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.
If you need large amounts of oil, then either you plan on taking physical delivery, so you can just let the contract expire, or you don't plan on taking delivery of that oil, in which case you want cash settlement contracts.
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.
That would seem counter to, "with no intention of taking delivery," from your parent's comment.
More to the point is that a bunch of dumbasses were speculating on oil futures without understanding the nature of the market, and no ability to take delivery on the oil in any event. Nobody should be holding those when they're so close to expiry unless they know what they're doing.
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 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.
I'm surprised IB let speculators trade in a contract going to delivery. I worked as a risk manager in a commodity trading firm and only hedgers qualified to take delivery were permitted to hold contracts going to delivery.
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.
I don't think they knew in this case they were potentially trading on margin. The broker didn't know either which is crazy.
I'm surprised IB let speculators trade in a contract going to delivery. I worked as a risk manager in a commodity trading firm and only hedgers qualified to take delivery were permitted to hold contracts going to delivery.
It's really odd that this bug occured, as IB has no issue pricing credit spreads with negative values. Must be an issue specific to commodities futures contracts. I wonder what data types they were using.
I’ve written code (a year or so ago) against the IB API and it seemed clear to me that the API was a thinish skin over multiple backend systems. The feed you get for products from different markets (even different futures markets) was different - the population of fields in price and trade feed was wildly inconsistent. I’m guessing each market is accessed in by a different IB system. Negative prices are a feature of some massively traded futures - interest rate futures for example - but can effectively never occur for index futures or the like.
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…
> Well, yeah, it's reasonable to expect investors to appropriately researching something before buying, and be cognizant of the risk that it could crash.
Is it? Isn't this the entire reason risk management departments exist?
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.
If you only had farmers and individuals purchasing their goods allowed to trade futures, there is direct incentive for either party to manipulate the physical market through their actions, in ways that they only could, that wouldn't necessarily make any economic sense and could have spillover effects into the real economy. By having a more open market for futures, you theoretically have a more efficient market for all participants which you mention in your last sentence.