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Moontower Munchies #156
Friends,
Guitar and commencement speech. Yes, please. This was great:
đşHow the Worldâs Largest Oil Derivatives Trading Firm Is Navigating the Iran War | Odds on Open
Iâm biased considering I traded oil options for nearly 20 years but this interview is pure heat. Ethan Khoâs sat for a lengthy interview with Greg Newman, co-founder of Onyx, the worldâs largest liquidity provider in oil.
Letâs go right to the excerpts (emphasis mine).
Interviewer: The oil markets have been crazy recently. How do I make sense of it all?
Greg: Honestly, Iâd argue to begin with that itâs not like you should know something. There have been many crises, but this is unprecedented, and as a trader in particular itâs been very, very difficult.
There are so many oil contracts and so many liquidity pools out there. Brent and WTI are the key contracts that most traders and finance people know â thatâs really the pool people dip into to hedge. But even that market, which is normally super liquid, has had its basis completely break down for a lot of these hedges. Weâre used to at least one, two, three cents bid/offer, deep liquidity, lots of high-frequency traders, all that. Weâre now talking 50 cents per barrel bid/offer minimum. And as youâre hedging, the price swings dollars per barrel at a time. It just breaks the whole system, because so many things in the oil world â all the contracts for every different product around the world, every region â ultimately link back to those core liquidity pools. When everything is broken from that sense, itâs incredibly hard to get a handle on it. So speculation has, to some extent, been out of the water. Itâs been very difficult to do⌠Whatâs actually going on in the physical market gets reflected in these more niche contracts, of which there are many, many more, but theyâre less liquid. Thatâs our specialty. Unless youâve had exposure to those, itâs probably been very difficult to get an accurate reflection of what you should really be trading to profit from this.
How Onyx manages process when liquidity breaks down
Greg: We are market makers. Thereâs obviously a proprietary element to that, as you and your audience know very well. The temptation always is to combine your market making, look for some arbitrage-type opportunities, and then layer a discretionary element on top of that â ride momentum, things like that. But to begin with, it was really about getting to grips with the fact that youâve got to take that discretionary overlay off the table. It just doesnât serve you, because youâve got people defaulting, people who canât finance their positions. There are people whose only job is to take risk off the table because theyâve either blown up or they need to hedge, and itâs just not an orderly move. So you go back to your core business model â and you have to ask whether your core model is even suitable for that regime. The discretionary, hedge-fund-style approach is just not going to fare well in this scenario, certainly not at the beginning.
All the high-frequency traders looked like they were out of the game, to some extent. Maybe in the last couple of days theyâve been back in, bits and pieces, but certainly nowhere near the kind of medium-frequency trading they usually do. Thatâs been blown out of the water, and you can see it in the volatility. So you go back to your core model. Any model you had, any automation you had â it just doesnât mean anything in this market. You go back to manual. Youâve got to be fully on top of it. Itâs kind of basic in its process: you have a month-one price, you add your time spread, you infer the rest of the curve, then you keep adding differentials. Thatâs not too hard to see how to do. But theyâre all moving so aggressively that just keeping everything in line is 90% of what we focused on. Because then what youâre able to do is spot the things that are so far offside that you can take them on â not to hold a proprietary view, but to back out of the liquidity with a correlated contract, something traded a bit further down the forward curve. Just going back to basics â fair value, trading whatâs in front of you.
[Kris: This is exactly what I meant in Timing the Market when I describe taking off the discretionary trader pipe and glasses and putting on the market-maker boots and scrubs:
Trading is compensation for a service. In other words, a role. Donât lose sight of the role. The easiest way to remember that is to ask yourself, âIf Iâm buying X at this price, what is it cheap against?â
The mantra stops you from drawing lines in the sand. From turning a relative value game into aâŚtiming game. Thatâs what an outsize position relative to your business is â a timing bet.]
As you build infrastructure and a brand for liquidity and people come to you because youâre reliable, thatâs when it pays off, because theyâre not really looking for a good economical price â theyâre looking for liquidity, and thatâs what we do. So it was a good test of our business model. If you didnât have that, honestly, the only move was to stay out of it until you could spot something not obvious but where you felt relatively safe â and that was just very, very dangerous to do.
