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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

#41

Post by beckingz »

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.

Liquidity is the standard answer.

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

#42

Post by whatok »

codenesium wrote: post #36
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.

I don't think they knew in this case they were potentially trading on margin. The broker didn't know either which is crazy.

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.

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

#43

Post by mrlala »

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.

>Speculation on futures seems dumb if you have no intention of taking delivery

What? How is it any more dumb than speculating and buying a stock hoping it will go up?

Speculation in futures is what gives those farmers liquidity in the markets.

Futures is a zero-sum game.. so in my world futures make way more sense to trade than everything throwing money into stocks to magically make money out of thin air until they don't.

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

#44

Post by jdadj »

whatok wrote: post #37
everlost wrote: post #35

Earlier quoted context omitted.

Wasn't this a cash settled contract?

No.

It's not a cash settled contract.

"Delivery shall be made free-on-board ("F.O.B.") at any pipeline or storage facility in Cushing, Oklahoma with pipeline access to Enterprise, Cushing storage or Enbridge, Cushing storage."

Source: https://www.cmegroup.com/trading/energy/crude-oil/light-swee...

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

#45

Post by mrlala »

flint wrote: post #29

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.

IB automatically closes out your position before delivery can happen if you don't close it out.. so not sure why you are surprised IB lets them trade?

>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.

Ehh.. what? I've been part of a CTA for many many years, we have trading programs.. our clients trade in our programs.. the entire industry never takes delivery yet trades all these contracts which have delivery (metals, ags, energies). Very confused what you are talking about.. everyone rolls out of these before first notice dates.. brokers are on your back a week before the FND are coming up.

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

#46

Post by jgalt212 »

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…

It's far from a solved problem. Similar issues, albeit not quite as volatile exist for TBA mortgage bonds--except it's not usually problem of storage and more a problem of delivery.

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

#47

Post by defen »

wbl wrote: post #18
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…

Financial settlement against a spot market in a large port.

WTI (West Texas Intermediate, the one that went negative) is already settled at a specific place: Cushing, Oklahoma. Unlike with Brent Crude you can't just drive a tanker up to Cushing Oklahoma. So if you buy a WTI contract you are promising to take delivery of 42,000 gallons of oil there...it's the nature of the contract that there's no way around this.

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

#48

Post by curiousllama »

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…

The other issue here is that there IS an economic justification: everybody bid up the price of storage. If it costs me $60 to store a barrel I can sell for $10 later, then I'll pay someone $40 to take it off my hands now. An asset became a liability, hardly a rare concept to anyone who has owned a car they had to pay someone to tow away... CEO is just passing blame.

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

#49

Post by [deleted] »

jgalt212 wrote: post #46
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…

It's far from a solved problem. Similar issues, albeit not quite as volatile exist for TBA mortgage bonds--except it's not usually problem of storage and more a problem of delivery.

[deleted]

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

#50

Post by thanatropism »

About two months ago I delivered to a private client a (monthly-basis) prediction model for ethanol prices that included Brent -- in logarithm -- as a predictor.

I know the monthly spot average of that statistic (fetched from FRED, the Fed of St. Louis system) won't turn negative, but still...

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