NYMEX or the CFTC to make 

sound regulatory judgments based upon incomplete and potentially misleading information about 

a trader’s positions. Unless comprehensive data on trader positions is made available, the 

regulated exchanges and the CFTC will continue to be unable to prevent excessive speculation 

from causing unreasonable changes in the price of energy commodities. 

H. Late August 2006: The Market Turns Against Amaranth 

“OCTOBER. This is one of the peculiarly dangerous months to speculate in 

stocks in. The others are July, January, September, April, November, May, 

March, June, December, August, and February.”

 --Mark Twain, Pudd’nhead Wilson’s Calendar (1893).

By late August, the resolution of Amaranth’s dilemma—how to trade out of its large, 

high-priced spread positions without causing the price of those spreads to fall—could not be 

postponed for much longer. In previous months, Amaranth had rolled its short positions into the 

next month, hoping that market conditions would change and enable it to unload its positions. 

There were now no more summer months into which it could roll these positions. By late 

August, with hurricane season almost over and natural gas supplies plentiful, it appeared likely 

there would be adequate supplies for the winter. The market fundamentals were strongly 

indicating that there the winter/summer price spreads should fall. This would be particularly 

disastrous for Amaranth, which was still holding large positions that it had obtained when these 

spread prices were high. 

 Another problem for Amaranth was its increasing margin requirements. In mid-August, 

Amaranth’s margin requirements reached $2 billion. This huge sum caused Amaranth’s clearing 

firm, JPMorgan Chase, to become alarmed about the size of Amaranth’s positions, the attendant 

risks to Amaranth’s solvency, and JPMorgan Chase’s own potential obligations, if the market 
 100 

turned against Amaranth. The clearing firm concluded, on August 23, that “a more senior level 

discussion with Amaranth about their energy risk position is needed.”127

Amaranth’s traders told the Subcommittee that, as the last day for trading on the 

September contract approached, Amaranth’s trading strategy was to: (1) let some of its 

September contracts, which were now all ICE swaps, expire; and (2) use ICE to sell more 

September contracts, while buying more October contracts to offset its short position in that 

month. By selling September contracts and buying October contracts, Amaranth was in effect 

betting that the September contract price would fall faster than the price of the October contract. 

 Amaranth’s overall positions in the week leading up to the expiration of the September 

2006 contract are shown in Figure 48. During this week Amaranth increased its short position in 

the September contract and decreased its short position in the October contract.128 

 

127 Time line summarizing JPMorgan Chase’s interactions with Amaranth through September 21, 2006; Bates No. 

JPM-PSI 00006031.

128 Amaranth also had sold a large number of put options on the October 2006 futures contract which, upon their 

expiration on August 28, 2006, substantially reduced Amaranth’s short position in the October contract. A put 

option gives the option holder the option to sell the underlying futures contract to the seller, at the strike price 

specified in the option. Because this option to sell, when exercised by the buyer of the option, in effect results in the 

seller of the option receiving a futures contract, for risk management purposes selling a put option is akin to the 

holding of a long position in the underlying futures contract, and is calculated as such in determining a trader’s 

overall position. 
 101 

Figure 48 

Amaranth’s Positions on August 24-29, 2006 

AMARANTH'S POSITIONS 

on AUGUST 24, 2006

Sep-06 Dec-06

Apr-07

Jan-07

Mar-07

Oct-06

Nov-06

-120000

-90000

-60000

-30000

0

30000

60000

90000

120000

ICE

NYMEX

 

AMARANTH'S POSITIONS 

on AUGUST 25, 2006

Sep-06 Dec-06

Apr-07

Jan-07

Mar-07

Oct-06

Nov-06

-120000

-90000

-60000

-30000

0

30000

60000

90000

120000

ICE

NYMEX

 

AMARANTH'S POSITIONS 

on AUGUST 29, 2006

Dec-06

Sep-06

Apr-07

Jan-07

Mar-07

Oct-06

Nov-06

-120000

-90000

-60000

-30000

0

30000

60000

90000

120000

ICE

NYMEX

Fig. 48. In late August, Amaranth increased its short position in the September contract and decreased 

its short position in the October contract. Data source: NYMEX and ICE.

 As can be seen in Table 19, the volume of Amaranth’s trading in the September contract 

was a significant share of the overall volume of trading on ICE during the last week in August. 

In particular, on August 28, the day before the September contract expired, Amaranth sold over 

37,000 September contracts on the ICE electronic exchange, accounting for over 40% of the total 

exchange-traded volume on ICE on that date, and over 25% of the entire volume of exchange 

traded futures and swaps on NYMEX and on ICE on that date. Amaranth also traded large 

amounts of the October contract (Table 20). Figure 49 presents the total volumes on NYMEX 

and ICE traded on these dates. 

AMARANTH'S POSITIONS 

on AUGUST 28, 2006

Dec-06

Sep-06

Apr-07

Jan-07

Mar-07

Oct-06

Nov-06

-120000

-90000

-60000

-30000

0

30000

60000

90000

120000

ICE

NYMEX
 102 

Table 19 

Amaranth Trading Volumes on August 21-29 

Natural Gas Contract for September 2006 

Trading Volumes Net Position 

 ICE 

Electronic 

Exchange 

NYMEX 

Futures 

OTC 

ICE Cleared 

OTC 

NYMEX 

Cleared 

NYMEX + 

ICE 

8/21 -8,580 3,870 -- -2,500 -56,423

8/22 -5,940 -450 -- -- -60,573

8/23 -7,260 2,300 2,500 13,750 -55,394

8/24 -2,048 670 1,830 -2,620 -56,487

8/25 -6,458 2,350 3,470 -600 -60,992

8/27 -3,825 -- -- -- -64,817

8/28 -37,275 4,989 12,711 -7,564 -96,403

8/29 -15,893 6,721 -- -4,008 -104,707

Table 20 

Amaranth Trading Volumes on August 21-29 

Natural Gas Contract for October 2006 

Trading Volumes Net Position 

 ICE 

Electronic 

Exchange 

NYMEX 

Futures 

OTC 

ICE Cleared 

OTC 

NYMEX 

Cleared 

NYMEX + 

ICE 

8/21 -3,317 -13,548 11,650 -9,050 -113,451

8/22 4,348 1,025 200 -200 -111,639

8/23 2,666 -4,609 15,000 -17,200 -112,991

8/24 -628 539 250 -850 -116,105

8/25 1,402 53 7,000 -2,000 -111,651

8/27 2,689 -- -- -- -114,340

8/28 -10,680 -423 100 650 -82,164

8/29 -11,317 -9,055 -- -4,008 -90,232

 
 103 

 Figure 49 

 NYMEX AND ICE TRADING VOLUMES

NATURAL GAS CONTRACT, SEPTEMBER 2006

0

25000

50000

75000

100000

8/21 8/22 8/23 8/24 8/25 8/26 8/27 8/28 8/29

NYMEX Futures

ICE Swaps, Exchange Traded

OTC, ICE Cleared

OTC, NYMEX Cleared

 NYMEX AND ICE TRADING VOLUMES

NATURAL GAS CONTRACT, OCTOBER 2006

0

25000

50000

75000

100000

8/21 8/22 8/23 8/24 8/25 8/26 8/27 8/28 8/29

NYMEX Futures

ICE Swaps, Exchange Traded

OTC, ICE Cleared

OTC, NYMEX Cleared

Fig. 49. During the last week in trading of the September contract, daily volumes for the September and 

October ICE swaps were greater than the daily volumes in the corresponding NYMEX futures contracts. 

Data sources: NYMEX and ICE. 

 In the last week of August, the price of the September contract fell from nearly $8 per 

MMBtu to less than $7, a substantial drop. The precise extent to which Amaranth’s large-scale 

selling of the September contract contributed to the decline in the contract’s price cannot be 

determined, because the price in the physical market for natural gas for September delivery was 
 104 

also declining during this period. At the very least, because Amaranth’s large-scale selling 

represented a significant share of the overall volume on ICE and NYMEX during this period, it 

would have been a significant contributing factor to the price’s decline. 

 Figure 50

Price of NYMEX Futures Contract for 

September 2006 

6.0

6.5

7.0

7.5

8.0

8/1 8/5 8/9 8/13 8/17 8/21 8/25 8/29

$ per MMBtu

Fig. 50. Due to an abundance of natural gas in storage and diminishing concern 

regarding potential hurricanes, the price of the September futures contract fell 

during August 2006. Data source: NYMEX. 

 The decline in the price of the September contract during the very last trading days of the 

month was particularly striking when compared to the price of the October contract. Typically, 

these contracts trade within 7 or 8 cents of each other.129 Throughout the summer of 2006, 

however, this spread had been much more volatile than in previous years, widening to about 50 

cents on several occasions. During the last week of August, the price spread had returned to a 

level in accordance with the norm of prior years. But on August 28 -- the date when Amaranth’s 

September contract sales represented a major portion of the trading volume in that contract -- the 

spread dramatically widened again to more than 35 cents. 

Traders interviewed by the Subcommittee stated they did not know why the spread in 

price between the October and September contracts widened so suddenly at the end of August. 

These traders said that they believed the widening of the spread to such a large degree was not in 

accordance with market fundamentals, and they believed the spread had to narrow as the contract 

neared expiration.130 Several of these traders took positions in accordance with this belief. 

These positions were directly opposite to the positions taken by Amaranth. 

 

129 NYMEX data. In 2003, the price of the September contract rose 20 cents above the price of the October contract 

at the expiration of the September contract; in 2004, the spread widened to about 15 cents on a couple of trading 

dates. Id. 130 In addition to the 35-cent spread between the October and September contracts, traders stated there were 

significant yet inexplicable increases in the price of an ICE-traded contract called the “Hub combo,” and a 
 105 

 Figure 51 

Difference in Price 

NYMEX Natural Gas Futures Contracts for 

October 2006 and September 2006

0

0.1

0.2

0.3

0.4

8/1 8/5 8/9 8/13 8/17 8/21 8/25 8/29

$ per MMBtu

Fig. 51. The price of the October/September spread spiked to about 34 cents on August 

28, the date before expiration of the September contract. Data source: NYMEX. 

 On the last day of trading in the September 2006 contract, August 29, Amaranth sold 

nearly 16,000 contracts on ICE. Most of these September contracts were linked to purchases of 

ICE swaps for October 2006; in other words Amaranth was buying the price spread between the 

October and September contracts and betting that the October price would be higher. Amaranth 

dominated the buying of this spread on ICE on August 29, accounting for about 45% of the 

volume of the trading on that date. 

