...For readers who haven't been following one of the most stunning cautionary tales about the failure of risk oversight and its consequences, Aas - a legendary power trader with a seat on the Nasdaq Nordic commodities exchange - wracked up a staggering loss that when the spread between German and Norwegian power prices widened by 17 times during a single trading day, an incident that Nasdaq has described as a "a true black swan event."
The blowout was triggered by an extremely unlikely confluence of factors: A jump in the price of European carbon allowances, which caused German power prices to soar, and forecasts for unusually heavy rains in the hydropower-reliant Nordic region, which caused Nordic power prices to drop.
At the time, Aas had a huge open position betting that the spread would narrow. So when it widened by such an extreme degree, Aas was forced to surrender all of his liquid assets to cover his margin. But it wasn't enough, and the exchange was forced to liquidate his position at a massive discount in what is typically an unusually illiquid market (European power markets, once rife with hedge funds and other traders, have seen trading activity plunge over the past two decades as volatility stabilized, eliminating the incentive for speculation).
When the dust had cleared, other exchange members were forced to contribute back-up capital to cover the loss, narrowly averting what could have been a catastrophic collapse.
Read more at https://www.zerohedge.com/news/2018-09-21/norwegian-power-trader-facing-bankruptcy-after-massive-black-swan-loss
The blowout was triggered by an extremely unlikely confluence of factors: A jump in the price of European carbon allowances, which caused German power prices to soar, and forecasts for unusually heavy rains in the hydropower-reliant Nordic region, which caused Nordic power prices to drop.
At the time, Aas had a huge open position betting that the spread would narrow. So when it widened by such an extreme degree, Aas was forced to surrender all of his liquid assets to cover his margin. But it wasn't enough, and the exchange was forced to liquidate his position at a massive discount in what is typically an unusually illiquid market (European power markets, once rife with hedge funds and other traders, have seen trading activity plunge over the past two decades as volatility stabilized, eliminating the incentive for speculation).
When the dust had cleared, other exchange members were forced to contribute back-up capital to cover the loss, narrowly averting what could have been a catastrophic collapse.
Read more at https://www.zerohedge.com/news/2018-09-21/norwegian-power-trader-facing-bankruptcy-after-massive-black-swan-loss
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