A mystery trader, who was able to predict the move by the US government to approve a 300-mile pipeline of natural gas as part a bill to prevent a Treasury default, surprised almost everyone.
Wall Street analysts expected vague promises about energy permits in a bill that would raise the US debt limit. Options trading, however, suggests that something more was in store.
On May 24, several days before the announcement of an agreement, a large bullish bet on Equitrans Midstream Corp was placed. The company has a major stake in the Mountain Valley Pipeline, which is long overdue. The bet involved buying 100,000 call options for the company’s stock.
In just a few short days, it proved to be prescient and highly profitable.
The White House and Republican legislators came to an agreement on May 27 that gave the Mountain Valley Pipeline, which has been delayed for years, the final approvals it needed to finish the project.
Negotiators from both the White House, and Congress, argued back and forth about broad parameters for an agreement throughout April and May. Details were kept secret and subject to change almost until the end. There were doubts about whether a deal could be made before the US ran out of money at the beginning of June.
The law, signed by President Joe Biden Saturday, forced the project to get permits. The bet appeared to have made $7.5 million by Friday on paper. are wondering if more than just skill and luck was involved.
What’s your question? How sophisticated are these traders? Donald Sherman, the chief counsel of Citizens for Responsibility and Ethics Washington’s ethics watchdog, asked: “And what are their links to the government?” The bet, he said, raises the question of whether or not the terms of the debt agreement were leaked ahead of time.
It is difficult to determine whether a trade was improperly made based on confidential government information, especially when the news is market-moving. There are many gray areas in the rules.
Members of Congress and other officials are prohibited from using confidential information that they have learned while in office. If, however, someone hears a Congressional employee loudly mentioning a piece information on the train they are likely to be in the clear. Philip Khinda is the head of Cadwalader’s SEC enforcement practice. He said that the challenge for investigators was not to simply determine if the information had been shared but also to discover the intention behind it. These are difficult cases because they present both legal and investigational complications.
The options trade has not been accused of any wrongdoing. The Securities and Exchange Commission declined to comment on the issue.
The call options still attract a lot attention because of their timing – just before an agreement on debt ceilings was reached. The $8 strike price is also roughly equivalent to what some Wall Street analysts valued the Mountain Valley Pipeline Equitrans.
The outlook for the Mountain Valley Pipeline project was bleak before the debt agreement. Years of legal battles with environmentalists were raging. Equitrans shares fell by 35% in the last year.
Equitrans has roared to life after the announcement of the kickstart. Equitrans shares soared by a record 49% in the last week.
Dan Taylor, professor at the Wharton School, who studies insider trade, said: “These trades were highly concerning.” It raises the question as to whether or not it is just a coincidence.
Equitrans stated that neither it nor its executives were involved with the transaction. The firm said in a press release that the pipeline is “essential infrastructure” that will provide American families with reliable and affordable domestic energy. It will also help reduce carbon emission levels and boost energy security.
The project is not without its supporters. Senator Joe Manchin is a Democrat from West Virginia, where the pipeline will run. He has been a long-time supporter. On Friday, he praised the project by tweeting that it is “truly America’s MVP”, an apparent reference to its initials.
Manchin replied, “I don’t know anything about options trading.” He continued, “The one thing I do know is that people require power.”
Trading aside, including the pipeline as part of the debt ceiling law was a political flashpoint.
The Virginia Senator Tim Kaine, a Democrat, who also lives in the state where the pipeline runs, proposed an amendment that would remove the pipeline from the debt agreement. This effort failed on Thursday.
Kevin McCarthy, the Speaker of the House who led the negotiations on behalf of the GOP, and representatives for the White House did not respond to Saturday’s requests for comments about the trade.
The surprise was that the bill was included in the debt ceiling itself, and not as part of another vote or promise to pass a different bill. Spiro Dounis is a Citi analyst who covers Equitrans.
Options that support the trade are outstanding. This indicates that no one has cashed out the bet yet. The windfall could increase if the rally continues.