The largest of the traders that took a position opposite Amaranth was Centaurus, another 

hedge fund. Centaurus sold nearly 12,000 October/September spreads on the last day of trading, 

August 29. According to Centaurus traders interviewed by the Subcommittee, Centaurus 

believed the October/September price spread was overpriced, that the September contract was 

out of line with prices in the physical market, and that the difference in price between the 

September contract and the October contract would narrow. 

 Both Amaranth and Centaurus traded primarily on ICE, though both also traded some 

contracts on NYMEX. For most of the day on August 29th, the total volume of trading in 

September natural gas contracts on ICE was greater than for the corresponding September 

contract on NYMEX. In fact, the volume of trading on ICE exceeded the volume on NYMEX 

until the final twenty minutes. 

 significant yet inexplicable increase in the price of over-the-counter exchanges of futures for swaps. According to 

these traders, these anomalies indicated that natural gas futures were under-priced, and arbitrage trades between the 

under-priced futures market and the physical market would cause the price of the futures contract to rise prior to 

expiration. This explanation offers yet another example of how the price of contracts traded on ICE can have a 

material effect upon the trading of the related NYMEX futures contract. 
 106 

 Figure 52 

Trading Volumes on NYMEX and ICE

Natural Gas Contracts for Sept. 2006

at 10-Minute Intervals on August 29, 2006

0

2000

4000

6000

8000

10000

12000

14000

10:10

10:30

10:50

11:10

11:30

11:50

12:10

12:30

12:50

13:10

13:30

13:50

14:10

14:30

NYMEX

ICE

Fig. 52. Prior to the last twenty minutes of trading, the majority of trading on the 

final settlement day for the September futures contract occurred on ICE. Data 

sources: NYMEX and ICE. 

 

Figure 53 

Trading Volumes on NYMEX and ICE

Natural Gas Contracts for Sept. 2006

Last Hour of Trading, August 29, 2006

0

1000

2000

3000

4000

5000

6000

1:35 PM

1:45 PM

1:55 PM

2:05 PM

2:15 PM

2:25 PM

ICE

NYMEX

Fig. 53. From 1:30 to 2:05 pm on August 29—which is the half hour before the 

settlement period—the volume of trading of ICE swaps was significantly greater 

than the volume of trading of NYMEX futures contracts. Data sources: NYMEX 

and ICE. 
 107 

 As the final day of trading approached for the September contract, NYMEX officials had 

become concerned that Amaranth might conduct a large volume of trading during the last half 

hour of trading, in the same manner it had on several occasions in the spring. The last half hour 

of trading is called the final settlement period because, as explained earlier, NYMEX uses the 

prices paid during that final half hour to calculate the expiring contract’s final price. At 

approximately 11 a.m. on August 29, NYMEX compliance officials telephoned Amaranth’s 

compliance officer, Mr. Carrieri, and informed him that Amaranth should trade in an orderly 

manner throughout the trading session, especially during the final half hour. According to 

NYMEX officials, they informed Amaranth that they did not want Amaranth to conduct a large 

volume of trading within the final settlement period in order to avoid distortions in the final 

settlement price. Mr. Carrieri relayed these instructions to the Amaranth traders. 

 In accordance with NYMEX’s instructions, Amaranth concluded its trading on NYMEX 

around 1:15 p.m. Shortly afterwards, Amaranth concluded its trading on ICE. Amaranth traders 

explained to the Subcommittee that it considers its positions on NYMEX and ICE as components 

of an overall position, and hence, to keep its overall portfolio balanced, it needed to conclude the 

bulk of its trading on ICE at the same time as it concluded its trading on NYMEX. Amaranth 

explained that when it exited trading on NYMEX, it had largely achieved the risk profile it had 

sought for the day, and did not contemplate additional trading on ICE. As the September 

contract price and the September-October price spread had remained within satisfactory 

parameters from Amaranth’s perspective during the trading prior to 1:15 p.m., it did not believe 

it was at significant risk by completing its trading at that time. 

 Shortly after Amaranth exited the market -- around 1:40 p.m -- the price of the September 

contract began to rise, and the price difference between the September and October contracts 

began to narrow. During this period, most of the trading was still taking place on ICE. ICE 

trading records indicate that for most of the day, there was one very large seller (Amaranth) and 

one very large buyer (Centaurus) of September contracts. Amaranth believed the price of the 

September contract would fall; Centaurus believed the price would rise. For most of the day, the 

buying pressure from Centaurus had been matched up against the selling pressure from 

Amaranth, and vice versa. The price of the September contract stayed relatively flat during this 

period. Centaurus intended to keep on buying as long as the difference in price between the 

October contract and the September contract was unusually wide. This could not happen while 

Amaranth was selling, as Amaranth’s selling helped keep the spread wide. After Amaranth 

finished its selling, however, Centaurus’s bidding for more September contracts was no longer 

matched by Amaranth’s selling, and the price of the September contract began to rise. The rising 

price of the September contract narrowed the spread between the October and September 

contract. 

In the last 45 minutes of trading on August 29, Centaurus bought nearly 10,000 

September contracts on ICE and about 3,000 on NYMEX, including approximately 9,000 

contracts between 1:40 and 2:10 p.m. Centaurus’s buys represented a significant share of the 

total volume traded on both exchanges during that period for the September contract, including 

nearly 50% of the trading volume in the last hour of trading on ICE. As Figure 55 shows, just 

prior to the final half hour of trading, Centaurus’s volume of buying was approximately equal to 

the total volume generated by all of the other buyers on NYMEX and ICE combined. 
 108 

 Figure 54 

Amaranth and Centaurus: Trading Volumes

ICE Natural Gas Swap for September 2006

 on August 29, 2006

0

500

1000

1500

2000

2500

3000

3500

4000

4500

10:0010:2010:4011:0011:2011:4012:0012:2012:4013:0013:2013:4014:0014:20

Amaranth SELLS

Centaurus BUYS

contracts

Fig. 54. Amaranth and Centaurus trading volumes in the September 2006 ICE 

natural gas swap, by 10-minute intervals, on the date of expiration of the 

contract. Data source: ICE. 

Figure 55 

Centaurus Trading Volume on ICE & NYMEX 

Natural Gas Contracts for September 2006

Last Hour of Trading on August 29, 2006

0

1000

2000

3000

4000

5000

6000

13:3513:4013:4513:5013:5514:0014:0514:1014:1514:2014:2514:30

NYMEX, Total Volume, All

Traders

Volume Due to Centaurus

Buying on ICE

Volume Due to Other

Traders, ICE

contracts

Fig. 55. From about 1:30 p.m. until about 2:00 p.m., the volume of trading on 

ICE in the expiring September 2006 contract due to Centaurus exceeded the 

volume generated by all of the other traders on ICE. Data source: ICE and 

NYMEX. 
 109 

Figure 56 

Price of ICE Henry Hub Natural Gas Swap

for September 2006, on August 29, 2006

5.6

5.8

6

6.2

6.4

6.6

6.8

7

03:45:45 GMT13:08:17 GMT13:43:50 GMT14:07:14 GMT14:16:41 GMT14:30:52 GMT14:49:56 GMT15:11:20 GMT15:31:37 GMT15:45:39 GMT16:05:16 GMT16:46:33 GMT17:22:32 GMT17:46:58 GMT17:52:17 GMT17:57:49 GMT18:02:46 GMT18:07:39 GMT18:17:12 GMT

Last hour of NYMEX trading

$ per MMBtu

 

Fig. 56. The price of the ICE natural gas swap contract for September began to 

rise steeply around 1:45 p.m. on August 29. Times are expressed in Greenwich 

Mean Time (GMT) as a result of the manner in which trade times are recorded 

and expressed in the ICE database. In August, Daylight Savings Time (DST) is 

four hours earlier than GMT. Data source: ICE. 

Figure 57 

Price Difference Between ICE Natural Gas Swaps 

for September and October 

on August 29, 2006

0

0.1

0.2

0.3

0.4

0.5

0.6

10:58:48 GMT13:15:11 GMT13:49:27 GMT14:08:28 GMT14:22:06 GMT14:38:19 GMT14:58:31 GMT15:14:28 GMT15:32:21 GMT15:42:00 GMT16:01:52 GMT16:52:53 GMT17:34:12 GMT17:50:32 GMT17:56:41 GMT18:02:27 GMT18:07:17 GMT18:16:25 GMT18:36:23 GMT

Last hour of NYMEX trading

$ per MMBtu

Fig. 57. The price of the October/September spread began to fall sharply at the 

same time the price of the September contract began to rise sharply. Data 

source: ICE.
 110 

 The price data underlying Figure 57 indicates that the price of the 

October/September spread opened at 36 cents, and fifteen minutes later began to rise. In 

just about an hour, from about 10:10 a.m. to 11:23 a.m., the price of the spread jumped 

from about 37 cents to 50 cents. This period, in which the price of the spread rose 

significantly, was the same time period in which Amaranth’s buying of the spread was 

most heavily concentrated. At the end of the day, after Amaranth’s buying had stopped, 

the price of the spread fell dramatically – about 40 cents in one hour. Similarly, during 

the final hour of trading, the price of the September contract jumped by about 60 cents – 

an increase of nearly 10%. 

 The day after trading concluded on the September contract, Amaranth charged 

that it had been the victim of apparent price manipulation and requested an investigation 

by market regulators. In a letter sent to NYMEX dated August 30, 2006, Amaranth 

wrote: 

As you are no doubt aware, during the last 60 minutes of trading in the September 

NG [natural gas] contract, the price of the September NG contract spiked up by 

approximately 10%. We believe that such price movements did not reflect bona 

fide supply and demand market forces. . . . We also believe that the trading that 

caused the price movements during the closing range of the September NG 

contract was motivated by the desire by one or more market participants to affect 

the settlement price of the September NG contract, which the public relies on as a 

key price benchmark for physical and financial contracts involving natural gas.131

 Amaranth noted that “as a responsible market participant we abided by your 

request” not to execute any large orders during the last half hour of trading, and had 

“completely liquidated our September NG position by approximately 1:15 pm.” “It is 

apparent to us,” Amaranth contended, “that certain market participants are not trading in 

a responsible manner.” Amaranth requested that NYMEX “immediately initiate an 

investigation into the trades and traders that caused yesterday’s artificial price spike.” 