Pricing fair value on Sunday night with no precedent
[Kris: I love this. Mock traders only need apply. Back to basics in a fast market. Snap judgements born from reps.]
Greg: Breaking it down â you have the Friday-night indications, and itâs our job to be completely 100% in the know. It cannot be partially in the know. So the moat weâve got is our relationship with the brokerage firms around the world and the dark pool of liquidity weâve got great visibility over. Itâs not like other markets where itâs all electronic. Itâs barely electronic, and in a time like now, electronic trading basically goes out the window, apart from the core one or two contracts. So this is where the niche expertise comes in.
Number one: you did know where it was Friday night. Thatâs not going to be completely irrelevant â youâve at least got your starting point. Weâve also got traders whoâve been doing this long enough that they have a general sense of the relationship between big moves in the outright contracts â WTI and Brent â and Middle East wars, and generally what should happen to the refined products, how the curve should behave, how the time structure should behave, how clients tend to behave. And if youâre in our game with the kind of market share we have â 20â30%, sometimes 50% of some of these contracts â youâve got a very good sense of how people are positioned. You know the weak spots in the curve, the strong parts in the curve. Thatâs not going to change, because at the very least people are going to sell what they own and buy what they donât own. So you at least know where those things are going to come in.
So it becomes about having a very good feel for how the curvature started and how the relationships were working before, overlaid with analysis. Youâve got a weekend in oil, thankfully, where nothing trades, and you can use that time to look at previous times â whatâs happened before. For example â itâs getting a little niche â naphtha, which we use for cracking to make petrochemicals, is a really key contract with Iran. They produce so much of it and send a lot of it to China, and China makes a lot of petrochemicals. So thatâs a real sweet spot for Iran when an Iran situation kicks off. Youâre expecting a reaction there.
Physical market participants and the reflexivity of hedging behavior
Greg: And then youâre expecting â okay, if all these things were to get higher, we know the behavior of, say, refiners is going to change. Thatâs the other thing about this market thatâs different to maybe every other asset class. In a way itâs relatively illiquid, but so sophisticated. What that means is, for most contracts around the world, when thereâs a big price move of any differential or time spread â let alone the outright price â it can reveal or destroy someoneâs economics very quickly.
For example, a refiner says, âokay, Iâve got to hedge what I produce versus what I buyâ â what we call the margin. Theyâre selling this kind of diff. And if it suddenly goes up $5, some of these bigger refiners have made an extra $5 billion on paper for the rest of the year. So they want to lock that in. Their behavior changes at certain price levels. The producers change their activity. And again, going from $80 to $120 oil, youâve gone from maybe pretty good economics for a producing country to suddenly the best budget theyâve had in five years. So if they can lock that in, thatâs what theyâre going to do.
Another thing thatâs unprecedented: how involved governments and producing countries have been in the futures market. Usually theyâve said, âlook, weâre too big, we donât want to hedge everything, itâll just mess things up.â But we saw the US Treasury sell WTI â or at least it was reported that way â selling WTI swaps throughout the year, 11 million barrels, which isnât a huge amount, but in a market like this itâs huge. Youâve got Saudi Aramco, BP, Shell â these guys who own a lot of the oil infrastructure in the world â theyâre hedging. In real time youâre seeing their economics change, them trying to lock it in on paper, then suddenly those economics flipping on their head and deteriorating, and then the reverse.
Shipping companies are like, âlook, this is great for my economics.â Airlines have done incredibly well from their hedges because theyâre long, and theyâre very active hedgers, and suddenly the hedge is way in the money. Theyâre going to want to lock it in. The airlines are a good example, because they hedge based on predetermined travel and fuel usage â thatâs what determines the size of their hedge. So suddenly the price skyrockets as much as it does, and then you have disruption for airlines â there have been reports of something like a thousand flights a day cancelled around the Middle East. Suddenly they donât have that physical consumption anymore. So theyâre like, âwell, weâve just got a long position then, weâre just speculators now.â So they rush to take profit.
