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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

#21

Post by akiselev »

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…

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 would probably reduce the number of speculators at the same time, reducing the risk of this happening to begin with.

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

#23

Post by SilasX »

socrates1998 wrote: post #19

If you don't know what is going on, then why on earth would you risk so much money? IB fucked up, no doubt, but these idiots are trading shit they know nothing about. Don't trade on margin.

Well, yeah, it's reasonable to expect investors to appropriately researching something before buying, and be cognizant of the risk that it could crash.

It's not reasonable for them to expect to deal with a platform that misrepresents the state of the market and executes trades at a non-market price, as was happening here. (It was telling them the oil futures still had a positive price when it was negative, and making them pay on that basis.)

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

#24

Post by ashtonkem »

codenesium wrote: post #22

Wasn't the original purpose of futures to let farmers and others lock in prices early so they can mitigate risk? Speculation on futures seems dumb if you have no intention of taking delivery.

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 use or sell oil in large amounts, it makes sense to use futures to stabilize your downside risk, even if those futures are cash settled.

That being said, I think that cash settled futures make purely speculative trading much easier, so you’d have a good point if that’s what you were heading towards.

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

#25

Post by AnimalMuppet »

curiousllama wrote: post #20
wbl wrote: post #18

Earlier quoted context omitted.

Financial settlement against a spot market in a large port.

Cash settled contracts exist. These people just chose not to buy them. The question is how to structure physically settled contracts. After all, oil needs to get delivered to someone at some point.

If you get into the market for physically settled contracts with no intention of taking delivery, then you're almost certainly a speculator. I'm not sure that it's the market's job to make that safer for you.

I am not justifying inaccurate pricing. Burning speculators is fine, but give everyone accurate information.

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

#27

Post by vardump »

AnimalMuppet wrote: post #25
curiousllama wrote: post #20

Earlier quoted context omitted.

Cash settled contracts exist. These people just chose not to buy them. The question is how to structure physically settled contracts. After all, oil needs to get delivered to someone at some point.

If you get into the market for physically settled contracts with no intention of taking delivery, then you're almost certainly a speculator. I'm not sure that it's the market's job to make that safer for you. I am not justifying inaccurate pricing. Burning speculators is fine, but give everyone accurate information.

Or possibly someone who needs large amounts of oil and want to hedge against fluctuations?

Freight industry, airliner, etc.

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

#28

Post by ashtonkem »

ralph84 wrote: post #16

Would be nice to have more details on exactly what happened with the trades. Did the trades clear? Did IB liquidate the contracts before expiration? Was someone on the hook for taking physical delivery?

I feel like any sane clearing house should’ve rejected these trades.

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

#30

Post by lstamour »

codenesium wrote: post #22

Wasn't the original purpose of futures to let farmers and others lock in prices early so they can mitigate risk? Speculation on futures seems dumb if you have no intention of taking delivery.

To clarify, it’s the farmer or resource producer shorting or selling the future to protect against the price falling (where the short will make money) while the buyer of a future (processing industries, farmers needing feed, etc.) does so to protect against high prices (where the price goes up unexpectedly). You can also do this with options on futures for presumably more leverage.

That said, it varies by regional availability. For instance, Canada has fewer options: https://www.producer.com/2017/11/hedging-with-u-s-futures-an... To properly hedge a Canadian producer using a US future you’d need to also hedge against the Canadian dollar, presumably. And hope that the weather and such is similar enough.

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