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

161–170 of 182 posts

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

#161

Post by tialaramex »

andy_wrote wrote: post #121
kccqzy wrote: post #117

Earlier quoted context omitted.

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 mone…

And as you'd expect ETF managers "fixed" this by shuffling things so that the "same" ETF is now backed by a different mix of futures they're less worried about.

My opinion is that ETFs are legalised bucket shops and ought to go away. The Oil Futures market represents an actual need, Alice wants to sell her oil knowing what she'll get for it when it's delivered in a week's time, Bob wants to be able to lock in today's prices for next week's oil. There is clearly a deal to be made there and if people who don't actually need oil want to tie themselves up in it and maybe improve liquidity I guess I won't stop them. But Oil ETFs are just a way to gamble on the value of the Oil Futures, and that's why we forbade bucket shops. Negative future prices show that the mechanisms which are supposed to make ETFs safer than bucket shops are flawed, and IMO too flawed to continue to accept them as a legitimate business.

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

#162

Post by Stierlitz »

tester89 wrote: post #158

I don’t really understand why the traders would end up owing money. If they thought they were paying 0,01 $/bbl but we’re actually “paying” -37 $/bbl wouldn’t IB owe them?

@tester89 > I don’t really understand why the traders would end up owing money. If they thought they were paying 0,01 $/bbl but we’re actually “paying” -37 $/bbl wouldn’t IB owe them?

My thoughts precicely, is there anyone on here that could explain the intricacies of these kind of trades?

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

#163

Post by em-bee »

tester89 wrote: post #158

I don’t really understand why the traders would end up owing money. If they thought they were paying 0,01 $/bbl but we’re actually “paying” -37 $/bbl wouldn’t IB owe them?

i understood that he bought at -3.7, and then it dropped further to -37.

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

#164

Post by hchz »

darkwizard42 wrote: post #62
elliekelly wrote: post #56

Earlier quoted context omitted.

Interesting point. Have we commoditized and securitized the storage of commodities yet? Can someone purchase oil storage futures contracts to mitigate this risk?

I think there might be a market for that but probably not as formal as the trading of oil futures themselves. Basically a more private transaction on a marketplace that isn't as visible or as liquid as the futures.

OTC-traded contracts are just as formal. I’d say that these markets are generally more formal in practice due to the lack of retail actors who don’t understand the microstructure, sources of risk, or how to price their assets individually and across their book.

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

#165

Post by somebodythere »

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?

You probably want the front month WTI and possibly Brent futures price.

USO has unpredictable drift due to contract rolling and often trades at a significant premium/discount to NAV.

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

#166

Post by tedunangst »

tester89 wrote: post #158

I don’t really understand why the traders would end up owing money. If they thought they were paying 0,01 $/bbl but we’re actually “paying” -37 $/bbl wouldn’t IB owe them?

He sold it (or IB did so on his behalf at end of day) at -$37.

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

#167

Post by sokoloff »

CrazyStat wrote: post #150
whatok wrote: post #42

Earlier quoted context omitted.

If anyone is trading futures and did not know they were trading on margin or trading highly levered instruments then they either are trading on a platform that has zero compliance or they misrepresented themselves as an investor.

The broker calculated the margin requirements based on the assumption that the price could not go negative. So the investors thought they were risking $30 per contract when it was actually a couple orders of magnitude larger than that. Effectively the broker lied to them about how leveraged they were.

Anyone who thought they were risking a max of $30/contract has no absolutely no business trading futures. Most of them are 1000bbl contracts and the disclosure docs that you read before being granted trading enablement are crystal clear. The margin required to be posted is not the limit of what you can lose. (If it was, margin calls would be much less of a thing.)

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

#168

Post by scurvy »

CrazyStat wrote: post #152
LatteLazy wrote: post #102

Earlier quoted context omitted.

>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. Unfortu…

Sounds like IB hired the Robin Hood team.

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

#169

Post by scurvy »

H8crilA wrote: post #6
AndrewBissell wrote: post #2

Incorrectly assuming values can never be negative is an all-too-common occurrence in trading and financial software. In 2012 Swedish stock futures trading was suspended for a time because their matching engine used an unsigned type for order quantities and someone submitted an order with a negative value which wrapped around to 4 billion: https://www.reuters.com/article/markets-sweden-bug/swedish-s... Interactive Bro…

I particularly dislike the attitude of the CEO which shows he either doesn't know or pretends that he doesn't know how such contracts work. Please read the contract specs and educate yourself a little, Mr. Peterffy, they're public and free. > 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…

Peterffy is a long time industry vet. He brought a lot of tech to trading in the 80's. He knows very well how things work.

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

#170

Post by scurvy »

isoos wrote: post #14
AndrewBissell wrote: post #2

Incorrectly assuming values can never be negative is an all-too-common occurrence in trading and financial software. In 2012 Swedish stock futures trading was suspended for a time because their matching engine used an unsigned type for order quantities and someone submitted an order with a negative value which wrapped around to 4 billion: https://www.reuters.com/article/markets-sweden-bug/swedish-s... Interactive Bro…

> Interactive Brokers' software is usually very solid. Except their web portal. 40-50% of the time it is unable to load my portfolio data (even without the current market value, just the number of stocks and cash balances). At the same time I log into the mobile app, it forces a logout on the web app (why?) and it is able to load the balances and portfolio. No explanation. Same network, no adblocker or other browser…

The single session thing is annoying. I'm guessing it is related to their various data provider regulations. The large brokers can get around this because, well, you are not really seeing pool depth and the like.
Post reply on HN