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Next Previous Lessons from the black swan of chaos in the nickel market HOME • INSIDER • WORLD • Lessons from the black swan of chaos in the nickel market
Του & nbsp; Ιωάννη Τελώνη
” If you can not explain it simply, you do not understand it well enough ”Albert Eistein
In the first part of this analysis we looked at the nickel market and its prospects and listed the dramatic events that led to its collapse. The collapse of the regulated market has been described by some as an event known as the black swan. But it is & nbsp; so things? Was there a way to avoid the chain of events that brought about the collapse? Did the supervisory authorities react correctly? Have we learned lessons from other such events in the past? In this second part we will see how the LME authorities, the various market players reacted and we will examine what we can learn from this crisis.
As we saw in the first part, the nickel market, a market with small fluctuations, went through the phenomenon of the black swan, an event completely unpredictable in size and time that brought about the collapse. The cause of the black swan was & nbsp; Russian invasion of Ukraine and & nbsp; the Tsingshan Group's large openings in aluminum trading with the support of JPMorgan Chase, BNP Paribas & nbsp; and Standard Chartered Bank.
With a price increase of 250% in just two days, the various market participants were on the brink of disaster. Tsingshan was in great danger, and of course the bankers who supported her.
But let's take things in turn & nbsp; as described by Jack Friday, Alfred Cang and Mark Burton for Bloomberg.
The price rally started on Monday, March 7th. From $ 30,000 a tonne jumped & nbsp; & nbsp; at $ 50,000. The various brokers in the London Metal Market (LME) were suddenly receiving phone calls from their banks & nbsp; to file additional & nbsp; amounts to cover their exposures. Margin calls were not about a few thousand but a few million dollars. For some of the big brokers the & nbsp; margin calls were approaching one billion for each one! For Tsingshan, too, the amount was astronomical at $ 3 billion! & Nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp;
On Monday night, the LME management convened a meeting of the “Special & nbsp; A small group of expert and legal advisers who had the power to issue extraordinary regulations. After a long deliberation, they decided to let things “run”.
On Tuesday, March 8, the market started trading at 1 in the morning. AED Mathew Chamberlain & nbsp; & nbsp; stayed in his office to watch the market open. Everything seemed to be going smoothly, with the price fluctuating & nbsp; at $ 50,000 a tonne.
Relieved, he left for home. At 5:30 he got a phone call that woke him up for good. & Nbsp; There was panic in the nickel market and even & nbsp; Worse, the panic began to affect other markets. The price of zinc jumped 15% in a few seconds before collapsing again.
Chamberlain convened a new meeting of the “Special Committee” at 6 in the morning. At 8:15 a.m. by decision of the LME, the session was suspended with the price having reached $ 80,000. The result of & nbsp; suspension was to flood the LME administration with anxious and desperate phone calls from brokers found in the eye of the cyclone. What became clear from a quick collection of transactions and positions left over from the abrupt closure and the huge price increase, about 80% of LME brokers would go bankrupt.
On March 10, the LME stated that “the March 8 price fluctuation posed a systemic risk to the market and that the LME had serious concerns about the ability of several market participants to finance their exposures, resulting in there is a risk of multiple breaches “. And yet & nbsp; The day before, Chamberlain himself, in an interview with Bloomberg television, insisted that the LME as a market was creditworthy.
THE LME DECIDES
& nbsp; Having to deal with a collapsing market, & nbsp; the LME Management & nbsp; made a decision unprecedented for a coordinated purchase: It canceled all transactions that had been drawn up on Tuesday morning. Coordinated markets and stock exchanges have the power and sometimes follow the practice of canceling transactions. This happens when operations occur or are lost due to a technical problem in the systems or when the “big toe” syndrome occurs, that is, a wrong entry by a broker – a real human error.
However, it is extremely unusual for a stock exchange to cancel the operations of an entire session, even after the end/suspension of trading. To understand the magnitude of the decision, $ 3.9 billion worth of transactions were drawn up at that session, according to a Bloomberg estimate. The decision favored all of them & nbsp; which were outstanding at $ 80,000 a tonne after & nbsp; “Took” the market back in time and specifically at the close of Monday when the price closed at 48,078 dollars per ton. But even with this decision & nbsp; about $ 500 million needed to cover & nbsp; margins were left unpaid. And half of that amount was for a negotiator – her & nbsp; group. Tsingshan. & Nbsp; This default was related to only a small part of her short position & nbsp; Tsingshan – about 30,000 tons.
The company had an additional 120,000 (!) Tons in the short & nbsp; off the stock exchange through bilateral agreements it had drawn up with banks such as & nbsp; JPMorgan Chase and Standard Chartered PLC.
THE REACTION MARKET
The LME decision created & nbsp; a storm of reactions in the international market. Investors who traded on Tuesday morning were furious. Among them are some of the biggest names on Wall Street. Goldman Sachs announced that it expressed its strong dissatisfaction & nbsp; to Chamberlain. Tower Research Capital, one of the oldest online platforms on Wall Street, announced that it would immediately restrict its LME transactions and reconsider its stake in it. Others were even sharper. AQR Capital founder Cliff Asness directly accused the LME of “robbing investors who traded in good faith to give money to Chinese nickel producers and their banks.” Asness's report apparently referred to the ownership of the LME which in 2012 had passed into the ownership of the Hong Kong Exchanges & amp; Clearing.
As for Tsingshan and owner Xiang Guangda, the big game he played had resulted in billions in losses. Xiang's reaction was to demand that the banks that financed him continue to support him, convinced that there would be a winner in the end.
THE CHAOS OF MARCH 16
< p>The LME & nbsp; closed & nbsp; for a week. Those in charge hoped that this time would be enough for the market to find its balance and restart. Among the measures taken was the introduction of a new daily limit. It started operating its electronic trading platform at 8:00 on the morning of March 16th. Within minutes, however, the electronic trading stopped, with the stock market declaring that there was a technical problem with the new daily limit.
In those few minutes of electronic trading, the price fell by more than 5%. Trading continued over the phone and on the stock market floor, known as & nbsp; Ring.
Otherwise, trading continued with the price taking the downhill with the price reaching the limit down of $ 45,590 per ton. This was also expected to begin the normalization of the market by closing the price gap with other metal exchanges. & Nbsp;
As for Tsingshan & nbsp; old & nbsp; verified explicit & nbsp; if you owe a million dollars & nbsp; & nbsp; in the bank you have the problem. But if you owe a billion then it is the bank that has the problem. So with Tsingshan. Under pressure from potential losses of billions of dollars, the company's financier banks continued their support, relying on a future reduction of & nbsp; to reduce their losses. & nbsp;
THE CONCLUSION
The whole episode with the black swan in the aluminum market left the LME Management and the systems and practices that were followed but also its culture.
& nbsp; He also left the Supervisory Authority exposed as obviously & nbsp; there were gaps in the operation that led to an organized & nbsp; collapse market with the risk of transmitting panic to other markets, the so-called contagion effect.
after the experiences & nbsp; from similar incidents in other markets again was not able to & nbsp; to have a complete picture of the market. The fact that a company managed to create such a large position that threatened the system itself is problematic. & Nbsp;
The systemic risk is & nbsp; Achilles heel of an interconnected & nbsp; globalized financial system. Such omissions and weaknesses are the worst that can happen. Hopefully, the next time the black swan appears, the supervisors will be better prepared.
From the June issue of Insider magazine
