When commodities melt down as abruptly as they did on Thursday, the first assumption is that big investors dumped massive long positions.
This time around, that doesn't seem to be whole story, or even the right one. Exchange data shows that not all traders were running for the doors; some added to positions, many betting on more losses rather than locking in profits.
In the hardest hit markets -- oil and silver -- the number of bets on the market rose even as prices crashed. Because oil dwarfs the rest of the commodities, the rise in the number of bets on oil was enough to drive up the notional value of all commodities markets even though crude fell 9 percent in price.
Open interest, the number of individual contracts available on an exchange, rose by $680 million across 28 commodities, a far cry from the $30 billion drops that have accompanied past sell-offs.
Since every open contract needs two counterparties -- a long who wants prices to rise and a short who wants prices to fall -- a rise in the number of open contracts indicates that more people were betting on the market.
While the data doesn't necessarily reveal the intent behind those bets, the fact that prices were falling rather than rising suggests the dominant force was selling, not buying.
It suggests that investors are reversing course and that the new shorts were big enough to offset the longs. It also suggests there's more downside to go, said Bill O'Grady, chief investment strategist at Confluence Investment Management in St Louis.
NOT LIKE BEFORE
That's what makes Thursday different from other massive sell-offs, such as September 29, 2008, when U.S. House of Representatives voted down a $700 billion plan to come to the rescue of worsening financial markets, or March 15, a few days after Japan's nuclear crisis drove traders to safer assets.
On both those occasions the value of open positions across the spectrum fell as traders closed out positions and moved into other assets.
Anecdotal evidence suggests that algorithmic traders, whose computer systems would not have been caught up in the emotional turmoil of yesterday's unprecedented $12 collapse in Brent prices, may have been on both sides of the market.
I think some of the momentum-type traders, their lanes got triggered into selling and then the market moved so much that it triggered some of them into short selling, said a senior oil trader at a major investment.
While far from conclusive, the data for Thursday suggest a different narrative: bears are mounting an attack on the market. But for open interest to go up even as shorts enter the market it means only one thing: someone else is going long, and long in a big way.
Rising open interest in a falling market is often seen as a bearish signal by traders, a sign that big money is coming in to force the market down. It also means investors seeking a quick buck in a rebound rally may be getting into the market.
And if it is a sign of potential future price declines it is also a recipe for volatility. Effectively there are a lot of people convinced the market is going to fall, but also a lot who see space for a quick rally. Should either side capitulate, the market could move suddenly up or down.
For now the identities of the new longs and shorts is not clear and the first shreds of evidence won't be available for a week, when the Commodity Futures Trading Commission releases its Commitments of Traders report that will shed some light on the new positions.
To be sure, open interest is an imperfect gauge at best. Unlike the market capitalization of equity markets, where a corporation controls the issuance of new securities, open interest in futures markets is can keep growing so long as new money enters the market.
(Additional reporting by Robert Campbell in Mexico City, Robert Gibbons in New York)
(Reporting by Lisa Shumaker; Editing by Jonathan Leff)