 The Subcommittee interviewed NYMEX officials and numerous traders who 

were active in the natural gas market on August 29 about the events of that date and the 

reasons for the price spike. Based on these interviews, Amaranth’s perception that the 

price spike towards the end of trading was “artificial” appears to be correct. There were 

no changes in the underlying fundamentals of supply and demand that suddenly emerged 

in the last hour of trading to precipitate the price spike. Rather, this volatility appears to 

have been caused in large part by the pattern of trading between the two largest traders in 

the natural gas market Amaranth’s complaint that the September price spike in the final 

hour reflected the effects of large-scale trading rather than market forces is an 

observation that could equally be applied to its own trading earlier in the day. 

 

 

131 Letter from Michael Carrieri, Compliance Director, Amaranth, LLC, to Anthony Densieski, Senior Director, 

Market Surveillance, NYMEX, August 30, 2006, Bates No. Amaranth_Senate012546.
 111 

 In an instant message conversation with another trader right after the close of 

trading on August 29, Amaranth’s top energy trader, Brian Hunter, complained about the 

trading activity during settlement: 

Brian Hunter: classic pump and dump boy I bet you see some CFTC inquiries 

for the last two days 

 crummertd: until they monitor swaps no big deal its all swaps now 

Brian Hunter: any time there is a 70 cent rally in 40 minutes on no fundamental 

event ... it will get investigated ... for sure132

Although Mr. Hunter expressed certainty about a CFTC inquiry into the trading on 

August 29, the other trader seemed to dismiss any CFTC investigation as “no big deal,” 

because the CFTC had no authority to monitor trading on ICE, where most of the trades 

had taken place. His observation underscores the reality that exempting ICE from CFTC 

oversight harms not only that unregulated market, but also NYMEX, a fully regulated 

market, by making both more vulnerable to market manipulation, excessive speculation, 

and unfair pricing. 

I. September 2006: Amaranth Collapses 

“The combination of precise formulas with highly imprecise assumptions can be 

used to establish, or rather to justify, practically any value one wishes . . . 

Calculus . . . [gives] speculation the deceptive guise of investment.” 

 --Benjamin Graham, 1949133 

 The 60-cent increase in the price of the September contract and the associated drop in the 

price of the October/September spread caused a huge loss for Amaranth. On August 29, its daily 

profit and loss statements recorded a loss in the value of its natural gas holdings of nearly $600 

million. Despite this enormous one-day loss, Amaranth still finished August with a net gain of 

$631 million for the month. 

 More ominous for Amaranth’s long-term survival, however, were the increased margin 

calls and requirements that followed. Because its natural gas holdings had lost value, on August 

30, Amaranth’s margin requirements increased by $944 million. According to an internal 

memorandum from JPMorgan Chase, Amaranth’s clearing firm, this margin call “resulted from 

Amaranth’s activity on the ICE yesterday.”134 On August 31, Amaranth’s margin requirements 

on ICE and NYMEX exceeded $2.5 billion; by September 8 they had surpassed $3 billion. 

 

132 Amaranth Instant Message, Bates No. AALLC_REG0650031. 133 Benjamin Graham, The Intelligent Investor, 4th ed. (New York, 1973), at pp. 315-321. 134 Time line summarizing JPMorgan Chase’s interactions with Amaranth through September 21, 2006; Bates No. 

JPM-PSI 00006032. 
 112 

 During the first week of September, from Amaranth’s perspective, more bad news 

arrived. Other natural gas prices began falling. Two spreads of particular concern to Amaranth 

were the March/April 2007 price spread and the January2007/October 2006 price spread. The 

March/April spread had begun a free fall, dropping nearly 25%, from $2.49 on August 25 to 

$2.05 on September 1. The falling March/April spread increased Amaranth’s margin woes. 

During the first two weeks in September, the January/October spread also went into a steep 

decline, falling from $4.68 on September 1 to $4.15 on September 11, to $3.52 on September 15. 

 During the summer, Amaranth had viewed falling prices as an opportunity to increase its 

positions in those contracts. Its large-scale buying had the effect of propping up the prices—

either preventing them from falling further or actually boosting them higher. A number of 

traders told the Subcommittee that they believe the winter/summer prices spreads remained 

overpriced during the summer for so long for two major reasons: (1) traders were aware that 

someone had taken a very large position in the spreads – some knew it was Amaranth – and, in 

their view, that person had kept making large purchases to keep the prices up; and (2) traders 

were concerned that one or more hurricanes could increase prices as well, as had happened after 

Hurricanes Katrina and Rita the previous year. In light of Amaranth’s demonstrated ability to 

push up the spread prices, smaller traders were reluctant to take the opposite position, even if 

they viewed the spreads as overpriced from the standpoint of market fundamentals.135

In early September, however, faced with margin requirements of several billion dollars, 

Amaranth no longer had the capital to add to any of its positions, as it had done several during 

the spring and summer. As prices fell, it could only stand by and watch. In an attempt to reduce 

its market risk, in early September Amaranth bought MotherRock’s position from ABN Amro, 

MotherRock’s clearing firm, which had assumed MotherRock’s portfolio. MotherRock’s 

offsetting positions helped to reduce Amaranth’s risk. 

 As hurricane season neared an end, however, and natural gas supplies remained plentiful, 

more and more traders viewed the winter/summer price spreads as overpriced. This analysis 

precipitated more selling, and prices began to collapse. Amaranth’s positions went into free fall. 

 

135 An increase in the price of the spread would be harmful to a trader who had taken the opposite position because it 

would result in an increase in margin requirements. 
 113 

 Figure 58 

NYMEX Natural Gas Futures Prices

All Months

August 29 - September 21, 2006

6

7

8

9

10

11

12

Sep-06

Mar-07

Sep-07

Mar-08

Sep-08

Mar-09

Sep-09

Mar-10

Sep-10

Mar-11

Sep-11

8/29

9/14

9/21

$ per MMBtu

Fig. 58. From August 29 through September 21, the forward curve for natural gas futures 

contracts fell significantly. Although market fundamentals were largely unchanged 

between the end of August and the latter part of September, absolute price levels fell by 

25% or more and winter/summer price spreads fell by as much as 75%. Data source: 

NYMEX.

 By September 15, as Amaranth’s natural gas positions continued to deteriorate and its 

cash position weakened considerably, Amaranth began to seek a counterparty to buy its energy 

book. One of the counterparties Amaranth approached was Centaurus. Late on Saturday, 

September 16, Amaranth’s senior energy trader Brian Hunter asked John Arnold, Centaurus 

CEO, whether the hedge fund would like to make a bid for some of Amaranth’s positions. Early 

the next morning, Mr. Arnold offered a bid after making the following observations: 

I was not in the office on Friday but I understand you were selling h/j 

[March/April]. The market is now loaded up on recent, bad purchases that they 

will probably try to be spitting out on Monday if there is a lower opening given 

that spread has been in free fall. In my opinion, fundamentally, that spread is 

still a long way from fundamental value. 

Over the past couple years the market has put a big risk premium into that spread 

yet it has paid out on expiry once in ten years. We’ll be at all time high storage 

levels with mediocre s/d [supply and demand] and an el nino. Even though that 

spread has collapsed over the past 2 weeks, the only reason it’s still $1 is 

because of your position. Historically, that spread would be well below $1 at this 

point given the scenario.136 

 

136Email from John Arnold to Brian Hunter, Sept. 17, 2006, Bates No. AALLC_REG0251227-28 (Emphasis added). 
 114 

 Mr. Arnold gave Mr. Hunter two price quotes for the March/April spread: 45-60 cents 

for the March/April 2007 spread which had closed the previous trading day at $1.15; and $1.00-

$1.20 for the March/April spread in 2008 and beyond, which had closed the previous day at 

between $2.10 and $2.20. Mr. Hunter declined Mr. Arnold’s offer. Mr. Arnold’s prediction of 

the behavior of these spreads, however, turned out to be remarkably accurate. On September 21, 

the last day of Amaranth’s trading in the natural gas market, the March/April 2007 spread stood 

at 58 cents, and the March/April spreads for 2008 and beyond ranged from $1.18 to $1.25. 

 After several days of frantic negotiations with several brokerages and banks, on 

September 20th, Amaranth formally sold its energy book to its clearing firm, JPMorgan Chase, 

and Citadel, another hedge fund. To meet its margin calls and satisfy client requests, Amaranth 

liquidated the remainder of its $8 billion portfolio. 

J. Amaranth’s Market Impact 

Until its September collapse, Amaranth dominated trading in the 2006 U.S. natural gas 

market. It bought and sold thousands of natural gas contracts on a daily basis. It frequently held 

40% or more of the open interest in natural gas futures in a particular contract month. At some 

points during the year, it held more than 100,000 natural gas contracts. Its trading moved prices 

and increased price volatility. 

Amaranth’s trading did not take place in a vacuum; its largely unregulated trading and 

price distortions harmed other market participants. Some natural gas end users were forced to 

purchase natural gas at inflated prices. Others were unable to hedge their natural gas expenses 

due to the unpredictability and volatility of the market. Still others suffered large losses. 

Inflated Natural Gas Prices. Some natural gas distributors and end users told the 

Subcommittee that, due to the higher than normal price spreads during the spring and summer of 

2006, they were forced to purchase contracts to deliver natural gas in the winter months at prices 

that were disproportionately high when compared to the plentiful supplies in the market. 

The American Public Gas Association told the Subcommittee, for example, that many 

local gas distributors were forced to pass on high natural gas prices to their customers, including 

residents, schools, hospitals, small businesses, and local electrical plants powered by natural gas. 

