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Oil crash busted broker’s computers and inflicted big losses

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

#81

Post by wpietri »

simonh wrote: post #72
wpietri wrote: post #55

Earlier quoted context omitted.

> It’s pretty well known that commodity futures contracts are a game of hot potato Very much so. I wrote software for financial traders in the 1990s, and I heard tell of a couple of clerks (in this context, sort of "trader intern") who thought they were smart enough to do a little commodity metal trading on the side. However, they didn't quite understand the details of contract expiration, and so supposedly they ende…

There are contracts that specify physical delivery, but they also specify the warehouse or storage facility the commodity will be delivered to. The buyer can either collect the commodity or pay the storage facility to hold it for them. It's not likely it would be delivered to someone's house unexpectedly, because someone would need to pay for the additional cost of transportation.

Yeah, the way the story was told the thought they could save some money and the hassle of making a deal with a warehouse. Why pay for something they're never going to use? So they agreed to pay for transportation in the event of delivery, thinking they'd never get charged for it. But I could well believe this was a trader urban legend.

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

#82

Post by quickthrowman »

simonh wrote: post #72
wpietri wrote: post #55

Earlier quoted context omitted.

> It’s pretty well known that commodity futures contracts are a game of hot potato Very much so. I wrote software for financial traders in the 1990s, and I heard tell of a couple of clerks (in this context, sort of "trader intern") who thought they were smart enough to do a little commodity metal trading on the side. However, they didn't quite understand the details of contract expiration, and so supposedly they ende…

There are contracts that specify physical delivery, but they also specify the warehouse or storage facility the commodity will be delivered to. The buyer can either collect the commodity or pay the storage facility to hold it for them. It's not likely it would be delivered to someone's house unexpectedly, because someone would need to pay for the additional cost of transportation.

A source to back you up, this is precisely how it works. The CME link goes into more detail on how physical delivery works for base metals.

Other physically settled commodity contract have different delivery locations, /CL (WTI crude) delivery takes place at a terminal and storage facility in Cushing, OK.

https://www.cmegroup.com/education/courses/introduction-to-b...

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

#83

Post by centimeter »

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.

More people than farmers (or manufacturers, or whatever picturesque production business) buy futures without speculative intent. Most futures trades are for (indirect) hedging purposes. E.g. if I made burger buns I would buy and sell wheat futures even if I never actually took delivery of wheat futures, because I can hedge part of my exposure.

Modulo the fact that almost no one a naive observer might accuse of "speculating" is actually speculating, I do agree that speculating on commodities futures is dumb, because taking a directional bet on anything you don't have inside information into is dumb.

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

#84

Post by haltingproblem »

“Five days, including the weekend, with the coronavirus going on and a complex system where we have to make many changes, was not a sufficient amount of time,” he said. “The idea we could have bugs is not, in my mind, a surprise.” He also acknowledged the error in the margin model Interactive Brokers used that day.....We have called the CFTC and complained bitterly,” Peterffy said. “It appears the exchanges are going scot-free.”

Thomas Peterffy must think we are idiots. Anyone who trades commodity contracts for any period of time knows that the real cost of the contract is the actual cost of the commodity - storage costs. When storage costs spike and the actually commodity spot costs go down, the future will become negative!

One way to get a handle on storage costs is think of them being inversely proportional to the value density. The higher the value density, e.g. gold the less the storage costs. Oil is not so dense so storage costs matter. Financial instruments like the Treasury Bonds and the S&P futures contract have zero storage costs. Storage cost is of-course different than carry cost (the cost of funding your long position).

On another aside, I have known folks who have worked at IB in the past, and their systems absolutely suck dead goats. Huge masses of legacy C++ code with poor testing. Most of these brokerage firms have legacy code base from the 90s that is poorly understood. They also have nonexistent organizational quotient around code validation, correctness and testing their risk models. A futures margin model is not something one can whip up over a weekend but a good CS undergraduate can program one over a couple months.

Sorry for the IB customers but I have zero sympathy for IB or should I say negative ;)

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

#85

Post by evanpw »

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.

The contract is for a particular kind of crude delivered at a specific location. Most hedgers would still be better off closing the futures contract and taking the delivery they actually want instead.

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

#86

Post by hellofunk »

haltingproblem wrote: post #84

“Five days, including the weekend, with the coronavirus going on and a complex system where we have to make many changes, was not a sufficient amount of time,” he said. “The idea we could have bugs is not, in my mind, a surprise.” He also acknowledged the error in the margin model Interactive Brokers used that day.....We have called the CFTC and complained bitterly,” Peterffy said. “It appears the exchanges are going…

Agreed. IB's data is also not so accurate much of the time; the way it reports volume in particular is misleading. I've seen traders abandon IB after big losses because their strategies required actual live volume data that didn't suck, and nearly any other broker provides this.

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

#87

Post by andy_wrote »

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…

There are ETFs that track oil futures (basically like a stock, but backed by oil instead of a company). It's been a while since I've looked at any of this, but I think USO is still the most prominent.

There are plenty of things to watch out for with these ETFs. You pay ongoing expense fees. And ETFs, especially those that aren't just holding containers for assets, can have subtleties in their prospectuses that cause their value to fluctuate in counterintuitive ways. There's still a lot to be cautious about.

However, compared to the actual futures, they're more suitable for casual investors, for reasons such as what we see here. They can't go below 0 and don't necessarily involve margin. And the ETF will typically deal with things like rolling the futures position ahead of expiry.

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

#88

Post by centimeter »

derriz wrote: post #38
0x8BADF00D wrote: post #13

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…

From what I've seen, almost all financial companies developed a bunch of systems for different security types (which all have different rules and edge cases) independently, and only tried to tie them together as time went on. It's a recipe for a lot of confusion and inconsistency.

There are tons of opportunities in finance to make short-sighted proclamations like "the number of futures in this kind of contract is always 100" or "this type of security can't go negative", and have it be true at the time, but false 5 years later when they add a new type of contract.

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

#89

Post by mostlymeme »

LatteLazy wrote: post #79

Fuck IB and this “trader”, idiots should lose their shirts, that’s one of the intended outcomes of an efficient market. That said, there is an issue here with futures contracts: you can get very very large leverage when the price is near zero. This is the real issue with instruments that can negative price and just like their are “circuit breakers” in markets for big price swings, there should be breakers for enterin…

An efficient market that don't let traders operate? Did you even read the article?

Futures contracts that CAN BECOME NEGATIVE don't let large leverage when price is near zero, that's NOT TRUE. Future contracts margin is calculated with SPAN, and if it's done correctly, it considers the scenarios where price can go below 0.

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

#90

Post by brazzy »

akiselev wrote: post #21
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 w…

When the price mayhem was happening there was a discussion here on HN, and someone claimed that brokers would either never let retail investors handle contracts with physical delivers, or forcibly close the positions several days before the deadline.

Looks like Interactive Brokers fucked up in more than one way here.

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