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London traders hit $500M jackpot when oil went negative

bloomberg.com

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Re: London traders hit $500M jackpot when oil went negative

#21

Post by iav »

Ecco wrote: post #7

I really wonder if those guys really created $500M worth of “value” for the rest of the world. Because if they didn’t, it means it’s theft...

There needs to be a buyer and a seller for any trade. You don't know the stories of the other participants in those transactions - maybe if they didn't get rid of their oil on that day for pennies (or negative dollars), they would have been forced into far worse consequences, defaulted on their legal obligations, or forced into breaking a trade. If you read the terms of the futures market, it is very specific in how you must take delivery and where, and failing to fulfill those requirements exactly would result in way worse consequences (imagine an oil trader who is banned from trading... yeah way worse than losing a bit of money). There is a set of counterparties out there that collectively decided that paying those guys $500M was better than their next best alternative.

Re: London traders hit $500M jackpot when oil went negative

#23

Post by baconandeggs »

Ecco wrote: post #16
throwaway1777 wrote: post #13

Earlier quoted context omitted.

Derivative trading is usually zero sum. There is a loser for every winner. I don’t understand in what world buying and selling oil on an open market could be considered theft. Everyone knows the rules of the game.

Well, let’s consider a simplistic example: an obscure currency, let’s call it FAKE, that can be traded for USD. That currency is only used by people in a small island, and that island only exports clamshells and imports Big Macs. In this scenario, and unless I’m mistaken, the FAKE/USD rate will vary depending on: - how much clamshell those people can export and how much US people value them - how much BigMacs those g…

A speculator does one thing only: takes assets not in (peak)demand today and bets they are gonna be in demand in the future. He takes a calculated risk and a lot of times it doesn't pay off. Everybody involved is getting paid and all the transactions are voluntary.

If you think that is theft then I don't know what to tell you.

Re: London traders hit $500M jackpot when oil went negative

#24

Post by baconandeggs »

neximo64 wrote: post #20
throwaway1777 wrote: post #13

Earlier quoted context omitted.

Derivative trading is usually zero sum. There is a loser for every winner. I don’t understand in what world buying and selling oil on an open market could be considered theft. Everyone knows the rules of the game.

You can always 'create' more oil by pumping it out of the ground once the prices hit a certain amount. So it's not really 'zero-sum'. If the supply isn't locked or restricted it's hard to say that. Same thing with Tesla shares, or whatever it is. If you can create more Tesla shares its not zero sum (which is done often). Currencies too are printed when needed. About the only thing really zero sum are some cryptocurre…

It is zero sum in the sense that all the money has to be equal to all the stocks. Not in the sense of perceived value.

Re: London traders hit $500M jackpot when oil went negative

#25

Post by Ecco »

iav wrote: post #21
Ecco wrote: post #7

I really wonder if those guys really created $500M worth of “value” for the rest of the world. Because if they didn’t, it means it’s theft...

There needs to be a buyer and a seller for any trade. You don't know the stories of the other participants in those transactions - maybe if they didn't get rid of their oil on that day for pennies (or negative dollars), they would have been forced into far worse consequences, defaulted on their legal obligations, or forced into breaking a trade. If you read the terms of the futures market, it is very specific in how…

Super interesting. Thanks!

Re: London traders hit $500M jackpot when oil went negative

#26

Post by javert »

Ecco wrote: post #12
Ecco wrote: post #7

I really wonder if those guys really created $500M worth of “value” for the rest of the world. Because if they didn’t, it means it’s theft...

I’m fine with the downvotes - I understand it can be a controversial opinion. But I’d love to get some more detailed feedback!

Let's take an example. If I buy a stock at $20 from Arthur and sell it the next day for $60 to Bob, have I made $40 of value? Yes.

Without people like me, Arthur might have gotten a much worse deal (possibly $0). Again, without people like me, Bob might have gotten a much worse deal (possibly $100, or maybe he wouldn't be able to buy at any price).

That's the service that active traders provide to everyone else in the market.

It's not for you to judge whether the $40 is "worth" $40. It is.

The situation in the oil trading story is the same, in essence. It is "worth" $500M. Unless the traders intentionally manipulated the prices, which may nor or may be true. The same scenario could play out either way. So it could be that such a trade is worth $500M.

