London traders hit $500M jackpot when oil went negative • Hacker News Board

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

#81

Post by AmericanChopper » Wed, Aug 05, 2020, 7:50 AM UTC

wonderwonder wrote: post #74

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...

This would essentially mean that most winners on every trade in equities, crypto, forex (except for central banks I guess) etc. are committing theft. When individuals enter a trade on these markets its soley to make a profit, very rarely is it to take physical delivery of a good that will be used. You make a trade based on your assumption of which way the price of that asset will go. Someone else makes an equal and o…

There is a non-trivial number of people who believe the very concept of private property is theft. Quite a few of them post comments on HN.

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

#82

Post by neximo64 » Wed, Aug 05, 2020, 7:51 AM UTC

baconandeggs wrote: post #46

neximo64 wrote: post #43

Earlier quoted context omitted.

You can make more money though & you can make more stocks. That's where the notion you're addressing breaks down, even in the perceived sense: The Hong Kong dollar is pegged at the moment, this also means it's not zero sum for a buyer or seller either, especially at the peg boundary like now. They simply make more Hong Kong dollars or withdraw them.

It is zero sum because it adjusts, no matter what you do. If you pump more oil from the ground, the prices will fluctuate until they reach the new zero-sum level that takes into account the new production level. A pegged dollar is the same, it only takes a little longer. When they print they dilute the value of the current dollars in circulation but not immediately, because of the peg. But eventually, because it is z…

Actually with the lag it changes everything, because you can earn interest/dividends on the amounts. You can die in the meantime so its someone elses. The variations are endless. When someone discusses it as being zero-sum there is always just a scenario you can describe where it isn't, and if even just $1 can't be accounted for the whole argument breaks apart.

It is never really instantaneous and can take more than months, years. You would have thought printing 6 trillion would have changed something but not really.

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

#83

Post by sgt101 » Wed, Aug 05, 2020, 8:12 AM UTC

truckerbill wrote: post #72

No discussion here about the environment. This indirectly fuels demand.

How so?

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

#84

Post by zahma » Wed, Aug 05, 2020, 8:19 AM UTC

I'd greatly appreciate if any of you can explain how such a trade happened in layman's terms. Every time I try to look various vocab, I end up getting deeper into the glossary of hyperlinked words on investopedia and totally lose sight of the bigger picture.

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

#85

Post by gadders » Wed, Aug 05, 2020, 8:22 AM UTC

hogFeast wrote: post #50

anonu wrote: post #44

The crux of this trade was the TAS order type. It seems like these guys arbed the liquidity difference beyond their wildest dreams... But now they're probably spooked about it because it sounds borderline manipulation. Order types are constantly getting traders or exchanges in trouble. If you know about the less popular ones you always stand to beat out your competitors who dont. TAS reminds me of D-quotes on NYSE.

It isn't an order type. In many institutional markets, trades are settled at a price that isn't known when the trade is booked. This happens in rates (LIBOR rigging was an example, it happens elsewhere), it happens in forex (the daily fix, masses of shenanigans there). You also find it in derivative markets (equity options on expiry dates) or, indeed, in any situation where certain dates matter (fund manager with a b…

Also, Local = trades with their own money, rather than working for a bank or other financial institution.

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

#86

Post by gadders » Wed, Aug 05, 2020, 8:30 AM UTC

wodenokoto wrote: post #78

dmarlow wrote: post #3

I think most people saw the opportunity, but just didn't know how to properly capitalize on it. At least that's where I was. I wasn't going to take delivery of any oil, that's for sure. At least nothing that stood to make anything significant from. Then, there was also the whole contango thing too.

Just like we pass around code-stories/war stories, I remember reading a funny story about this stuck-up senior trader who ended up having to take delivery of a shipment of coal. Probably an urban legend, but still funny. This thread seems to support the idea that you can't just receive your futures at home. But I guess even with a designated warehouse, you're stuck with the warehouse bill. https://skeptics.stackexcha…

There is also this story from Bloomberg about when one of their journalists tried to buy a single barrel: https://www.bloomberg.com/news/articles/2015-11-03/that-time...

"Could a barrel of crude really kill me?" I asked a petrochemical engineer captive to my persistent, doubtlessly annoying questions. It absolutely can, he said. Hydrogen sulfide gas—H2S, for short—has a terrible propensity to evaporate from crude, knock out your olfactory capabilities, and slowly suffocate you to death.

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

#87

Post by pjc50 » Wed, Aug 05, 2020, 8:30 AM UTC

Ecco wrote: post #25

iav wrote: post #21

Earlier quoted context omitted.

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!

A good angle to think of for options trading is that writing out-of-the-money options is like selling insurance. Occasionally you have to make a big payout, but the rest of the time you're getting small payments.

Some of the market participants were effectively insuring others against the price of oil dropping too low.

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

#88

Post by silasdavis » Wed, Aug 05, 2020, 8:31 AM UTC

javert wrote: post #26

Ecco wrote: post #12

Earlier quoted context omitted.

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 th…

I am fine with your tautology:

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

What other sensible quantative way of defining value is there?

The question is do we think the position leveraged to extract that value is fair. You seem to think that price manipulation (presumably of some explicitly prohibited forms) can be unfair. So I assume you amenable to some extrinsic definition of fair play.

In your example what might be the form of advantage you exploited? It could be informational or it could be based on capital. Perhaps your informational advantage is based on diligent study of a situation or perhaps it is based on cronyism. Similarly perhaps your ability to take on the risk is based on hard work or inherited wealth. I'm not saying any of these is inherently wrong but people can and do take moral/social positions on such advantages exploited for profit. Even though that discussion might be rather intractable.

So we can define the value of the trade by the spread but that says little about whether the information/capacity asymmetries were fair. If a well functioning market is meant to approximate fairness with sufficient diversity of participants then a market anomaly like this seems like more like an exception to that rule.

I do not think it is justified to call it theft.

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

#89

Post by truckerbill » Wed, Aug 05, 2020, 8:44 AM UTC

sgt101 wrote: post #83

truckerbill wrote: post #72

No discussion here about the environment. This indirectly fuels demand.

How so?

Any news of gains like this raises optimism about oil prices, more people will be inclined to invest. More generally, engaging in the market is being complicit with it. Worth noting we’re all complicit, but trading is more voluntary.

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

#90

Post by londons_explore » Wed, Aug 05, 2020, 8:48 AM UTC

sgt101 wrote: post #83

truckerbill wrote: post #72

No discussion here about the environment. This indirectly fuels demand.

How so?

Because someone owning an oil fired power plant can buy all these negative priced oil futures, take actual delivery, and burn the oil to produce electricity and get paid for that.

Normally, burning oil to make electricity is uneconomic, since gas, coal, and even renewables are cheaper. Oil fired plants were sitting mostly mothballed for the last decade in most of the world, for use only in emergencies.