Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

Oil crash busted broker’s computers and inflicted big losses

bloomberg.com

Post reply on HN
Print view View original

121–130 of 182 posts

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

#121

Post by andy_wrote »

kccqzy wrote: post #117
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…

Definitely no. ETFs merely hide the fact that the underlying are futures contracts. ETFs make these futures contracts seem like stocks so any Tom Dick or Harry thinks they understand it and buys them. It's a very leaky abstraction. > They can't go below 0 One month ago people know that futures can't go below 0. What guarantees ETFs will never go below zero? It's economically absurd to think an ETF holding negatively…

The asset value underlying an ETF can be negative, but then the owner of the ETF will just have a worthless piece of paper. The ETF managers will have a problem on their hands regarding the negative amount, though.

In contrast, a futures contract is an agreement to make a future trade, so it can keep going against you past 0. If you are able to take physical delivery, your worst-case scenario is that you pay the money you said you would, and you get your oil. But if you are a casual day-trader type, you probably don't have the ability to take physical, so you may be in trouble (over a barrel, literally).

I agree with you about the dangers of ETFs and about knowledgeability. I didn't mean to advocate for ETFs on an absolute basis, just to make a relative statement about them vs. futures.

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

#122

Post by PeterisP »

codenesium wrote: post #34
ashtonkem wrote: post #24

Earlier quoted context omitted.

Taking physical delivery and hedging are not one and the same. It’s entirely possible to use a cash settled future to hedge against market movements; the farmer sells at a steep loss, but their cash settled wheat futures offset a large percentage of the loss on a cash basis. The distinction you’re looking for here is those who are speculating on market prices, vs. those who are hedging against market prices. If you u…

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.

You may hedge your risk of prices of a different but related product.

E.g. a bread manufacturer wants stability on their cost of goods, so they may buy wheat futures even though they don't ever want to receive direct shipment of wheat, they're dealing with specific regional flour suppliers but the wheat futures at a major location are a good proxy for that price.

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

#123

Post by beerandt »

quickthrowman wrote: post #82
simonh wrote: post #72

Earlier quoted context omitted.

There are contracts that specify physical delivery, but they also specify the warehouse or storage facility the commodity will be delivered to. The buyer can either collect the commodity or pay the storage facility to hold it for them. It's not likely it would be delivered to someone's house unexpectedly, because someone would need to pay for the additional cost of transportation.

A source to back you up, this is precisely how it works. The CME link goes into more detail on how physical delivery works for base metals. Other physically settled commodity contract have different delivery locations, /CL (WTI crude) delivery takes place at a terminal and storage facility in Cushing, OK. https://www.cmegroup.com/education/courses/introduction-to-b...

Oil and gas also have the benefit of published prices for most pipeline transport, although you still need a buyer/terminal that's physically connected to the network to take delivery.

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

#124

Post by fludlight »

brazzy wrote: post #90
akiselev wrote: post #21

Earlier quoted context omitted.

I've only recently started learning about how trading works in depth so I'm probably way off, but isn't he just avoiding the obvious answer? The broker and the clearing house. I thought that's a large part of why we have them? It just so happens that counterparty risk includes handling of massive amounts of physical goods so they'll have to charge larger commissions to cover the additional risk on the contracts. It w…

When the price mayhem was happening there was a discussion here on HN, and someone claimed that brokers would either never let retail investors handle contracts with physical delivers, or forcibly close the positions several days before the deadline. Looks like Interactive Brokers fucked up in more than one way here.

Don't know why you're being downvoted. Physical delivery IS a third rail for retail investors and brokers should absolutely have a field in their settings page that authorizes them to close the position x days or hours before maturity.

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

#125

Post by Bluecobra »

haltingproblem wrote: post #84

“Five days, including the weekend, with the coronavirus going on and a complex system where we have to make many changes, was not a sufficient amount of time,” he said. “The idea we could have bugs is not, in my mind, a surprise.” He also acknowledged the error in the margin model Interactive Brokers used that day.....We have called the CFTC and complained bitterly,” Peterffy said. “It appears the exchanges are going…

Peterffy is talking out of his ass, they had more than 5 days. CME's current specifications for order entry/market data has been in place for years now. Whoever was writing their software on their backend failed to read the documentation.

https://www.cmegroup.com/confluence/display/EPICSANDBOX/Posi...

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

#126

Post by bsder »

centimeter wrote: post #73
wpietri wrote: post #55

Earlier quoted context omitted.

> 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…

That's fake. Delivery doesn't work that way. The contract will specify one or a few acceptable delivery locations, always some industrial shipping depot or something.

It certainly could be apocryphal, but ....

I thought the commodity was coal. And the issue was that the trader was at a fancy new office park with a river view that was an old dock specifically for coal.

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

#127

Post by twic »

wpietri wrote: post #114
ashtonkem wrote: post #108

Earlier quoted context omitted.

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.

Thanks! Maybe the market maker I worked for was atypical. We definitely had opinions on where the market was going and made good money from that, especially in times of high volatility.

It's hard to make money by pure market-making, so it's common for market-makers to also do some amount of speculation.

After 2008, banks were banned from speculating (ish) [1], but were allowed to do market-making. It's common for market-making desks to do speculative trades under cover of market-making activity. It's hard to conclusively prove that any given trade is speculation rather than market-making (which involves hedging), so they generally get away with it.

[1] https://en.wikipedia.org/wiki/Volcker_Rule

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

#129

Post by mring33621 »

joncrane wrote: post #78
SrslyJosh wrote: post #11

I am playing my second tiniest violin for them right now.

Are you saving the tiniest one for when comes down with COVID-19? (I'm curious who the tiniest one is for)

tiny violins fit well in tiny hands

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

#130

Post by rossdavidh »

Bluecobra wrote: post #125
haltingproblem wrote: post #84

“Five days, including the weekend, with the coronavirus going on and a complex system where we have to make many changes, was not a sufficient amount of time,” he said. “The idea we could have bugs is not, in my mind, a surprise.” He also acknowledged the error in the margin model Interactive Brokers used that day.....We have called the CFTC and complained bitterly,” Peterffy said. “It appears the exchanges are going…

Peterffy is talking out of his ass, they had more than 5 days. CME's current specifications for order entry/market data has been in place for years now. Whoever was writing their software on their backend failed to read the documentation. https://www.cmegroup.com/confluence/display/EPICSANDBOX/Posi...

While I don't doubt that what you say is true, systems which, by spec, should be able to handle a given situation, that then years after they were written finally are called upon to handle that situation, fail more often than not.

The CEO also said they would pay $100million to clean up, which is not chump change, even for them I bet.

I'm not saying they were blameless, but I think most systems which have never had a given variable go negative, that years after they were written finally have that variable go negative, will have problems.

Post reply on HN