Review: Rigged, the story of the DME

In particular, Khaleed is such a huge part of the story that knowing he isn't a real person raises the question of just what in the book is nonfiction, and what is exaggerated. There are other annoying inaccuracies that further undermine just how much of the book reflects reality. The main character's starting date at the NYMEX is described as being on a Monday, but the date in question actually was on a Sunday; an attempt to disguise BP as a company called UK Petroleum fails miserably when what was apparently a pre-editing reference to BP shows up in a paragraph, unaltered, after somebody on the copy desk failed to change it to its alias. Any editor who has ever goofed -- and that's pretty much all of them -- won't be able to do anything but laugh when they encounter that one.

Rigged has a front cover that shouts out international intrigue, espionage, back-room deals, money, like something out of John LeCarre. But the story is actually far more pedestrian. The main character, David Russo, a vice-president of strategy at NYMEX, is actually John D'Agostino; the foreword is up front about this, and makes no attempt to disguise that fact. The real D'Agostino held the title of vice president of strategy and business development at NYMEX.

Other characters are fairly easily identified. For example, Nick Reston, Russo's boss, is very obviously Bo Collins, former NYMEX President. D'Agostino and Collins, after leaving NYMEX, were key principals in the formation of MotherRock, a hedge fund that collapsed in 2006 after bad calls in the natural gas market.

In Rigged, Russo is asked by Reston to fulfill an invitation, sent by leading Dubai officials, to come to the emirate and chat about some long-term, unspecified possibilities. He accepts the invitation -- primarily because nobody else wanted to, given that it required a departure from New York a day or two after Thanksgiving -- and begins a frustrating yet ultimately successful process to get the NYMEX signed as a partner for the DME launch. The search does involve partaking of the Dubai night life, so as might be expected, there are an adequate number of titillating references to tall, beautiful Australian flight attendants for Emirates Air, cavorting at late-night pool parties. There are hints of dirty deeds being done to Russo by entrenched NYMEX interests, eager to thwart any change, but even these are pretty tame. (A snooping long-range photographer sounds like it was lifted right from John Grisham's The Firm.)

Where the book falls down is that at the very least, its subtitle is extremely premature: The true story of an Ivy League kid who changes the world of oil, from Wall Street to Dubai. The DME began trading June 1. It has not changed anything yet. It may be highly successful eventually. But even if it is, it really only means that the world has another transparent exchange-based benchmark, based on a Middle East sour crude. The trading community knew long ago that such a benchmark might eventually become established. So it's difficult to see where DME success is going to radically alter markets. A successful Asian energy contract seems like a natural development, but it's an addition to what exists already. It doesn't need to undermine any other ongoing trading activity.

The most intriguing part of the book is something that was not discussed during the formation of the DME. Russo needs to get approval from Saudi religious authorities to enable the DME to operate in a land of sharia, Islamic law. Derivatives are seen as haraam, prohibited under sharia’s rule against charging interest. But the religious authorities ultimately didn't say “no” to the activities of DME, which the DME's developers concluded was the same thing as saying "yes." The book portrays this acquiescence as being the final piece of the puzzle, and was something rarely heard mentioned as a hurdle as DME sought to launch.

Daily volume on the DME currently stands anywhere between 1,000 to 2,000 contracts, with each contract representing 1,000 barrels of Oman crude. (Another odd thing about the book: the fact that the DME is trading Oman crude, and not Dubai crude, isn't mentioned until the afterword). Volume for light sweet crude on NYMEX exceeds 200,000 contracts, so DME Oman is just about 1% of the average daily NYMEX volume. Pricing on DME has been inexplicable at times: just Wednesday, the settlement price for January Oman on DME was less than the Platts Dubai assessment, which based on relative qualities, makes no sense. Its physical deliveries as a percentage of open interest are tremendous, which shows that the delivery mechanism works. But it's so unusual that it raises questions, still unanswered, about whether there's something wrong with the contract that leads to this level of deliveries.

The DME, so far, can hardly be called a sign of earth-moving change, as the author would have you believe.

Rigged is a good read. But if you come to it with knowledge of how oil markets work, you're going to find yourself scratching your head at times.