$500M may sound like rich compensation for this type of work, but everybody's compensation is determined by supply and demand, i.e., the rarity of people who can perform that work, and its utility. [1]

(There was also a lot of risk involved, and capital allocation is how a market economy coordinates its activities, but that feels too big to get into here.)

When you accuse honest people of theft, that's nasty. That's probably why you are being downvoted. Then again, people also get downvoted unfairly all the time, so who knows.

[1] Well, except when the government alters the curve. For instance, $500M can pay for 14,000 American teacher-years. But the government forcibly operates an education cartel and artificially holds down the salary of teachers. They are certainly worth far more than the $35K a year I used in that calculation.

Re: London traders hit $500M jackpot when oil went negative

#27

Post by chii »

Ecco wrote: post #16
throwaway1777 wrote: post #13

Earlier quoted context omitted.

Derivative trading is usually zero sum. There is a loser for every winner. I don’t understand in what world buying and selling oil on an open market could be considered theft. Everyone knows the rules of the game.

Well, let’s consider a simplistic example: an obscure currency, let’s call it FAKE, that can be traded for USD. That currency is only used by people in a small island, and that island only exports clamshells and imports Big Macs. In this scenario, and unless I’m mistaken, the FAKE/USD rate will vary depending on: - how much clamshell those people can export and how much US people value them - how much BigMacs those g…

> Too bad for him, but he kinda made this happen ... Couldn’t that be considered theft to some extent?

why is it "too bad for him" when he loses (to the people he gave value to), but "theft" when he takes value from the people? That's just a double standard.

And you also mis-understand derivatives trading's purpose - to offload risk to a third party that is willing to take it.

Re: London traders hit $500M jackpot when oil went negative

#28

Post by Ecco »

baconandeggs wrote: post #23
Ecco wrote: post #16

Earlier quoted context omitted.

Well, let’s consider a simplistic example: an obscure currency, let’s call it FAKE, that can be traded for USD. That currency is only used by people in a small island, and that island only exports clamshells and imports Big Macs. In this scenario, and unless I’m mistaken, the FAKE/USD rate will vary depending on: - how much clamshell those people can export and how much US people value them - how much BigMacs those g…

A speculator does one thing only: takes assets not in (peak)demand today and bets they are gonna be in demand in the future. He takes a calculated risk and a lot of times it doesn't pay off. Everybody involved is getting paid and all the transactions are voluntary. If you think that is theft then I don't know what to tell you.

Well, a theft can be voluntary: that’s what con-artists do all the time!

Re: London traders hit $500M jackpot when oil went negative

#29

Post by Ecco »

chii wrote: post #27
Ecco wrote: post #16

Earlier quoted context omitted.

Well, let’s consider a simplistic example: an obscure currency, let’s call it FAKE, that can be traded for USD. That currency is only used by people in a small island, and that island only exports clamshells and imports Big Macs. In this scenario, and unless I’m mistaken, the FAKE/USD rate will vary depending on: - how much clamshell those people can export and how much US people value them - how much BigMacs those g…

> Too bad for him, but he kinda made this happen ... Couldn’t that be considered theft to some extent? why is it "too bad for him" when he loses (to the people he gave value to), but "theft" when he takes value from the people? That's just a double standard. And you also mis-understand derivatives trading's purpose - to offload risk to a third party that is willing to take it.

The double standard question is totally legitimate and a very good one!

My point of view is that the trader willingly entered the market with the sole intent of trying to make a profit, whereas the other two just wanted to actually trade goods.

Which is why the situation is asymmetrical in my opinion, and why the way we judge it could be as well.

Re: London traders hit $500M jackpot when oil went negative

#30

Post by FabHK »

neximo64 wrote: post #20
throwaway1777 wrote: post #13

Earlier quoted context omitted.

Derivative trading is usually zero sum. There is a loser for every winner. I don’t understand in what world buying and selling oil on an open market could be considered theft. Everyone knows the rules of the game.

You can always 'create' more oil by pumping it out of the ground once the prices hit a certain amount. So it's not really 'zero-sum'. If the supply isn't locked or restricted it's hard to say that. Same thing with Tesla shares, or whatever it is. If you can create more Tesla shares its not zero sum (which is done often). Currencies too are printed when needed. About the only thing really zero sum are some cryptocurre…

There is positive supply of oil, or Tesla shares.

However, the net supply of derivatives (such as options, forwards, futures) is zero.

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