One of its members, the Minnesota Municipal Utilities Association, complained of being locked 

into unfairly high prices in a 2007 letter to the House Committee on Agriculture: “Many natural 

gas distributors locked in prices prior to and during the period Amaranth collapsed that in 

hindsight were distorted due to Amaranth’s accumulation of an extremely large position. The 

lack of transparency in the over-the counter (OTC) market for natural gas and the extreme price 

swings surrounding the fallout of Amaranth have, in their wake, left bona fide hedgers reluctant 

to participate in the markets for fear of locking in prices that may be artificial.”137 

 

137 Letter from the Minnesota Municipal Utilities Association to U.S. House of Representatives Committee on 

Agriculture, March 22, 2007, http://www.apga.org/Peterson%20CFTC%20Letter_3.22.07.pdf. 
 115 

 The Municipal Gas Authority of Georgia (MGAG) told the Subcommittee that to reduce 

volatility and mitigate additional price spikes on supplies of natural gas for the 2006-07 winter, 

its hedging procedures required it to hedge part of its winter natural gas in the spring and 

summer of 2006. MGAG officials explained that they knew natural gas prices were still 

extremely high, but they could not “roll the dice” and hope prices would eventually drop, so they 

hedged half of their winter gas prior to September 2006. By hedging earlier in 2006 when 

natural gas prices were high, MGAG told the Subcommittee that its customers incurred hedging 

losses of $18 million over the actual market prices during the winter of 2006-07. MGAG 

officials characterized the extra $18 million, which resulted in higher natural gas bills for their 

customers, as a “premium” forced on them by excess speculation in the market by Amaranth and 

others. MGAG officials also told the Subcommittee that, due to unexplained price swings and 

price spikes in natural gas prices during the year, their members had lost confidence that the 

market would fairly reflect natural gas costs. MGAG member and industrial customer hedge 

volumes to-date during 2007 are down sharply from 2006, which they believe is attributable to 

the lack of confidence in the forward market. MGAG’s risk manager indicated that last winter’s 

hedging was very expensive, but now the lack of hedging by its members leaves its customers 

exposed to price spikes in the future. MGAG concluded by telling the Subcommittee that, 

contrary to reports that no one was hurt by Amaranth’s trading practices, their customers were 

forced to pay millions of dollars in extra natural gas costs unrelated to fundamental supply and 

demand. 

The New England Fuel Institute framed the issue this way: “Unnecessary volatility in the 

energy markets leads to unexpectedly high heating costs .... When gas and diesel prices are 

driven up by adverse market forces, people will simply drive less. But when the prices of 

heating fuels are set by market players looking for a quick buck, people are left out in the 

cold.”138 

 

American industry was also affected. The Industrial Energy Consumers of America, a 

nonprofit association that represents manufacturers powered by natural gas, wrote: “Wall Street 

type trading companies are making enormous profits trading energy. While we have nothing 

against generating an honest profit, those profits must be paid for by someone through higher 

prices or more volatile markets.”139 At a 2007 business conference on natural gas issues, 

panelists condemned high natural gas prices and price volatility in the United States.140 For 

example, the natural gas manager for steel giant Arcelor Mittal noted that, in 2006 alone, his 

company spent $1 billion on natural gas. “Our biggest concern as an end user is price,” the 

panelist said. “Our second concern is price and our third concern is price.” A panelist from 

Tyson Foods stated: “Natural gas at $4 may not have a big impact on earnings, but $15 gas has 

an impact.” A panelist from chemical manufacturer FMC Corporation added: “The pricing 

impact of natural gas impacts our global competitiveness.” 

 

138 Sean Cota, President, New England Fuel Institute, statement before the Senate Democratic Policy Committee, 

May 8, 2006. 

139 Industrial Energy Consumers of America letter to U.S. Senate Committee on Agriculture, April 5, 2006. 140 “Natural gas price a concern for US business – panel,” Reuters, May 11, 2007. All panelist quotations are taken 

from this article reporting on the conference panel. 
 116 

Unpredictable Prices. Other natural gas distributors and users told the Subcommittee 

that the wide price spreads and extreme price volatility in the 2006 natural gas market made it 

difficult for them to hedge risks and protect against adverse price changes. Some told the 

Subcommittee that the influx of speculative trading from hedge funds had exacerbated market 

volatility to the extent that small players felt uncomfortable entering the market. One public 

utility expressed to the Subcommittee a lack of confidence in its ability to effectively hedge 

against large and unpredictable swings in natural gas prices. 

At the same 2007 business conference on natural gas issues, a seminar was held on 

“Managing Price Risk in a $5 - $10/MMbtu World,” with panelists offering a variety of trading 

strategies to try to deal with the extreme price volatility in the market.141 One energy trader from 

Cargill Risk Management, after presenting a chart showing volatile natural gas prices in 2006, 

asked the audience “Did you watch in disbelief trying to decide when to enter the market?”142 

He also offered this warning from John Keynes: “Markets can remain irrational longer than you 

can remain solvent.” 

 Industrial Energy Consumers of America has stated: “[O]ver the last five years U.S. 

natural gas prices have been the most volatile commodity in the world.”143 A group of four 

Attorneys General from the Midwest issued a lengthy 2006 report that described U.S. natural gas 

prices as “whacky,” unrelated to supply and demand, and subject to “irrational swings.” The 

report noted a “striking correlation between large increases in trading and increases in the 

volatility and level of natural gas prices.” The American Public Gas Association has concluded 

that the problem worsened in 2006: “The unwinding of Amaranth’s excessively large natural gas 

positions in the OTC led to even greater price volatility in an already volatile regulated market. 

Because of the lack of transparency of the OTC market, the full effect of Amaranth’s trading on 

natural gas prices may never be fully determined, and the American public likely will continue to 

feel the effects of Amaranth’s trading for a substantial period of time.”144

Trading Losses. It was not just local gas distributors, municipalities, industry, and small 

businesses that expressed concern about the 2006 natural gas market, the Subcommittee also 

heard from traders angry at the ability of a single hedge fund to distort market prices. One trader 

told the Subcommittee that many traders were reluctant to take positions opposite Amaranth, 

regardless of their view on market fundamentals, due to Amaranth’s demonstrated ability to 

affect natural gas prices through large trades. 

 Other traders told of large losses incurred in response to sudden price movements 

attributed to Amaranth’s trading. One dramatic example involves MotherRock LP, a $300 

million hedge fund that was headed by the former NYMEX chairman Bo Collins and was 

heavily invested in natural gas futures. Part of MotherRock’s trading strategy was based upon its 

view that natural gas prices and spreads for the upcoming winter were overvalued in light of 

plentiful supplies and moderate demand. It bet that futures prices for winter contracts would fall 

 

141 “Managing Price Risk in a $5-$10/MMbtu World.” GasMart 2007 conference. Chicago, IL: May 10, 2007. 142 Jerry Afdahl, Cargill, “Managing Price Risk in a $5-$10/MMbtu World.” GasMart 2007 conference. Chicago, IL: 

May 10, 2007.

143 Industrial Energy Consumers of America letter to U.S. Senate Committee on Agriculture, April 5, 2006. 144 American Public Gas Association letter to the Federal Reserve Board of Governors, February 22, 2007. 
 117 

in relation to the summer prices; it sold a significant number of futures contracts for March 2007 

and bought contracts for April 2007. This position was directly opposite Amaranth’s position. 

 As Amaranth’s large positions and trades continued to push up winter contract prices, 

MotherRock’s positions lost value, especially its position in the March/April price spread. On 

July 31, 2006, when Amaranth’s trading caused a sudden 72 cent jump in the March/April price 

spread, a number of MotherRock’s positions were directly affected, and MotherRock was unable 

to meet its margin call. Shortly afterwards, MotherRock announced that, due to losses it had 

suffered in the natural gas market over the summer, it no longer had sufficient funds to continue 

operations. The hedge fund folded soon after. 

At the time, a number of traders and analysts stated publicly that market conditions did 

not justify the extreme price movements on July 31. “What’s distressing is that this move in 

natural gas prices that took MotherRock out, and will ultimately wind up taking others out as 

well, wasn’t really the effect of record-breaking heat or hurricanes,” one natural gas trader said. 

The trader explained: 

This move was less about the real fundamental drivers, and more about other funds 

triggering a massive short covering rally, which inflicted big financial pain on all of those 

traders who were positioned for more of a downside move. Because let’s face it, even 

with record breaking heat, there’s not one real rational reason why we should see nearly 

$9 gas, when we all know we’re going to end the refill season with more gas than we 

know what to do with.145

When asked by the Subcommittee, another trader described Amaranth’s effect on 

MotherRock as follows: “Bo [Collins, CEO of MotherRock] opposed Brian [Hunter, 

Amaranth’s senior energy trader] on March/April and on October/January. Bo thought 

March/April was overpriced. Brian came in with another tranche [of buying March and selling 

April contracts at the end of July] and killed Bo.” 

This trader described Amaranth’s senior energy trader, Mr. Hunter, as “doing so much 

action [trading] on the exchange that he was a one-man industry.” This trader said it was “a 

lopsided game,” in which it was nearly impossible to take a position opposite Amaranth, 

regardless of market fundamentals. “You could take either of two positions,” the trader said. 

“You could either jump on the bandwagon and go with the strong hand or oppose that position 

and endure months and months of pain for a moment of instantaneous gratification when 

Amaranth imploded. There are only a few people in this market who can endure that kind of 

pain.” 

 

145 Alan Lammey, Spike in Gas Futures Prices Collapses ‘Short’ Hedge Fund, Possibly More, Natural Gas Week, 

August 7, 2006. See also Gerelyn Terzo, MotherRock Wont Be Nat Gas’ Last Victim; The volatility that undermined 

this hedge fund shows no sign of slowing, Investment Dealers Digest, August 14, 2006. 
 118 

In an email obtained by the Subcommittee, a hedge fund analyst wrote the following to a 

colleague in early August: 

Bo [Collins] is done, Monday [July 31] blew them up. ... Market going nuts with 

Amaranth the featured FU player, they took it to Mother Rock on Monday in the h/j 

[March/April] spread.”146

Still another trader told the Subcommittee that “everyone in the market knew Amaranth killed 

MotherRock.”147 

 

146 E-mail dated August 4, 2006, Re: Collins, Bates No. xxx-PSI-009788. NYMEX futures contracts are generally 

designated by a two-letter symbol signifying the commodity, followed by the two-digit designation for the year, and 

a one-letter designation for the month. The letters used to designate months are F, G, H, J, K, M, N, Q, U, V, X, and 

Z. Thus, NG07F is the NYMEX designation for the natural gas contract for January 2007, whereas a simple 

combination of letters, such as h/j, refers to the March/April spread. 

147 Interview with Subcommittee staff, May 16, 2006.
 119 

VI. PROTECTING U.S. ENERGY AND ECONOMIC SECURITY 

The health of the U.S. economy depends in part upon well-functioning capital markets, 

including the commodity markets that now play such a large part in determining U.S. energy 

prices. Since the 1930s, federal law has prohibited market fraud, manipulation, and excessive 

speculation to protect the vibrancy and efficiency of U.S. capital markets.148 Federal agencies 

like the SEC, CFTC, and FERC have built a system of checks and balances, including market 

surveillance capabilities, trade analysis, regulatory actions, and criminal prosecutions, to detect, 

prevent, and punish persons who attempt to interfere with the free and fair functioning of U.S. 

capital markets. But those systems are inadequate when it comes to energy trading. 

