>FERC built a terrible box, and the box had some buttons that were labeled “push here for money,” and JPMorgan pushed them and got money. You can understand the category mistake very easily:
>FERC thought the box was for generating electricity at market prices but with a robust backup system to ensure reliable supply, and
>JPMorgan thought the box was for dispensing money.
>It’s a perfectly understandable mistake to make if you have spent your career building and operating boxes that dispense money, as JPMorgan global commodities head Blythe Masters has. What else could the box be for?
That was a really interesting read, but I'm not familiar with a lot of the terminology so it was a bit hard to follow. Any chance you might be able to explain a bit more of what was happening there?
I get that they found a loophole that rewarded them for producing more of the less efficient energy, but I'm a bit unclear on what the actual rules were, the roles of the various players in this, and how the transactions were taking place.
The rules say that they choose the best rate that satisfies demand, then pays all accepted bids that rate.
But bids change over time, and you can't just buy one hour's energy: plants take time to "boot up" which have costs. So they pay in 3 hour increments. If your bid for time t is accepted, they pay you for t,t+1, and t+2.
JPMorgan set prices at {Good price, outrageous price, outragous price}
JPMorgan got an average of 2/3*outrageous price, which made them an obscene amount of profit.
The stupid system didn't notice.
As I understand it the players submit bids to a central computer that decides who to order from.
Thanks for clarifying. Just to make sure I'm following then--the system was essentially looking at the bid price for just the first hour, and ignoring hours two and three despite the fact that time needed to be sold in three hour commitments due to the boot up time, which let JPMorgan jack bids two and three up and have them automatically accepted since the bids for hours two and three were never considered in the bid selection logic?
If so that's one major oversight for whomever built the system. I honestly could see why JPMorgan would be going "so...you're sure these are the rules? Really? Mmmm...ok....well, if you say so." I'm sure they didn't exactly telegraph how they would abuse this, but I find it a bit hard to hold them responsible for what is essentially negligence on the behalf of whomever was in charge of designing the system logic.
>As set forth below, Enforcement has determined that, through the 12 strategies
investigated here, JPMVEC violated the Commission’s Anti-Manipulation Rule,
18 C.F.R. § 1c.2, by intentionally submitting bids to CAISO and MISO that falsely
appeared economic to CAISO and MISO’s market software but that were intended to,
and in almost all cases did, lead CAISO and MISO to pay JPMVEC at rates far above
market prices.
Legally, they seem to have lied at one point when asked, and anyway this is a settlement which doesn't mean their actions were found illegal.
I'm not sure if it's the previous two hours or the next two hours, but either way yields the same result. Also, they may not be doing 3 hour increments, but just having a buffer time. I only know what the article says.
Whoever built the system probably assumed that bids represented people's actual intentions, and tried to get the cheapest power given the inputs. They missed a loophole, yes.
Note that there are other strategies that did similar but different things.
>FERC built a terrible box, and the box had some buttons that were labeled “push here for money,” and JPMorgan pushed them and got money. You can understand the category mistake very easily:
>FERC thought the box was for generating electricity at market prices but with a robust backup system to ensure reliable supply, and
>JPMorgan thought the box was for dispensing money.
>It’s a perfectly understandable mistake to make if you have spent your career building and operating boxes that dispense money, as JPMorgan global commodities head Blythe Masters has. What else could the box be for?