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I'd greatly appreciate if any of you can explain how such a trade happened in layman's terms. Every time I try to look various vocab, I end up getting deeper into the glossary of hyperlinked words on investopedia and totally lose sight of the bigger picture.
Both entertaining and educational.
Earlier quoted context omitted.
But they don't have the storage capacity, otherwise prices would never have gone below zero.
You don't need storage if you immediately burn the oil?
I don't know for sure, but my hunch is that it's insignificant in terms of extra carbon emissions.
> There are also rules that forbid trading with the goal of deliberately affecting the settlement [price] > Vega’s jackpot involved about a dozen traders aggressively selling oil in unison before the May West Texas Intermediate contract settled at 2:30 p.m. I think it's safe to say the traders deliberately affected the settlement price. Granted they took on a lot of risk, it was still deliberate. Now the question is…
The funny thing about these stories is that it probably can be proven, and the reason for that is that there's quite likely a text or an e-mail from some cocky idiot saying "We could make a tonne if we push the price down" or "Man I can't beleive we managed to push the price to -37, we're going to make a killing".
There's a scene in one of my favourite movies Margin Call
"I'm well aware of the fucking time Sam, I'm telling you, you need to see this"
"See What? Email it to me"
"I don't think... that that would be a good idea...."
"I'm on my way"
Earlier quoted context omitted.
But they don't have the storage capacity, otherwise prices would never have gone below zero.
You don't need storage if you immediately burn the oil?
The crux of this trade was the TAS order type. It seems like these guys arbed the liquidity difference beyond their wildest dreams... But now they're probably spooked about it because it sounds borderline manipulation. Order types are constantly getting traders or exchanges in trouble. If you know about the less popular ones you always stand to beat out your competitors who dont. TAS reminds me of D-quotes on NYSE.
Yes, it’s curious that the traders didn’t participate in similar trades in subsequent months — appears they may have been shocked and spooked at the outsized bonanza. If this is indeed just a good trade going great, the investigation will hopefully clear their names and they’ll simply get credit for their success.
I'd greatly appreciate if any of you can explain how such a trade happened in layman's terms. Every time I try to look various vocab, I end up getting deeper into the glossary of hyperlinked words on investopedia and totally lose sight of the bigger picture.
Lots of functional market participants, e.g. oil refiners, don’t precisely time their trades. Their jobs don’t reward getting the best price at a given second. But they do reward getting cheap trades and punish getting the worst price in a day.
One solution is to trade at a standard future price. “Give me the closing price and a 50% commission cut” is a common order. In some markets it can be the dominant order type. That causes low liquidity during the day and lots of it at a single instance: the close.
These oil markets close at 2:30PM. Say a bank got an order, at Noon, to sell at the close $1bn of oil. It’s 12:01PM and oil is at $15. The bank could wait until the close and trade all $1bn. The bank makes its commission. But there is a risk the whole amount won’t be able to be sold at that instance. In that case, the bank would be left holding the bag for the balance. So it hedges.
At 12:30 it sells $100mm. This nudges the price to $10. The bank sells another $100mm. Price moves to zero. Bank sells another $100mm. Price goes to -$10. Bank sells another $100mm, thereby paying to offload oil. Price moves to -$20. By the time the close comes around, the price might be -$25. The bank pays its blended price, which may be -$10. But the customer paid -$25, so the bank makes 15.
In the equity markets, this is addressed with VWAP [1]. The volume weighted average price at which the stock traded during the day. More difficult to game. But more expensive to implement and thus execute.
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Just like we pass around code-stories/war stories, I remember reading a funny story about this stuck-up senior trader who ended up having to take delivery of a shipment of coal. Probably an urban legend, but still funny. This thread seems to support the idea that you can't just receive your futures at home. But I guess even with a designated warehouse, you're stuck with the warehouse bill. https://skeptics.stackexcha…
There is also this story from Bloomberg about when one of their journalists tried to buy a single barrel: https://www.bloomberg.com/news/articles/2015-11-03/that-time... "Could a barrel of crude really kill me?" I asked a petrochemical engineer captive to my persistent, doubtlessly annoying questions. It absolutely can, he said. Hydrogen sulfide gas—H2S, for short—has a terrible propensity to evaporate from crude, kn…
That's like asking an electrician if 120v will kill you. Maybe if you use it wrong enough but odds are it's just going to be unpleasant.
The crux of this trade was the TAS order type. It seems like these guys arbed the liquidity difference beyond their wildest dreams... But now they're probably spooked about it because it sounds borderline manipulation. Order types are constantly getting traders or exchanges in trouble. If you know about the less popular ones you always stand to beat out your competitors who dont. TAS reminds me of D-quotes on NYSE.
You're not wrong that Order Type choices are complex and venues need to be careful what they allow. But at the same time, if you're a trader, you really should know all the order types a venue supports and what they let traders do. There are not that many of them. I did trade support from the IT side for a few years and I knew all the orders and which venues would accept which types and that was in European equities.…
The crux of this trade was the TAS order type. It seems like these guys arbed the liquidity difference beyond their wildest dreams... But now they're probably spooked about it because it sounds borderline manipulation. Order types are constantly getting traders or exchanges in trouble. If you know about the less popular ones you always stand to beat out your competitors who dont. TAS reminds me of D-quotes on NYSE.
It isn't an order type. In many institutional markets, trades are settled at a price that isn't known when the trade is booked. This happens in rates (LIBOR rigging was an example, it happens elsewhere), it happens in forex (the daily fix, masses of shenanigans there). You also find it in derivative markets (equity options on expiry dates) or, indeed, in any situation where certain dates matter (fund manager with a b…
I can confirm that not only was rigging the fix common, it was so common that there was (is?) a blacklist of institutions whose trades would be discounted when figuring out what the price of each currency should be.
That is, the people who were responsible for calculating the spot FX rates knew there were enough people trying to game the system that the software was designed to mitigate that as far as possible. To a large extent, they even knew who those people were (by no means all were UK-based).
And then the Libor scandal comes along, and everyone's like "oh noes... who knew there was manipulation and collusion!". Hmmm...
The crux of this trade was the TAS order type. It seems like these guys arbed the liquidity difference beyond their wildest dreams... But now they're probably spooked about it because it sounds borderline manipulation. Order types are constantly getting traders or exchanges in trouble. If you know about the less popular ones you always stand to beat out your competitors who dont. TAS reminds me of D-quotes on NYSE.
Interesting read about how TAS destabilizes markets. https://www.transtrend.com/en/insights/market-not-a-shop/
One way of facilitating this demand has been the introduction of trading-at-settlement (TAS) orders. TAS allows market participants to buy or sell relative to the daily settlement price before that price has been determined. Over the years, TAS has been associated with several efforts to artificially influence the settle. Exchanges respond to these signs of manipulation by stating that such trading activity will be subject to disciplinary action. But why does an exchange even offer an order type that at the very best can be used as a tool for market participants to walk away from their responsibility to negotiate a fair price?