In 2006, Amaranth’s massive trading distorted natural gas prices and increased price 

volatility. Other market participants have complained of unfair market practices and unfair 

prices. Some have lost confidence in the ability of the futures market to provide a fair price, and 

are therefore reluctant to invest in the natural gas market, hedge their price risks in these markets, 

and participate in the trading that produces a market consensus on correct pricing. Discredited 

markets, reluctant market participants, and ineffective pricing do nothing but harm U.S. 

economic and energy security interests. 

Three key steps would help protect our energy markets, reduce trading abuses, and better 

ensure fair pricing. First, Congress should make energy exchanges that are currently exempt 

from the CFTC’s regulatory system, such as ICE, subject to the same statutory and regulatory 

requirements as the regulated exchanges, such as NYMEX. Second, the CFTC and the 

exchanges should reinvigorate the statutory prohibition against excessive speculation. Third, the 

Congress should increase funding for the CFTC and authorize it to collect user fees from the 

commodity markets. 

A. Close the Enron Loophole. 

The key law establishing government oversight and regulation of U.S. commodity 

markets is the CEA. Right now, the CEA is burdened with complex exemptions, exclusions, and 

limitations that make it extremely difficult to ensure U.S. energy markets operate in a fair, 

transparent, and efficient manner. 

The primary problem is Section 2(h)(3) of the CEA, which exempts energy commodities 

traded on electronic energy exchanges by large traders from routine government oversight. 

Section 2(g) also excludes energy swaps from the law. Both provisions were added to the CEA 

in 2000, at the request of Enron and others, creating the “Enron loophole,” that exempts key 

energy commodities from government oversight. These provisions have resulted in the irrational 

situation in which one key U.S. energy exchange, the NYMEX, is subject to extensive regulatory 

oversight and obligations to ensure fair and orderly trading and to prevent excessive speculation, 

while another key energy exchange, ICE, operates with no regulatory oversight, no obligation to 

ensure its products are traded in a fair and orderly manner, and no obligation to prevent 

excessive speculation. The Amaranth case history demonstrates that trading in both markets 

 

148 See, e.g., Securities and Exchange Act of 1934, 15 U.S.C. § 78a et seq.; Grain Futures Act of 1922, later 

amended to become part of the Commodity Exchange Act, 7 U.S.C. § 1 et seq. 
 120 

affects energy prices, that trading in each market affects prices in the other market, and that 

traders view futures contracts and swaps to be equivalent financial instruments for riskmanagement and speculation. The existing provisions in the law that exempt energy contracts 

traded on ICE from regulatory oversight make no economic sense. 

The Amaranth case history also shows that when a regulated market such as NYMEX 

takes steps to prevent price manipulation or excessive speculation, a trader can still trade without 

limitation simply by replacing its futures contracts on NYMEX with swaps on ICE. After 

NYMEX directed Amaranth to reduce its natural gas positions in August 2006, Amaranth moved 

those positions to ICE. The net result was that the action by the regulated exchange, pursuant to 

the CFTC’s requirements, did nothing to reduce Amaranth’s size in the marketplace; it simply 

caused trading to move from a regulated market to an unregulated market. Natural gas prices 

were not protected from Amaranth’s subsequent large-scale trading. 

The Amaranth case history also illustrates the stumbling blocks thrown up by the current 

system that impede market regulators from making informed decisions. Right now, energy 

market regulators have direct, routine access only to trading data from regulated exchanges and 

not from the unregulated exchanges. In the Amaranth case, for example, NYMEX officials 

reviewing Amaranth’s trading positions were able to examine only Amaranth’s trades on 

NYMEX, missing highly relevant information about equivalent trades on ICE. The result was 

that NYMEX officials were forced to make significant regulatory decisions regarding market 

manipulation and excessive speculation based upon incomplete and possibly misleading trading 

data. A regulator denied critical trading information cannot make informed decisions to protect 

the integrity of U.S. energy markets. 

Eliminating the Enron loophole would level the regulatory playing field between the 

NYMEX and ICE exchanges, increase energy price transparency, and strengthen the ability of 

the CFTC to analyze market transactions and police U.S. energy commodity markets. It is time 

to put the cop back on the beat in all U.S. energy markets. 

B. Reinvigorate the Prohibition Against Excessive Speculation 

In addition to closing the Enron loophole, the CFTC and energy exchanges need to 

reinvigorate the CEA’s prohibition against excessive speculation. Amaranth’s trading 

demonstrates that excessive speculation can distort futures prices not only in the next month or 

two, but for many months into the future. Currently, the major focus of the CFTC and the 

exchanges is to prevent excessive speculation from disrupting orderly trading of a contract near 

the expiration of that contract. The CFTC and the exchanges need to be vigilant to ensure that 

traders’ speculative positions in futures contracts several seasons, or even several years, in 

advance are not distorting prices. Regulators should obtain and analyze aggregate position and 

trading data for large traders and develop flexible criteria for when to require reductions in large 

positions. Presently the only factor that is identified for consideration in whether a trader’s 

position is excessive is the aggregate position size. Other factors could include, for example, 

market concentration relative to total open interest, relationships between positions in different 

months such as spread positions, and past trading patterns. 
 121 

Again, however, these tasks cannot be accomplished unless the CFTC and the exchanges 

have more comprehensive information about traders’ positions. It is unreasonable to expect the 

CFTC to prevent excessive speculation if the CFTC cannot see all of the market or lacks the 

authority to limit a trader’s positions on the unregulated exchanges. 

Amaranth’s positions and trades in futures contracts expiring months or even years later 

had a real-time affect on energy prices, forced some natural gas distributors and users to lock in 

future delivery contracts at high prices, and drove at least one competitor out of business. Yet 

NYMEX regulators monitoring Amaranth’s trades weighed in only when Amaranth’s positions 

appeared likely to affect the prices of futures contracts that were about to expire. Our energy 

regulators need to have a longer time horizon than the next 60 days. 

C. Increase CFTC Resources 

Congress should also provide adequate resources to the CFTC so that it can effectively 

perform its oversight function, a recommendation discussed in the final section of this Report. 
 122 

VII. CFTC RESOURCES TO MONITOR NATURAL GAS MARKETS 

Another obstacle to the CFTC’s ability to detect or prevent price distortions and 

excessive speculative trading is the agency’s inability to obtain adequate staff, technology, and 

budget resources. 

Over the last ten years, commodities trading has exploded in U.S. markets. Trading 

volumes have quintupled to 3 billion contracts per year.149 The number of different futures 

contracts and options being actively traded has increased nearly sevenfold, from 179 in 1995, to 

an estimated 970 in 2006, to a projected total of 1,120 in 2008.150 An entire new energy 

commodities exchange, ICE, has been established and is now trading hundreds of thousands of 

contracts daily. Investments in futures commission merchant accounts have quadrupled, 

increasing from $33 billion to $137 billion.151 Investments in major U.S. commodity indices 

have grown more than tenfold, climbing from a combined total of less than $10 billion in 

investments in 2000 to an estimated $145 billion in early 2007.152 Commodity traders have 

become featured in financial publications as the new market stars pulling in tens or hundreds of 

millions of dollars in compensation each year.153

Figure 59: Commodity Trading of Non-Financial Instruments (Average Month End Open Interest) 

Fig. 59. Reproduced from: Mark N. Cooper, The Role of Supply, Demand and Financial 

Commodity Markets in the Natural Gas Price Spiral, at p. 11, March 2006. 

 

149 CFTC FY2008 budget request and briefing documents supplied to the Subcommittee. 150 Id. 151 Id. 152 These figures are based primarily on the Goldman Sachs Commodity Index (GSCI) and Dow Jones-AIG 

Commodity Index (DJ-AIGCI). See “Strong Asset Momentum Underpins Metals Markets,” Commodities Now 

(March 2006) for commodity investment level in 2000; Goldman Sachs press release stating that the GSCI had $110 

billion in investments in January 2007, available at http://www2.goldmansachs.com/gsci/articles/ 

gsci_061106125458.html; and Dow Jones-AIG press release stating that the DJ-AIGCI had an estimated $35 billion 

in investments in February 2007, available at http://www.djindexes.com/mdsidx/index.cfm?event=showAigNews. 153 See, e.g., Rich Blake and Andrew Barber with Robert LaFranco, The Trader Monthly 100; Earn, Baby, Earn,

Trader Monthly, April/May 2006. 
 123 

Despite the overwhelming explosion in commodity trading, the CFTC has experienced 

declining staff numbers, aging technology systems, and flat budgets. One key problem is that, 

unlike its sister organizations the SEC and FERC, the CFTC is not funded through user fees, and 

is instead required to compete against all other governmental functions to secure appropriated 

funds. Its fiscal year 2007 budget of $98 million is one-eighth the size of the SEC budget of 

$881 million; its current staff of 450 is one-eighth the size of the SEC staff of 3,500. For fiscal 

year 2008, the CFTC requested a budget increase of $17.9 million for hiring new staff and 

technology upgrades. 

Without a significant upgrade in staff, technology, and budget resources, the CFTC will 

continue to be unable to effectively monitor the energy markets, prevent manipulation and 

excessive speculation, and punish misconduct. 

A. CFTC Market Surveillance and Enforcement 

The CFTC is an independent regulatory agency created in 1974. Its mission is “to protect 

market users and the public from fraud, manipulation, and abusive practices related to the sale of 

commodity and financial futures and options, and to foster open, competitive, and financially 

sound futures and option markets.”154 

The CFTC oversees 13 regulated commodity exchanges that meet the requirements for 

Designated Contract Markets, and 11 registered Derivative Clearing Organizations that meet the 

requirements for clearing trades on the regulated exchanges. Examples include NYMEX, 

Chicago Board of Trade, and Chicago Mercantile Exchange. Additional commodity trades take 

place on 17 Exempt Commercial Markets that operate largely outside of CFTC oversight, but 

which may affect trading on the regulated exchanges. ICE is the most prominent example of an 

Exempt Commercial Market. 

