The Nickel Squeeze, 2022Some background helps

A price that rose 250% in two days, and an exchange that cancelled the trades. What happens when the hedger is the one being squeezed, and what a cancelled market does to the meaning of a price.

What happened

• Background — a very large nickel producer holds a substantial short futures position. For a producer, being short the metal it mines is an ordinary hedge: it locks in a selling price for future output.
• Early 2022 — supply concerns intensify sharply following the invasion of Ukraine, and nickel prices begin rising fast.
• 7 March 2022 — the price roughly doubles in a day as short positions are forced to cover into a market with almost no willing sellers.
• 8 March 2022 — the price spikes again, reaching more than $100,000 a tonne intraday, having been near $25,000 days earlier. Margin calls on the short positions run into billions.
• 8 March 2022 — the exchange suspends trading in nickel and then cancels several hours of trades that had already executed, resetting prices to the previous day's close.
• Aftermath — trading reopens days later with price limits. The cancellation is litigated, and the episode becomes a reference point in every subsequent discussion of exchange discretion.

The mechanism

• A hedge is a short position, and a short position can be squeezed. The producer's economic exposure was fully covered — it owned the metal, or would produce it. Its cash exposure was not: futures are marked daily and margin is paid in cash immediately, while the physical metal pays nothing until sold.
• This is exactly the Metallgesellschaft pattern, three decades later: an economically sound hedge with a cash-flow timing mismatch that becomes fatal before the hedge pays off. Run it through the margin-call simulator — the distance to the call is always shorter than the distance to being wrong.
• Short squeezes are self-reinforcing. Covering a short means buying, which raises the price, which forces more covering. The mechanism is identical to the 2021 equity squeeze with different participants.
• Much of the position was in over-the-counter contracts, so its full size was not visible to the exchange or to other participants. Position transparency exists precisely to prevent this, and it works only for what it can see.
• The exchange faced a genuine dilemma. Enforcing the margin calls at spike prices risked defaults that would have flowed to the clearing house and its members. Cancelling trades protected the system and destroyed the assumption that an executed trade is final.

What it teaches

• Hedging transforms risk; it does not remove it. A price hedge converts price risk into liquidity risk, basis risk and counterparty risk. Those are usually smaller. They are not zero, and they arrive on a different schedule.
• Cash flow timing is a first-order risk. "The hedge works at maturity" is no comfort to a position that must be funded daily until then.
• Position size relative to the market is itself a risk. A position large enough that exiting moves the price cannot be exited at the marked price, which means the mark was never real.
• Market rules contain discretion. Exchanges have powers to halt, to cancel and to impose limits. Those powers are in the rulebook and are rarely read until they are used.
• Counterparty and venue risk are not only about failure. A venue that survives by changing the outcome has still changed your outcome.
• The lesson for anyone smaller: the same dynamics operate at every size. A crowded short in a thin instrument behaves this way without needing headlines — see the other side of the trade.

What the episode did not show

• It was not a failure of futures as a hedging instrument. Futures did exactly what they do: mark daily, call margin, and transfer cash. The mismatch was in how the hedge was sized and funded.
• It was not a pricing model failure. No model was wrong. A market cleared at prices that reflected an absence of sellers, which is what prices do.
• It was not unprecedented. Commodity squeezes have a long documented history, and the mechanics have not changed in a century.