As cotton surged, China trader amassed $510 million bet
$510 Million Bet
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 Feb. 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 Jan. 6 and Feb. 11 of 2011, which was nearly two years after the violations in the soybean oil market.
Ge's one-month holding equates to nearly 5 percent of total open interest in the spot-month contract at the time, or about a third of average daily trade, according to Reuters calculations. It is not clear whether his holdings were concentrated in the prompt month or not, or whether he ever took delivery of cotton.
At their peak, Ge and his firms' position was equal to more than one-eighth of total fund investments in the cotton futures and options market, based on separate CFTC data that put total "managed money" holdings at just over 40,000 lots.
While China in general has long been a large presence in cotton as the world's top consumer, the role of Chinese traders in the futures market has been a quietly growing force - one often talked about in generalities, rarely specifics.
"People have a difficult time grasping that there are hundreds of multimillionaires in China that nobody's ever heard of," said Ron Lawson, a partner at commodity investment firm LOGIC Advisors who has been trading cotton since 1986 and provides advice to Chinese investors on U.S. agricultural markets.
And Then They Fell
It is unclear how much money Ge made on his cotton trade, which the CFTC said was reduced to within the limits on Feb. 14 after the agency's Division of Market Oversight had called a manager at the funds to advise him of the violation.
Data suggest that much of the position may have been liquidated the previous Friday. On Feb. 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.