1. CFTC Organization 

To accomplish its mission, CFTC has seven major operating divisions or offices. The 

Division of Market Oversight and the Division of Clearing and Intermediary Oversight provide 

market trading and clearing surveillance. The Division of Enforcement investigates and 

prosecutes violations of the CEA and CFTC regulations. The Office of Chief Economist 

provides economic analysis; the Office of the General Counsel provides legal advice; the Office 

of Proceedings handles customer complaints; and the Office of Executive Direction and Support 

develops and administers CFTC policies and regulations. Figure 60 shows the relative budget 

allocations among the CFTC operating units. 

 

154 Source: CFTC website, at www.cftc.gov. For more information on the history of the CFTC, please see the 

Subcommittee’s prior report, U.S. Strategic Petroleum Reserve: Recent Policy Has Increased Costs to Consumers 

but Not Overall U.S. Energy Security, U.S. Senate Permanent Subcommittee on Investigations, Washington, DC: 

March 5, 2003, pp.159-162. 
 124 

CFTC FY2007 Budget By Program Division

Market 

Oversight

18%

Clearing & 

Intermediary 

Oversight

14%

Chief 

Economist

2%

Enforcement

29%

Proceedings

3%

General 

Counsel

7%

Exec. Direction 

& Support

27%

Figure 60

Fig. 60. Resource allocation among CFTC program divisions. Data source: 

FY2007 Budget and Performance Estimate. 

Three divisions play key roles in preventing fraud, manipulation, and excessive 

speculation in the commodities markets. They are the Division of Market Oversight, the 

Division of Clearing & Intermediary Oversight, and the Division of Enforcement. 

The Division of Market Oversight is primarily responsible for conducting the CFTC’s 

market surveillance program. Its analysts review trading data to detect suspect price movements 

and determine whether traders’ positions are significant enough to affect commodity prices. This 

division also reviews actions taken by regulated exchanges to enforce trading rules, such as 

limits on speculative positions. The Division of Clearing & Intermediary Oversight reviews 

clearing practices, management of margin accounts, and the settling of accounts between trading 

parties. 

Although investigations into potential misconduct may be initiated by the Market 

Oversight Division, CFTC’s Enforcement Division is responsible for pursuing any such 

investigations and prosecuting any instances of fraud, manipulation, abusive trading practices, or 

other violations of the Commodities Exchange Act or CFTC regulations. If the Enforcement 

Division determines that a violation has occurred and the CFTC Commissioners concur, the 

CFTC can file civil or administrative injunctions, seek suspensions or revocations of trading 

registrations, and impose civil monetary penalties.155 

The CFTC has devoted a sizeable portion, roughly 40%, of its Enforcement staff 

resources to its New York City office, where CFTC staff confer regularly with NYMEX staff. If 

NYMEX provides the CFTC with evidence of potential wrongdoing, the CFTC can either pursue 

the case on its own or return the case to NYMEX for further action.156 In addition, pursuant to 

 

155 For criminal cases, the Enforcement program works with the Department of Justice to file and prosecute cases. 

The CFTC has also filed actions against false or misleading advertising for illegal futures and options. 

156 NYMEX interview, January 23, 2007. 
 125 

FERC’s new responsibility under the Energy Policy Act of 2005 to conduct market oversight to 

prevent manipulation of energy prices, the CFTC and FERC have entered into information 

sharing agreements to discuss energy-related cases.157

2. CFTC Market Surveillance Program 

CFTC’s market surveillance program is designed to prevent misconduct in the U.S. 

commodity markets. The CFTC states on its website, “The primary mission of the market 

surveillance program is to identify situations that could pose a threat of manipulation and to 

initiate appropriate preventive actions.”158 

CFTC’s primary tool for identifying suspect conduct is its “large trader reporting 

system.”159 Under this system, clearing members of regulated exchanges must submit to the 

CFTC daily reports with end-of-day positions, including buy or sell volumes and trading activity, 

for traders holding positions above a certain threshold.160 These thresholds are set by the CFTC 

after considering the total open positions in that market, the size of positions held by traders in 

the market, and CFTC’s surveillance history of the market.161 The reporting threshold in the 

natural gas market, for example, is any trader that holds 200 or more natural gas contracts. 

CFTC calls the large trader reporting system the “backbone” of its market surveillance program, 

and estimates that large trader reports provide it with data on 70-90% of the total open interest in 

any given market.162 

In addition to large trader reports, the CFTC requires each regulated exchange to provide 

it with a daily report containing overall trading information, including such data as the total gross 

open contracts, trading volumes, and prices (including the lowest and highest price of sales or 

bids) for each futures and option product by contract.163 This exchange report must also include 

open long and short positions, purchases and sales, exchanges of futures for cash, and futures 

delivery notices. This data enables the CFTC to compare overall exchange data with the large 

trader reports to identify any discrepancies.164 It also enables the CFTC to review individual 

 

157 See CFTC Press Release No. 5127-05, “CFTC Chairman Jeffrey and FERC Chairman Kelliher sign MOU on 

Information Sharing, Confidentiality,” October 12, 2005. 

158 Backgrounder: The CFTC Market Surveillance Program; July 2001. 

159 See CFTC Report: “Backgrounder: The CFTC’s Large-Trader Reporting System,” available at 

www.cftc.gov/opa/backgrounder/opa-ltrs.htm (hereinafter “CFTC Backgrounder: Large-Trader Reporting System”). 

Data from large trader reports are made available to the public in CFTC’s “Commitment of Traders” reports. 

NYMEX told the Subcommittee that it also reviews the large trader reports filed with the CFTC. NYMEX 

interview, January 23, 2007. 

160 CFTC receives large trader reports from members of clearing organizations, futures commission merchants, and 

foreign brokers. As described earlier in this report, the buyers and sellers on an exchange do not actually transact 

with each other directly, but trade through members of the exchange’s clearing organization. An individual trader 

may also use a clearing broker. 

161 For physical-delivery markets, the threshold would also depend upon the volume of deliverable supplies. See 

CFTC Backgrounder: Large-Trader Reporting System; Commission Reg. 15.03(b). 

162 Testimony of Reuben Jeffrey III, CFTC Chairman, before the US Senate Committee on Banking, Housing, and 

Urban Affairs, July 25, 2006. 

163 See 17 CFR 16.01. 164 According to CFTC, a comparison is made if “a) the sum of clearing members’ large-trader positions exceeds the 

members’ open cleared positions, or b) a clearing member has a cleared position many times the reporting level for a 

given market, but reports little or no large trader positions.” CFTC Backgrounder: Large-Trader Reporting System. 
 126 

traders’ activities across multiple exchanges. In addition, the data helps the CFTC monitor the 

enforcement of margin requirements and evaluate whether clearing members have sufficient 

capital on hand to cover their clients’ trading positions. 

Besides routine large trader and exchange reports, the Market Oversight Division has the 

authority to request trading data directly from traders or non-regulated exchanges through 

issuance of a “special call.”165 A special call may request additional information about a 

participant’s trading and delivery activities, including related over-the-counter (OTC) 

transactions. The CFTC has used this authority in energy markets.166 

In addition to collecting and analyzing trading data, the Oversight Market Division 

conducts market oversight by engaging in discussions with market participants to better 

understand their trading positions and strategies. In a process CFTC calls “jawboning,” CFTC 

market surveillance staff meets with regulated exchanges like NYMEX and with individual 

companies and traders to clarify or discuss positions that could potentially disrupt the futures and 

options markets.167 The Market Oversight staff presents any issues of concern to CFTC 

Commissioners on a weekly or more frequent basis.168

3. Limitations in CFTC Market Surveillance Program 

The CFTC’s market surveillance system has a number of limitations that prevent the 

agency from obtaining a comprehensive view of commodity markets and hinder its ability to 

detect and prevent fraud, manipulation, and excessive speculation. 

First, no market data is obtained on a routine basis from key commodity markets, such as 

ICE, which are exempt from CFTC authority. The absence of this data means that CFTC is 

unable to obtain a complete picture of these markets. Second, CFTC has limited capability to 

process and review daily transactional trading data. Third, CFTC has limited capability to 

integrate trading data across exchanges. 

CFTC analyses have typically focused on reviewing end-of-day reports on large trader 

positions. However, reports on the trader’s end-of-day net position—the difference between 

their open long contracts and open short contracts in any one commodity—do not contain any 

information about that trader’s activity during the trading session. If a trader ends the day with 

no net position or change in position, that trader would not appear in an end-of-day report, even 

if the trader had made numerous intraday trades. 

 

165 7 U.S.C. § 6g(d). 166 Starting in October 2006, for example, in response to a special call, ICE began supplying the CFTC with clearing 

member position data for contracts that are cash-settled, based upon NYMEX natural gas contract prices. The 

CFTC emphasizes, however, that “consistent with the regulatory framework governing ECMs set forth in the CEA, 

[the special call was not] issued in order to conduct regular market surveillance of the ICE contracts themselves.” 

See CFTC letter to Senator Jeff Bingaman, February 22, 2007, pp. 3, 7. 

167 For a more detailed discussion of jawboning, see the Subcommittee’s prior report, “U.S. Strategic Petroleum 

Reserve: Recent Policy Has Increased Costs to Consumers but Not Overall U.S. Energy Security,” Washington, DC: 

March 5, 2003, p. 139. 

168 Testimony of James E. Newsome, CFTC Chairman, at Senate Hearing before the Committee on Energy and 

Natural Resources, “Enron Corporation’s Collapse,” Senate Hr. 107-458; January 29, 2002, p. 27. 
 127 

Recently, however, both ICE and NYMEX have voluntarily provided CFTC daily trading 

data about each transaction taking place on the exchange. Largely as a result of the lessons 

learned from Amaranth’s trading practices, since early this year ICE has been providing daily 

transactional data to CFTC on a voluntary basis. Similarly, earlier this year NYMEX began 

providing to CFTC daily transactional reports, which include key data on all transactions, not 

just the large trader positions. These are much-needed improvements and efforts by both 

exchanges that will enhance CFTC’s oversight capabilities. 

