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Oil crash busted broker’s computers and inflicted big losses

bloomberg.com

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Re: Oil crash busted broker’s computers and inflicted big losses

#101

Post by nromiun »

> Its software couldn’t cope with that pesky minus sign, even though it was always technically possible -- though this was an outlandish idea before the pandemic -- for the crude market to go upside down.

Wow, just wow. They are handling millions (billions?) of dollars every day and couldn't find the time to test that they can just DISPLAY a minus sign. That's insane.

And it's not even that outlandish. People were saying it could go into the negative weeks before it happened. This just seems like pure laziness. Just pretend everything is business as usual.

Re: Oil crash busted broker’s computers and inflicted big losses

#102

Post by LatteLazy »

mostlymeme wrote: post #89
LatteLazy wrote: post #79

Fuck IB and this “trader”, idiots should lose their shirts, that’s one of the intended outcomes of an efficient market. That said, there is an issue here with futures contracts: you can get very very large leverage when the price is near zero. This is the real issue with instruments that can negative price and just like their are “circuit breakers” in markets for big price swings, there should be breakers for enterin…

An efficient market that don't let traders operate? Did you even read the article? Futures contracts that CAN BECOME NEGATIVE don't let large leverage when price is near zero, that's NOT TRUE. Future contracts margin is calculated with SPAN, and if it's done correctly, it considers the scenarios where price can go below 0.

>Futures contracts that CAN BECOME NEGATIVE don't let large leverage when price is near zero, that's NOT TRUE

It clearly is. If I can buy a contract for 1c, I can get 100,000 contracts for 1000usd. Then if the price rises of falls by 1usd, I'm up/down 100,000 dollars. Can you think of any retail product with that sort of leverage?

That's the danger of putting zero in a denominator.

Re: Oil crash busted broker’s computers and inflicted big losses

#103

Post by 0x8BADF00D »

mostlymeme wrote: post #99
flint wrote: post #97

Earlier quoted context omitted.

They are deliverable https://www.cmegroup.com/trading/energy/crude-oil/light-swee...

That's no the contract in which IBKR has lost money. These are: QM NYMEX, and WTI ICE. Both cash-settled.

CL is not cash settled, it is physical delivery. It is traded on NYMEX.

Re: Oil crash busted broker’s computers and inflicted big losses

#104

Post by andy_wrote »

haltingproblem wrote: post #98
andy_wrote wrote: post #87

Earlier quoted context omitted.

There are ETFs that track oil futures (basically like a stock, but backed by oil instead of a company). It's been a while since I've looked at any of this, but I think USO is still the most prominent. There are plenty of things to watch out for with these ETFs. You pay ongoing expense fees. And ETFs, especially those that aren't just holding containers for assets, can have subtleties in their prospectuses that cause…

Sorry but this is terrible advice. If trading Oil Futures is akin to playing Russian Roulette then trading Oil ETFs is akin to juggling live hand grenades. One will go off as soon as you stop! Most commodity and leveraged ETFs are designed to benefit just one party - the designer of the ETF. There are plenty of articles on USO and its travails.

I'm not recommending USO or oil itself as an investment, and I agree that you will be paying money to the ETF manager if you get involved in it.

But I don't agree that USO is _more_ dangerous for a casual trader to trade than oil futures, for the reasons I mentioned.

Removing the overall fluctuations of the oil market, the relative problem with ETFs is that they bleed away value over time. That's a real issue, but I wouldn't compare that to juggling a live hand grenade.

Edit: you did not say it was more dangerous, my mistake. I do think that ETFs are less dangerous, for the reasons I mentioned.

Re: Oil crash busted broker’s computers and inflicted big losses

#105

Post by fhars »

wpietri wrote: post #55
elliekelly wrote: post #9

> Peterffy said there’s a problem with how exchanges design their contracts because the trading dries up as they near expiration. The May oil futures contract -- the one that went negative -- expired the day after the historic plunge, so most of the market had moved to trading the June contract, which expires May 19 and currently trades around $24 a barrel. > “That’s how it’s possible for these contracts to go absolu…

> It’s pretty well known that commodity futures contracts are a game of hot potato Very much so. I wrote software for financial traders in the 1990s, and I heard tell of a couple of clerks (in this context, sort of "trader intern") who thought they were smart enough to do a little commodity metal trading on the side. However, they didn't quite understand the details of contract expiration, and so supposedly they ende…

There is this old story in the same vein (and of course also [citation required]): https://thedailywtf.com/articles/special-delivery

Re: Oil crash busted broker’s computers and inflicted big losses

#106

Post by whatok »

andy_wrote wrote: post #87
elliekelly wrote: post #9

> Peterffy said there’s a problem with how exchanges design their contracts because the trading dries up as they near expiration. The May oil futures contract -- the one that went negative -- expired the day after the historic plunge, so most of the market had moved to trading the June contract, which expires May 19 and currently trades around $24 a barrel. > “That’s how it’s possible for these contracts to go absolu…

There are ETFs that track oil futures (basically like a stock, but backed by oil instead of a company). It's been a while since I've looked at any of this, but I think USO is still the most prominent. There are plenty of things to watch out for with these ETFs. You pay ongoing expense fees. And ETFs, especially those that aren't just holding containers for assets, can have subtleties in their prospectuses that cause…

> And the ETF will typically deal with things like rolling the futures position ahead of expiry.

