American regulators have instituted a landmark fine against a small, Shanghai-based firm called Sheenson Investments Ltd and its founder Weidong Ge for the firms involvement in rampant speculation on soybean oil and cotton futures.
With his ownership in Sheenson and a Hong Kong-based fund group called Chaos Investment Ltd, Ge had amassed a position across the market as large as 5,389 lots, about 8 percent larger than the federal limit, the CFTC said. That would have had a notional value of over $510 million as of February 10, 2011, based on the front-month price on that date.
His position in a single-month cotton contract ran as high as 4,099 lots, more than 17 percent beyond the maximum allowed for speculation, the CFTC said. Ge exceeded the limits on every day between January 6 and February 11 of 2011, which was nearly two years after the violations in the soybean oil market.
On February 11, total market open interest – the number of outstanding contracts in the market – dropped by more than 21,000 lots, or almost 10 percent, one of the biggest declines since 1980, according to exchange data.
The cotton rally peaked on March 7, followed by an even more painfully swift decline as prices halved within four months. Merchants who had struggled to buy physical bales just months earlier were now stuck with surplus stock in a falling market as consumers defaulted on import deals.
It is believed that Ge’s speculative actions greatly contributed to the already wild price swings. Sheenson Investments Ltd has agreed with the CFTC to return $1 million they made from the deals and pay a $500,000 civil penalty for exceeding federal limits on speculative bets.