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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

#151

Post by rajacombinator »

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…

You couldn’t sound more clueless here. A rare screwup by IB for sure but the only reason you’re hearing about it is because the CEO is a standup guy. (Very sharp one too.) Other brokers would no doubt sweep this under the rug and/or pursue their customers for the losses.

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

#152

Post by CrazyStat »

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're ignoring the margin requirements.

Assuming your broker is competent (which the broker in this story is not), they won't let you buy 100,000 contracts for 1000 USD unless you can cover the potential downside, which would be of millions (possibly tens of millions) of dollars. So you can't actually leverage $1000 into going up for down $100,000; you would be tying up $X,000,000 to go up for down $100,000.

Unfortunately IB was not competent and they did not calculate the margin requirements correctly, which allowed their customers to leverage themselves improperly.

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

#153

Post by CydeWeys »

centimeter wrote: post #77
CydeWeys wrote: post #57

Earlier quoted context omitted.

Airlines buy futures in Jet A or Jet A-1. They have no interest in crude oil because they aren't refiners and they have nothing to do with it. The freight industry will similarly buy futures in bunker fuel, diesel, or whatever exactly they use to fuel their vehicles. Again, they're not refiners and have no use for raw crude. It's the oil refiners that buy futures in crude. Well, them and speculators.

> Airlines buy futures in Jet A or Jet A-1. They have no interest in crude oil It doesn't matter. Airlines absolutely buy crude futures to hedge against changes in fuel cost. It might be impossible to buy futures in the exact good you need, or it might be too expensive due to illiquidity and slippage. It's like how beer manufacturers buy aluminum futures even though they almost never take delivery on the futures. The…

There are jet fuel futures. If they speculate on crude and then jet fuel itself goes up because e.g. a big jet fuel refinery blew up, they're screwed, because the crude future didn't actually hedge against the specific problem they're facing, and now they have to pay a lot more for jet fuel. Or it could be any other problem that specifically affects jet fuel but not crude in general.

Anyway, as usual, Wikipedia has a relevant article, and it seems that airlines do both: https://en.m.wikipedia.org/wiki/Fuel_hedging

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

#154

Post by alasdair_ »

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.

The standard answer is that speculators provide liquidity.

People that want to buy or sell a commodity typically only want to do a certain number of transactions. What happens if they can’t find someone to take the other side of a trade? It would be annoying to have to wait a week until someone else is interested. Moreover, they may want a different quantity than you do, or they may want a different delivery date.

There is also price discovery as you allude to. A farmer selling pork doesn’t necessarily want to have to track the details of the Chinese economy and the weather patterns in Europe just to get a fair price for their goods. Speculators help with that.

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

#155

Post by haltingproblem »

ornornor wrote: post #120
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…

> On another aside, I have known folks who have worked at IB in the past, and their systems absolutely suck dead goats. Huge masses of legacy C++ code with poor testing. As a customer I’m not surprised at all. Their software is terrible, especially the simplified web application and their mobile app. Terrible. But their fees are incredibly low. You can convert a million dollar to other popular currencies for less tha…

At interbank rates? Ok, that is _pretty_cool_. I will check that out, thanks!

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

#156

Post by haltingproblem »

rajacombinator wrote: post #151
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…

You couldn’t sound more clueless here. A rare screwup by IB for sure but the only reason you’re hearing about it is because the CEO is a standup guy. (Very sharp one too.) Other brokers would no doubt sweep this under the rug and/or pursue their customers for the losses.

You sound like an employee ;)

On a serious matter, doesn't Peterffy owns a huge chunk of IB and a brokerage is as riskless of a transaction business as you can get to in the financial industry as possible.

IB's frontends used to lead the market and their pricing is decent too. Who else lost $100 million because they did not program futures and span margin properly?

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

#157

Post by haltingproblem »

stuzenz wrote: post #116
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…

Thanks for the information. I have been using IB and their API and had always wondered about the quality of their code base. I assumed there was a lot of legacy with their systems - I just had little idea of how well they were managing things internally. For my limited requirements, Interactive Brokers does seem to meet needs, but do you know of a platform that is highly regarded that is accessible for clients outsid…

The outside the US part, I think, will greatly narrow your universe of choices. Have you looked into Lime Brokerage? They are now owned by Wedbush but they used to have top tier technology.

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

#159

Post by haltingproblem »

jldugger wrote: post #148
haltingproblem wrote: post #98

Earlier quoted context omitted.

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.

If I just wanted a ticker symbol for the price of oil to put on a 'market health' dashboard, with no intention of actually investing in the ETF at all, would USO suffice?

No. USO is not symptomatic of the health of the Oil market [1]. USO is a bizarre beast and any analogy fails to explain it. The only thing indicative of the health of the Oil market is spot and futures prices. [2]

This, unfortunately (or for some, fortunately) requires understanding the structure of the Oil market and how Oil is bought, sold, delivered and transported and yes stored! Spot prices, futures, oil grades, hubs, contango, etc.

[1] https://www.bloomberg.com/news/articles/2020-04-30/investors... [2] https://oilprice.com/oil-price-charts

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