CFTC has not yet developed the technological systems to be able to integrate this 

voluminous amount of incoming data to provide meaningful market analyses without significant 

effort. Unlike SEC, whose systems integrate trading data from multiple exchanges, a team of 

CFTC staffers must manually integrate this exchange data each day. 169 Without an automated, 

consolidated view of trades that can be frequently updated in real-time across exchanges, it will 

continue to be difficult for CFTC to respond to changing trading patterns and strategies in a 

timely manner.170 

A fourth problem is that, unlike SEC’s electronic information recall system,171 CFTC is 

currently unable to readily match trades to the traders behind them for all exchanges.172 In order 

for CFTC to assess how much volume and open interest a trader has in related products, it needs 

to be able to identify and calculate that trader’s aggregate positions across exchanges and with 

respect to related products.173 Since traders may use more than one clearing firm, trade on 

multiple exchanges, and use multiple related products, CFTC analysts currently have to compare 

multiple reports by hand, identify anomalies, and request trader identification information from 

each of the relevant clearing members or exchanges. This slow and cumbersome process stands 

in stark contrast to the technological capabilities of the SEC. 

CFTC’s current market surveillance systems were developed during an era when trading 

involved mostly physical commodities and occurred on an exchange floor. Its surveillance tools 

have not matched the subsequent growth in commodity trading, commodity traders, electronic 

trading, and speculative trading, especially for energy products. Its systems have become 

 

169 Since the 1970s, the securities markets have been consolidating all trades from all exchanges, including those 

conducted over-the-counter, onto an electronic tape, through a process supervised by the exchanges and monitored 

by SEC. The electronic tape allows SEC and the exchanges to review real-time prices and trading volume on all 

trades, which are reported by exchange members or broker dealers. SEC interview, April 12, 2007. 170 SEC reviews small short-term significant changes in prices, and when surveillance staff suspect manipulation of 

prices or insider trading, they pull out the tape and make a issue an electronic “blue sheet” to the registered broker 

find out who the beneficial owner, or actual customer is. As SEC staff described it, the process can take place 

relatively quickly, allowing a smooth review of trading and highlighting any particular insider trading developments 

as they occur. SEC interview, April 12, 2007. 

171 The SEC uses an electronic blue sheets system which allows its staff to quickly find out from the registered 

broker who the beneficial owners or customer is behind a particular trade. The SEC staff said the system allows a 

smooth review of trading and highlighting any particular insider trading developments as they occur. SEC 

interview, April 12, 2007. 

172 The ICE trading data clearly identifies each trade both by clearing firm and by customer. Traders on ICE, 

however, are not permitted to trade through brokers; this prohibition eliminates the difficulty of identifying the 

ultimate purchaser in brokered trades that other exchanges face when generating this data. 173 For example, in natural gas, NYMEX staff told the Subcommittee that there are up to 7 trading products which 

“net out” for a trader’s complete natural gas position, such as options linked to futures prices. NYMEX interview, 

April 12, 2007. 
 128 

antiquated and are in dire need of upgrading if CFTC is to fulfill its mission of detecting and 

preventing fraud, manipulation, and excessive speculation. 

B. Limited CFTC Resources 

1. Limited Funds and Personnel 

Since its inception in 1974, CFTC has operated with a modest budget and a relatively 

small staff, especially compared to the SEC and Federal Energy Regulatory Commission 

(FERC). In recent years, Congress has dramatically increased the resources of both SEC and 

FERC which have used their larger budgets to hire more staff and upgrade electronic 

surveillance of the markets they oversee. In contrast, Congress has failed to provide CFTC with 

the resources needed to monitor the explosion in commodities trading that has taken place over 

the past few years. 

Figure 61 

Budgets for CFTC, FERC, and SEC: 2002-2007

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

2002 2003 2004 2005 2006 2007

Fiscal Year

Budget (in millions)

CFTC

FERC

SEC

Fig. 61. CFTC operates with less than half the budget of FERC and about oneeighth of the budget of SEC. Data source: SEC, FERC, and CFTC Budget 

Estimates, 2002-2007. 
 129 

Figure 62 

Staff Levels (Full-Time Equivalents) at 

CFTC, FERC, and SEC: 2002-2007

0

500

1000

1500

2000

2500

3000

3500

4000

2002 2003 2004 2005 2006 2007

Fiscal Year

Number of Staff (FTEs)

CFTC

FERC

SEC

Fig. 62. Since 2002, staff levels at CFTC have decreased while staff levels at 

SEC and FERC have risen. Data source: SEC, FERC, and CFTC Budget 

Estimates, 2002-2007. 

SEC Resources. In 2002, the General Accounting Office (GAO) reported that SEC staff 

resources were not commensurate with its workload.174 At the time, the securities markets had 

undergone enormous change, with more participants and increased complexity in market 

transactions. GAO pointed out that SEC’s limited resources did not allow SEC to “adequately 

deal with new and emerging issues” in securities trading, including technology-related changes. 

In an interview with Subcommittee staff, SEC said that accounting scandals such as those at 

Enron and Worldcom drew attention to its inability to keep up with increased activity in the 

securities market.175

In response, Congress more than doubled the SEC’s funding, from $377 million in 2000 

to $881.6 million in 2007. SEC staff told the Subcommittee that the additional funding has been 

used to increase staffing levels, increase staff pay (implementing pay parity), and upgrade and 

implement new technology systems. The total number of full time SEC staff increased from 

2,936 in 2001, to 3,623 in 2007, with significant increases in staff for the enforcement and 

examinations programs. Additional funding for staff resources was devoted to pay parity, as 

employees had cited low pay as a primary reason for leaving SEC. SEC staff told Subcommittee 

staff that the high staff attrition rates of the mid to late 1990s have dropped to 6% today. 

Similarly, increases for information technology have improved existing technological systems, 

such as for filing reports electronically, and new systems used for increased surveillance. For 

example, SEC has streamlined its monitoring of securities markets so that it receives real-time 

data from all exchanges as well as OTC markets on a continuous feed. SEC has also made the 

 

174 U.S. General Accounting Office: SEC Operations: Increased Workload Creates Challenges (GAO-02-302) 

Washington, DC: March 2, 2002. 

175 SEC interview, April 12, 2007. 
 130 

process by which it identifies the owners of securities entirely electronic, moving from paper 

“blue sheets” to an electronic blue sheet system. 

FERC Resources. FERC has also received recent funding increases to strengthen its 

oversight capabilities. In the Energy Policy Act of 2005, Congress increased FERC’s budget 

authorization and expanded its authority to conduct market surveillance and oversight to prevent 

energy price manipulation.176 FERC’s budget for its market oversight and investigations office, 

for example, was increased from $12 million in 2003 to $18 million in 2007, with an addition of 

40 full-time personnel. With additional funding, FERC has also transformed its electronic 

surveillance of the energy markets, obtaining real-time data from multiple markets. Among 

other innovations, FERC created automatic alerts based upon the raw data it collects on natural 

gas and electricity prices to draw analysts’ attention to potential concentrations of market power 

as they develop.177

NASD Resources. The National Association of Securities Dealers (NASD) is a private 

self-regulatory body that, among other duties, monitors over-the-counter securities trading.178 

NASD spends over $100 million a year on its computer systems, a technology budget that is 

larger than the CFTC’s entire FY2007 budget of $98 million.179 NASD uses its surveillance 

systems to conduct market oversight. 180 Among other systems, NASD compiles and publicly 

disseminates corporate bond transactions in real time “in a ticker-like fashion” through its Trader 

Reporting and Compliance Engine (TRACE).181 This system averages 22,000 transactions each 

day, representing more than $18 million in trading volume. In the OTC securities markets, 

NASD has worked through several generations of its Securities Observation News Analysis and 

Regulation (SONAR) program, which allows surveillance staff to electronically recreate the 

OTC market second by second, using news, market information and data mining to track down 

possible instances of fraud or insider trading. SONAR stores companies’ financial and news 

information so that NASD surveillance staff can quickly review a firm’s market share, volume 

concentrations, and other event scenarios. NASD’s system is considered state-of-the-art in the 

market surveillance field. 

CFTC Resources. In contrast to SEC, FERC and NASD, CFTC budgets have not seen 

dramatic increases commensurate with the increased complexity and volumes of commodity 

trading. CFTC budget levels have grown slowly, while staffing levels have actually declined 

over time. When the CFTC was first established in 1974, its began with about 450 full time 

 

176 Energy Policy Act of 2005, P.L. 109-58. 177 See discussion of Market Monitoring Center, Federal Energy Regulatory Commission, Congressional 

Performance Budget Request, FY2007, February 2006, p. 67. 178 NASD is recognized by SEC as a self-regulator for broker dealers that are not registered with a securities 

exchange, particularly those who trade in the over-the-counter (OTC) market. 

179 NASD interview; NASD 2005 Annual Financial Report, p. 32. NASD also spends $172 million a year in 

compensation and benefits for its 2,492 employees, as of December 31, 2005. 180 In its 2005 annual report, NASD cites its oversight statistics: it oversaw more than 655,000 individual brokers 

and 5100 brokerage firms, conducted 6,200 reviews based on its surveillance of market activity covering more than 

3,300 issues listed on NASDAQ, 8,200 OTC securities, resulting in 1400 enforcement actions filed by its 115 

enforcement attorneys. The NASD report states: “Since we don’t live in a perfect world, there has to be an NASD 

to keep the rest of the financial marketplace honest.” Id., p. 16. 181 NASD 2005 Year in Review, p. 8. 
 131 

staffers, gradually reached a peak of about 560 personnel in 1998, and fell back to about 450 

staffers in 2007. Figure 63 depicts CFTC budget and staffing levels over the last decade. 

Figure 63 

CFTC Budget and Personnel: 1995-2007

$0

$20

$40

$60

$80

$100

$120

1995 1997 1999 2001 2003 2005 2007

(in millions)

0

100

200

300

400

500

600

Budget

FTE

Fig. 63. CFTC staffing levels have declined since reaching their peak in 1998. 

Data source: President’s Budget Requests, 1995-2008. 

CFTC officials told the Subcommittee that its current budget level severely constrains its 

ability to attract and retain key staff, upgrade existing computer systems, and modernize its 

electronic market surveillance and enforcement tools to adapt to changes in commodities 

trading.182 

Staffing Constraints. CFTC officials told the Subcommittee that it has had difficulty 

hiring and retaining staff in part because of limited funding for staff salaries. Although CFTC 

received the authority to compensate its employees to a similar extent as other federal financial 

regulators under “pay parity” rules enacted in 2002, CFTC officials told Subcommittee staff that 

the Commission has not received enough funding to fully implement the pay parity 

authorization, and CFTC employees currently earn 20% less than other federal financial 

regulators.183 CFTC told the Subcommittee that it lost 58 experienced hires in FY2006, and their 

budget document states that over 30% of their senior managers may retire in the next three years. 

In addition, CFTC staff told the Subcommittee that the agency instituted a hiring freeze in 

October 2005, further hindering efforts to improve staffing. 