The jet fuel market in particular got most of the talk in our game, and there was some serious blood in the streets. It found its way onto X if you want to check it out, because it went in a straight line from probably about $90 a barrel â it carries a premium to Brent, so letâs say $10â15 above Brent â and it just went bang. And when I say bang, I mean no trades, all the way up to $200, and messing around since. How can that happen? Itâs an example of the market being unbelievably short that trade â taking on airline trades, thinking the marketâs not too volatile, âIâll just wear this as a carry tradeâ â then bang. Some of the biggest oil traders in the world have the biggest position on. They canât just go and buy it back; if they buy it back, itâs probably going to move another $100 a barrel, maybe more. So they just have to wear it. And so youâre hearing about oil traders in the market having huge margin calls â but these businesses are $10â15 billion-a-year businesses, and theyâre getting margin called. This is the kind of craziness Iâm talking about.
Voice brokers, people talking their book, and where the information actually lives
Greg: Why is it so incredibly difficult to replicate and do yourself? Because oil still has some very interesting dynamics â inter-dealer brokers and voice brokers. People hear that and say, âwhat, voice brokers?â Yeah â 80% of the volume is through voice brokers. If they donât know you, if they donât like you, if they donât give you information about who â or not even who, just what â is buying and selling, youâre just in the dark. Literally a dark pool. The exchanges hate it, but itâs a very well-protected industry, because itâs a community, and these guys get paid a ton of money. There are huge companies that see the edge in having relationships with these brokers and probably keeping it that way. So unless youâre plugged into that game, itâs going to be very, very difficult to have the kind of visibility Iâm talking about â whoâs positioned where.
And then you could say, âwell, look, Iâve got some friends, Iâve got some good information.â But thatâs classic â we laugh about it all the time. That used to be a thing: go to a Mayfair pub and talk about whoâs doing what. But the whole time, theyâre talking their book. And unbelievably, people still fall for it. They go, âoh, I know this guy at this company, he said everyoneâs buying, itâs going to be bullish.â Heâs probably on the offer. You cannot rely on that information whatsoever. People talk their book. Weâve gone from traders talking their book to OPEC talking their book â theyâre always out in the market feeding information, they know the headline sensitivity. Now youâve got Trump talking the US book. Itâs actually crazy.
Prediction markets as an information signal â and why Onyx stopped using them
Greg: Itâs like the financial market â itâs so financialized, and the worldâs governments know that and are more familiar with that than ever before, so they use it. They spoof the market, feed information, see how it reacts. That adds another layer. In that sense, there have been scenarios where huge option trades go through the night before Iran kicks off â huge, huge â someone clearly knows something. And even Polymarket being pretty useful. Somethingâs kicking off in Polymarket, an event that would clearly have a big impact on oil, and thereâs now a dark area of oil where youâre saying, âsomeone might come in and do something pretty serious now.â And itâs not the oil traders, not people with physical information â itâs people with government information. So the dynamics are getting super interesting, but like any other financial asset class, I guess.
Interviewer: You brought up Polymarket, and this was something I was curious about before our conversation. I havenât looked too closely into the types of contracts on these prediction markets related to the conflict in Iran, but Iâm sure you have because of its implications in your industry. In general, how accurate a forecast do these prediction markets tend to bring? Is there enough volume on them? And more importantly, how do you think about them as a source of information?
Greg: To begin with, it was great. There really was nothing like it. Funnily enough, it was the Iranian situation last year â I forget exactly which month â but it was very useful then, because it was a new concept. A lot of people were betting on whether the Strait of Hormuz would be closed. People have talked about the Strait being closed as a hypothetical â you put it in your scenario analysis, you talk about it as a hypothetical â but no one ever believed, one, that it was even possible, and two, that it would happen. We even had a research guy, adamant, been in the game for 50 years, saying, âyou cannot close the Strait.â So it was really interesting to see people actually believing it would. For a time in Polymarket, we were watching it live, going up to 80% yes, and weâre like, âcome on, someone knows something.â And then you get all these messages of people saying, âIâm literally on a ship in the Strait, itâs fine.â That kind of transparent information, in real time, you canât beat it. This is the good part of capitalism â using peopleâs greed for transparency, for the better functioning of markets and day-to-day life. No one in any other way would be incentivized to tell you whatâs really going on. So suddenly you have something like Polymarket, and someone has information and wants to trade it, and that finds its way into the ecosystem of information.
