Nymex Warned Amaranth In August on Trades

The New York Mercantile Exchange told Amaranth Advisors LLC that the hedge fund's natural gas bets were too big a month before the trades led to a $6 billion loss, said two people with knowledge of the meeting.

Amaranth reduced some of its natural gas trades after the warnings, according to the people, who asked not to be named because the communications were confidential. Nymex rules limit the number of contracts a single company or fund may hold.

"People are free to lose their shirt if they don't make good trading decisions," said Geoffrey Aronow, the head of enforcement at the U.S. Commodity Futures Trading Commission from 1995 to 1999. The regulatory oversight worked the way it was supposed to because the losses were borne by Amaranth's investors and didn't spread, Mr. Aronow said.

Greenwich, Connecticut-based Amaranth, which lost almost two-thirds of its investors' funds, traded gas futures and options on the Nymex and in so-called over-the counter markets, according to the people. The OTC trades were on an electronic system Nymex runs.