It is not often that CME is forced to activate its circuit breakers in its benchmark crude oil market, but this is exactly what happened on February 20 at 11:01:36 Chicago time. A well-known research company, NANEX LLC, has released a detailed “autopsy” of the event.
According to NANEX’s report, the crude oil futures contract “was hit with over 2,500 contracts within 2 seconds sending prices sharply lower”. The exchange’s computer activated its circuit breaker and then the price stabilized. NANEX’s analysis points to a very disturbing explanation of the whole event:
“We think another large sale appeared that would have decimated prices - which CME's circuit breaker logic picked up on, causing the halt”
It is obvious that such an attempt at “price decimation” is not a typical “stop run” operation and it is unlikely that the whole debacle could have been caused by the herd behavior of momentum traders or trading algorithms. The sale seemed to be coming from a single player who was trying to recreate the “flash crash” of 2010, but this time in the crude oil market. In times of increased “tail risks”, igniting a small scale panic is not too difficult, especially for a player who has access to unlimited liquidity. This time, the CME’s circuit breaker saved the day. It remains to be seen whether the market manipulators will find a way around it.