 

182 CFTC staff interview, March 26, 2007. 183 Under the Farm Security and Rural Investment Act of 2002, § 10702, the CFTC was authorized to pay its staff 

“pay parity” with the banking regulators and SEC. 
 132 

Information Technology. In addition to a staffing crisis, CFTC recognizes its current 

market surveillance systems are “woefully out of date.”184 Currently, CFTC has two major 

information systems to monitor transactions on commodities. Data from clearing members and 

the exchanges are entered into the Integrated Surveillance System (ISS) and used in the Large 

Trader Reporting System.185 CFTC staff told the Subcommittee that because they do not have a 

standard means of compiling data from clearing members and brokers, a team of 12 staff has to 

assemble position and financial information into one platform each day for analysis. 

CFTC’s second information system is the Exchange Database System (EDBS), which 

handles clearing member data from CFTC regulated exchanges, to monitor trading abuses such 

as trading ahead of customers. It was designed for analyzing data traded on the floor, or “pit,” 

when cards were flung across the trading floor. However, today’s commodities markets have 

shifted away from pit trading to electronic trading. According to the CFTC, trading volume on 

NYMEX, Chicago Board of Trade, and Chicago Mercantile exchanges is now about 70-75% 

screen-based and 25-30% floor-based,186 with electronic trading at NYMEX having increased 

over 200% in 2006 alone.187

CFTC’s strategic plan calls for a new system called the Trade Surveillance System (TSS), 

which would allow CFTC staff to integrate data from across exchanges, including floor and 

electronic trading, to determine inter-exchange violations or price manipulations, all of which the 

current systems currently cannot process.188 As a CFTC official described it, to go from EDBS to 

TSS would be “like going from the faucet tap to a fire hose” of data.189 CFTC’s strategic plan for 

2004-2009 estimates that TSS would cost $3.5 to $4.5 million and take two and a half years to 

fully implement. CFTC staff told the Subcommittee that its FY2008 budget request includes no 

funding to start work on the TSS system. 

CFTC staff also explained that, in recent years, the agency has had to divert funding from 

information technology needs to personnel costs. CFTC staff noted that its 2008 request for a 

budget increase for information technology is simply to bring its existing systems into 

compliance with general federal government information technology requirements, and not to 

upgrade or introduce new CFTC-specific surveillance or enforcement systems.190 CFTC 

estimates that its investment in technology development as a percentage of its annual 

appropriations has dropped from about 10% to less than 7% over the past five years.191 

Furthermore, given its limited budgetary resources, CFTC has not yet begun to allocate funds 

towards re-engineering its systems. 

 

184 CFTC, FY2004-FY2009 Strategic Plan, p. 12. In its strategic plan, CFTC lists several priorities related to the 

development of new trade surveillance systems that will remain “effective and robust” as trading becomes 

increasingly screen based. 

185 CFTC interview, March 26, 2007. 186 CFTC’s FY2008 OMB Budget & Performance Estimate, at p. 21; CFTC interview, 3/26/07. 187 NYMEX website. NYMEX Holdings, Inc. Reports Record Fourth Quarter and Full Year 2006 Results, 1/31/07, 

at http://www.nymex.com/press_releas.aspx?id=pr20070131a. 188 Commodity Futures Trading Commission: FY2004-2009 Strategic Plan, p. 12. 

189 CFTC interview, March 26, 2007. 

190 CFTC interview, March 26, 2007. 

191 Reuben Jeffery III, CFTC Chairman, testimony before the U.S. Senate Subcommittee on Financial Services and 

General Government Committee on Appropriations, March 9, 2007; p. 8. 
 133 

Enforcement. More staff and greater budgetary resources would also help improve 

CFTC’s enforcement efforts, which are currently strained. According to testimony and budget 

documents, in the past three years, CFTC’s enforcement program has filed more actions than in 

any other time in the program’s history. CFTC enforcement division reports typically list over 

100 investigations open at any one time.192 Many of the recent enforcement actions have been 

against traders in the natural gas markets. From 2002-2006, CFTC filed 34 cases and charged 54 

persons for violations related to energy markets.193

CFTC states that the increase in litigated cases without a subsequent increase in funding 

has diverted CFTC staff from opening and pursuing new cases. The division has lost 11% of its 

staff in the past two years and due to the hiring freeze has not been able to hire additional 

personnel.194 Technology also poses challenges for enforcement staff. CFTC’s fiscal year 2008 

budget request cites: “the dramatic increase in electronic trading poses additional challenges to 

the Enforcement program in terms of potential novel violations (or adaptations of traditional 

trade practice violations) and potential audit trail gaps. These challenges will require additional 

resources not only for investigation and persecution but also for Enforcement staff training.”195 

CFTC has found that investigating alleged abuses in the energy markets requires its staff 

to analyze volumes of trading data, hire experts, and review activities across multiple energy 

markets. Without additional resources, as CFTC’s budget request states, “there is a substantial 

risk that abusive trading in energy futures markets will go undetected, potentially costing 

American consumers hundreds of millions of dollars in additional energy costs.”196 

2. Increased Funding Through User Fees 

Under the current funding system, the CFTC is funded through general appropriations 

and must compete against all other government functions to secure resources. A more effective 

approach, already used to fund all other federal financial regulators, including the SEC, FERC, 

Federal Reserve, Office of the Comptroller of the Currency, and Federal Deposit Insurance 

Agency, would allow the CFTC to obtain funding through user fees imposed on the markets it 

regulates; here the commodity markets. A 2007 Congressional Research Service report notes 

that “every President since Ronald Reagan” has asked Congress to authorize such fees, including 

the Bush Administration.197 The President’s 2008 budget states that the “CFTC is the only 

Federal financial regulator that does not derive its funding from the specialized entities it 

regulates.”198

 

192 CFTC FY 2008 OMB Budget and Performance Estimate, p. 13. 

193 Id., p. 5. 

194 CFTC, FY2006 Performance and Accountability Report, November 2006, p. 19. 

195 CFTC, FY2008 OMB Budget & Performance Estimate, p. 59. 

196 Id., p. 49. See also “Algo trading raises stakes for market regulators,” Reuters, June 5, 2007 (describing 

regulatory review issues related to electronically placed trade orders by “hyper-fast computer programs”). 

197 See Congressional Research Service report, “Proposed Transaction Fee on Futures Contracts,” Report No. 

RS22415, p. 1. CFTC’s FY2008 budget includes a proposal to collect a “new transaction fee on commodity futures 

and option contracts traded on approved exchanges.” 

198 The Budget for Fiscal Year 2008, Appendix, p. 1041.
 134 

User fees would ensure that the persons who benefit from well regulated commodity 

markets contribute to the cost of policing such markets. While it is often suggested that the fee 

apply only to commodities traded on regulated exchanges, a better approach would be to apply 

the fee to both regulated and exempt exchanges, since a more broad-based fee would reduce the 

costs per trade and would ensure that regulated exchanges are not placed at a competitive 

disadvantage compared to exempt exchanges. In other words, any CFTC user fee should apply 

to trades not only on NYMEX, but also on ICE, since both markets play key roles in energy 

pricing and both markets require policing to detect, prevent, and punish misconduct. In addition, 

while the President’s budget proposes fees to cover CFTC’s current funding levels, the better 

approach would be to collect sufficient funds to enable the CFTC to modernize its antiquated 

technological systems, meet its staffing needs, and strengthen its oversight and enforcement 

functions. 
 135 

VIII. ADDITIONAL MINORITY STAFF VIEWS ON THE REPORT 

This Report represents the culmination of the Subcommittee’s extensive investigation 

into the impact of speculative trading on U.S. energy markets. This inquiry stems from the 

Subcommittee’s bipartisan staff report entitled, The Role of Market Speculation in Rising Oil and 

Gas Prices: A Need to Put the Cop Back on the Beat, which was issued in June 2006. This 

investigation has been a bipartisan effort from its inception and we applaud the Majority’s 

tireless dedication throughout this process. The recommendations in this Report comport with 

those of the Subcommittee’s June 2006 report and, to that extent, we join with the Majority on a 

bipartisan basis to make these recommendations. 

While we join with the Majority in making these recommendations, we are unable to 

reach some of the same factual findings with the same degree of certitude. For instance, 

although a number of facts presented in the report support the conclusion that Amaranth’s 

trading activity was the primary cause of the large differences between winter and summer 

futures prices that prevailed throughout 2006, other facts seem to indicate the opposite – that 

market fundamentals and price changes influenced Amaranth’s positions. These facts suggest 

that, at least at times, Amaranth was responding to the market, rather than driving it. For 

example, although the price of natural gas declined substantially after Amaranth’s demise, this 

alone does not prove Amaranth’s ability to elevate prices above supply and demand 

fundamentals; rather, the market may have simply reevaluated those fundamentals in light of the 

hurricane season ending without a major event and the prediction of a warm winter. It is clear 

that different conclusions can be drawn from the same set of facts. 

To be sure, the factual findings presented by the Majority regarding Amaranth’s impact 

on natural gas prices are compelling and raise valid concerns that demonstrate the need for 

greater transparency in our energy markets. Moreover, factual findings regarding the degree to 

which Amaranth affected prices are not necessary to justify the recommendations articulated in 

this report. We make these recommendations because they will better preserve the integrity of 

U.S. energy markets. As an increasing amount of U.S. energy trades occurs on unregulated, 

over-the-counter electronic exchanges, the CFTC’s large trading reporting system becomes less 

accurate, trading data becomes less useful, and market surveillance becomes less comprehensive. 

The structure, pricing, and trading of energy futures contracts and standardized, cleared energy 

swaps traded on electronic, over-the-counter exchanges are functionally equivalent, and the 

primary markets on which the two instruments are traded should receive equivalent regulatory 

treatment. 

Any implementation of these recommendations must be clearly defined and targeted to 

preserve the integrity of our energy markets. As a threshold matter, regulators need to develop a 

clear definition of “excessive speculation.” Without a clear, unequivocal definition of that term, 

the CFTC and regulated exchanges will continue to have difficulty monitoring and preventing 

price distortions. More important, we must ensure that any proposed cure is not worse than the 

disease. If we extend CFTC oversight and regulation to electronic, over-the-counter exchanges, 

we must avoid unintended consequences – namely, creating incentives for traders to shift their 

business to the far less transparent and unregulated bilateral, voice-brokered markets. 

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