The US natural gas market has endured extreme volatility for over a week, with traders still incensed over a technical failure they say caused widespread chaos in this core commodity market. On January 27th, natural gas futures prices recorded a historic surge, yet the New York Mercantile Exchange (NYMEX) triggered a highly unusual two-minute trading halt during the closing auction. This action distorted the settlement price and left traders, already anxious from a cold snap upending demand forecasts, bewildered. This market halt, which was supposed to last only five seconds, was the ninth such circuit breaker triggered by the exchange that day. George Cutraro, Global Head of Commodities Trading at Bank of America, stated in an interview, "There was clearly a serious operational failure that day, an issue that very likely affected the day's market trading outcome." Interviews with ten traders revealed that the incident caused losses for some investors and led others to question the market's fairness. CME Group, the operator of NYMEX, has informed traders that the extended halt was due to a "technical error." However, CME Group declined to comment on the specific cause of the failure or its impact on investors. The US Commodity Futures Trading Commission (CFTC) stated that the market volatility and corresponding circuit breaker activations were largely consistent with recent supply and demand changes, adding that it is continuously evaluating the related trading activity.

**Expired "Lottery Ticket" Bets** The disruption caused by the glitch rippled beyond the futures market into the options market. Prior to January 27th, a significant number of traders had placed tens of thousands of "lottery ticket" bets in the options market, wagering that the day's natural gas futures settlement price would exceed $7 per million British thermal units (MMBtu). Had these positions remained open and settled at $7.20—based on bid/ask quotes during the halt—this bet, which was nearly worthless in mid-January, could have yielded a $40 million windfall for holders. The profit window for this bet was inherently narrow, but the probability of profitability had become quite high just before the close. Natural gas futures prices dipped below $7 before rallying sharply to hit $7.31 with 68 seconds left in the settlement period, immediately before the circuit breaker was triggered. Traders reported that during the halt, while investors lacked real-time market data, a large volume of buy and sell orders continued to flow in. Had these orders been executed, the price could have climbed further to $7.40. However, because the trading suspension lasted too long and normal trading only resumed after the official close, these orders ultimately failed to execute. The day's settlement price was set at $6.95, rendering all such options bets worthless. CME Group declined to disclose the number of open positions at the close.

Bill Perkins, founder of Skylar Capital, said, "It's utterly absurd that the exchange triggered a trading halt on an options expiration day. This created numerous problems for market participants, problems that are still being dealt with." At least one affected investor, who requested anonymity due to private matters, has filed a complaint with CME Group. The investor stated that CME suggested pursuing compensation for losses through formal channels. However, the investor noted that proving how the market would have moved during those two minutes without the freeze makes recovering any losses nearly impossible.

**Potential for End-of-Day Manipulation** Although the January 27th halt malfunction was the direct cause of the chaos, the high frequency of circuit breaker triggers also exposed another major flaw in the natural gas market: persistently low liquidity as futures contracts approach expiration. In a market with dried-up liquidity, almost any trading activity can cause significant price swings. When such volatility is concentrated in the settlement window, it can unpredictably impact other related markets. Adam Sinn, CEO of hedge fund Aspire Commodities, stated, "Natural gas futures are not just a financial instrument; they are a physical commodity. Their price serves as a benchmark for consumer gas prices and determines monthly power contract rates, ultimately affecting every American's energy bill. The legitimacy and fairness of the settlement process cannot be overstated." In all energy markets, liquidity naturally declines before expiration as traders roll positions from expiring contracts to new ones. However, traders say the problem is particularly acute in natural gas: strict exchange regulations on position limits severely constrain market liquidity. Despite significant growth in the natural gas market, these so-called position limits restrict participation—smaller traders often cannot meet the requirements, leading to a situation where when liquidity dries up, large speculators like hedge funds can exert excessive influence on price movements. Ironically, while CME Group instituted position limits to prevent market manipulation, the resulting low liquidity can foster a practice known as "marking the close," where a party executes a large volume of trades during the settlement window to deliberately push the closing price in a specific direction. Adam Sinn suggested this behavior might explain the unusual price action in natural gas futures on January 27th. Perkins stated, "The position limits set by the CFTC arbitrarily reduce market liquidity, thereby exacerbating price volatility. To fix the liquidity problem, we either need to eliminate position limits entirely or significantly revise them." Meanwhile, the Intercontinental Exchange (ICE) has become the preferred platform for US physical natural gas traders. Traders report that the price spread between ICE and CME natural gas contracts has been widening, hitting a record disparity last week. Four traders indicated that this widening spread could negatively impact fund managers and natural gas producers who rely on NYMEX futures to hedge against price fluctuations, potentially causing them losses.

**Not an Isolated Incident** In fact, conditions for chaos were brewing even before January 27th. A sudden shift in weather forecasts from "warmer" to a "severe cold snap across most of the US" directly propelled natural gas prices higher. The cold weather also led to a drop in gas production, further boosting prices. This all occurred as traders were rolling positions from the February contract to the March contract, and the combination of factors dramatically amplified price volatility. Perkins warned that such events could recur. Without adjustments to the trading rules and operational model of the natural gas market, similar extreme price dislocations during settlement periods are likely when the next major cold wave arrives. Campbell Faulkner, Senior Vice President at brokerage BGC Group, said, "Many market participants haven't seen volatility this intense since the extreme price swings of the 2014 winter. A confluence of factors has created the current market environment, reminding everyone once again of the significant risks and challenges inherent in natural gas trading."