This listed as making commodity ETFs more suitable for "casual investors" is the exact reason why they always lose money on ETFs. Retail investors for the most part do not understand contango or backwardation and do not understand (even though it's listed at the beginning of every prospectus) that these are not buy and hold instruments. In fact, I'd argue that it's easier to understand roll costs by actually having to roll futures contracts yourself (which is not difficult at all) vs having it obfuscated away in an ETF.

Re: Oil crash busted broker’s computers and inflicted big losses

#107

Post by analyticstime »

LatteLazy wrote: post #102
mostlymeme wrote: post #89

Earlier quoted context omitted.

An efficient market that don't let traders operate? Did you even read the article? Futures contracts that CAN BECOME NEGATIVE don't let large leverage when price is near zero, that's NOT TRUE. Future contracts margin is calculated with SPAN, and if it's done correctly, it considers the scenarios where price can go below 0.

>Futures contracts that CAN BECOME NEGATIVE don't let large leverage when price is near zero, that's NOT TRUE It clearly is. If I can buy a contract for 1c, I can get 100,000 contracts for 1000usd. Then if the price rises of falls by 1usd, I'm up/down 100,000 dollars. Can you think of any retail product with that sort of leverage? That's the danger of putting zero in a denominator.

You can't buy a contract for 1c. You need to pay the margin, and the margin for futures is not calculated based on current price, it's calculated with SPAN, that considers different scenarios in which you can lose money.

For example, for this contract Bloomber says IB asked for $30 margin. But the margin is usually $7000 for this contract, that it was IB should have requested as collateral at least for each contract. in a day with that volatility should be much higher in IB, as they take that also in consideration, probably around $20000 per contract.

The problem was that IB didn't consider scenarios in which the price can go below 0. The software was designed in that way. But it shouldn't.

Re: Oil crash busted broker’s computers and inflicted big losses

#108

Post by ashtonkem »

wpietri wrote: post #61
codenesium wrote: post #34

Earlier quoted context omitted.

That is the point I was trying to make. Basically if you're in the business of producing or buying and selling the commodity the futures are for you. If you're just speculating how does that help anybody? I guess you could make the argument that having more eyes on the market means there is more information so the price is a better reflection of the true value.

It's a good question. Most markets have (or at least used to; I've been out of this a long time) a special class of speculator called a market-maker; they get discounted fees in exchange for providing liquidity. That way a seller doesn't have to wait around for a buyer. Speculators in theory also provide liquidity, and in theory also contribute to keeping the prices "correct" (meaning at levels that reflect what's kn…

Minor nit: market makers typically aren’t there to speculate, they’re there to provide liquidity and make small profits per trade doing so. Most market makers try their best to trade down to no position overnight, since they don’t want to be long or short in anything.

Re: Oil crash busted broker’s computers and inflicted big losses

#109

Post by analyticstime »

0x8BADF00D wrote: post #103
mostlymeme wrote: post #99

Earlier quoted context omitted.

That's no the contract in which IBKR has lost money. These are: QM NYMEX, and WTI ICE. Both cash-settled.

CL is not cash settled, it is physical delivery. It is traded on NYMEX.

IBKR doesn't allow to trade CL in the day of settlement, only cash-settled contracts:

QM - https://www.cmegroup.com/trading/energy/crude-oil/emini-crud...

WTI - https://www.theice.com/products/213/WTI-Crude-Futures

Re: Oil crash busted broker’s computers and inflicted big losses

#110

Post by danans »

Hopefully, one of the things that we price in going forward is the volatility in the price of oil vs alternatives, especially those that can be produced domestically in a way decoupled from international events. That includes natural gas and especially renewables. Remember that just a 6 years ago, oil was north of $100/barrel [1], and recently it's close to zero. Wind on the other hand has had a steadily reducing LCOE[2][3]. Solar's LCOE is also steadily reducing [3].

Volatility has a cost. With oil, it's one that the US and other countries hae historically tried to dampen with various industrial and political methods (the national strategic oil reserve, military/political "influence" on foreign oil producers, subsidies for domestic production), but seems like the current situation is beyond those methods' ability to control.

1. https://www.macrotrends.net/1369/crude-oil-price-history-cha...

2. https://www.energy.gov/sites/prod/files/2015/08/f25/LCOE.pdf

3.https://en.wikipedia.org/wiki/Cost_of_electricity_by_source#...

4. https://en.wikipedia.org/wiki/Cost_of_electricity_by_source#...

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