So I thought it was a really good thing to begin with. Then what started happening, unfortunately, is it got more and more popular, and we started to realize the way it settles is just not ideal. Even with that Strait example, some people felt it had technically closed â ships slowed down for a time. How do you define âclosedâ? The settlement matters. Itâs funny, because in our market in particular, with so many of these contracts, the big thing is to let contracts expire â which is actually quite unusual. A lot of us take these contracts to expiry. You might hold things against it, but expiry is incredibly important â how the contract expires and to what methodology. So weâre very used to studying these underlying methodologies, and thatâs where relative-value opportunities â maybe not arbitrage, but relative value â can become very important.
So when we studied that from a Polymarket perspective, we lost confidence very quickly in what the game was all about. You have to own the tokens â you have to own a big portion of it â to be able to decide. So who decides is as important as anything else. And then â Iâm not even saying itâs rigged â itâs just inefficient. So to use it as a reliable source of information, it kind of lost its gravitas quite quickly. So then we stopped looking at it.
Options flow as the real tell
Greg: âŚwhen someone has good information â and you can empathize â if you have good information, you donât know when itâs going to kick off. So you just want the straddle, you want some good convexity. An option is a great thing to use. The interest in options became so overwhelming that itâs been a better indication of information being out there than anything else. So we kind of moved from Polymarket to options open interest and options activity at key times, right around the moment.
[Kris: Umm yea. The oil options market has been smart af for a long time]
And just to finish on that: the oil market historically has been quite orderly around its market hours. But after 7:30pm our time â which is the US close, up to maybe 6pm their time â that window is meant to be dead. Itâs meant to not really trade, and itâs been very, very active around these times. So now weâre doing the hours later on, to see whatâs going on, because the order book will reveal things. If youâve got the visibility of all the contracts, thatâs where youâre in the best position to know: has someone selected something in particular, and what could that mean? Because thereâs no other reason why you would trade at that time. If you want to hedge, you go for the peak times. If you want to speculate, you want liquidity, so again you go for peak times. So why are you trading in these evening-to-nighttime trades? It makes no sense, other than maybe youâve just got the information. And I think Trump knows that as well, because he makes a lot of his announcements either on the weekend â when the market will gap up or down â or at night. And weâre forced to be very ready up until the actual close of the exchange now, rather than the close of the market day.
Thatâs my favorite stuff because itâs about the nitty-gritty of trading but the rest is full of good business talk and a bit more on trading:
Regime-break risk: when the exchanges themselves are the risk. Gregâs worst moment last week wasnât market risk but a flashback to 2022 TTF, when the EU floated capping the European gas futures price. A delta-flat book against expiry administrative volume becomes a billion-dollar naked short the instant nobody can sell you the futures to close on. He puts it in the same family as the Treasury basis trade.
What itâs like running the book through it. Sleeping bags in the office, WhatsApp blaring, the fighter-pilot bit.
The 26-hour evacuation. 55 people and 9 dogs chartered out of Dubai because the office was being bombed. Flight paths changed five times. They traded the next morning.
Countercyclical hiring during the lull. 2024 and 2025 were horrendous; thatâs when they bought a team from a competitor, set up Dubai, and did the cultural reformation.
Why Onyx hasnât taken outside capital, despite being asked repeatedly. Energy at the hedge funds has seriously underperformed outside of, say, Citadel. Capital isnât the constraint; deployment and conviction are.
From prop shop to liquidity infrastructure. The flywheel: data, training, single-dealer platform, retail brokerage, credit/mini-bank. All of it leveraged off the core engine of being the most-liquid price.
The Glassdoor review that turned Greg into a LinkedIn presence. And the Hamilton line about who tells your story.
Whatâs surprised him most after 14 years. Spoiler: itâs not technical.
Finally, I was chatting with an oil trader about this interview and he recommended a book I immediately lifted:
Stay groovy
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Great speech, wonderful message. Shared with my kids.