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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

#91

Post by defen »

mathgenius wrote: post #60
defen wrote: post #47

Earlier quoted context omitted.

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.

ICE offers an equivalent cash settled contract, that takes it's value from CME's closing prices. https://www.theice.com/products/213/WTI-Crude-Futures

Right, but the reason it went negative is that there was no place to store the oil (demand for storage went through the roof because demand for actual oil plummeted). So that if you held one of these contracts, you had to pay someone to store your oil (directly or indirectly, if doing a cash-settled contract). If the people in the article did cash-settled contracts they would have been in just as much trouble.

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

#92

Post by [deleted] »

AnimalMuppet wrote: post #80
centimeter wrote: post #75

Earlier quoted context omitted.

> If you get into the market for physically settled contracts with no intention of taking delivery, then you're almost certainly a speculator. Hard disagree. There are lots of reasons people with legitimate hedging concerns who don't intend to take physical delivery prefer the physical contract to a CSC (if it's even available).

Would you list some of those reasons, instead of just making the bare assertion?

[deleted]

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

#93

Post by mostlymeme »

everlost wrote: post #35
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.

Wasn't this a cash settled contract?

Yes

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

#94

Post by mostlymeme »

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.

They are cash-settled.

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

#95

Post by centimeter »

AnimalMuppet wrote: post #80
centimeter wrote: post #75

Earlier quoted context omitted.

> If you get into the market for physically settled contracts with no intention of taking delivery, then you're almost certainly a speculator. Hard disagree. There are lots of reasons people with legitimate hedging concerns who don't intend to take physical delivery prefer the physical contract to a CSC (if it's even available).

Would you list some of those reasons, instead of just making the bare assertion?

* Higher liquidity, lower slippage

* Different regulatory capital requirements

* Some commodities don't have cash settlement

* Sometimes a CSC doesn't count (as much) from a regulatory/insurance perspective if you're hedging a position in a commodities basket or whatever

I'm sure there are more - I don't work in commodities.

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

#96

Post by mostlymeme »

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.

IB asked for very low margin, $30 per contrat for long positions, normal is around $8000. Margin for futures is based on risk. They could perfectly thought that minimum price was 0.01, and that was what IB was telling to them.

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

#97

Post by flint »

mostlymeme wrote: post #94
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.

They are cash-settled.

They are deliverable https://www.cmegroup.com/trading/energy/crude-oil/light-swee...

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

#98

Post by haltingproblem »

andy_wrote wrote: post #87
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…

Sorry but this is terrible advice. If trading Oil Futures is akin to playing Russian Roulette then trading Oil ETFs is akin to juggling live hand grenades. One will go off as soon as you stop!

Most commodity and leveraged ETFs are designed to benefit just one party - the designer of the ETF. There are plenty of articles on USO and its travails.

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

#99

Post by mostlymeme »

flint wrote: post #97
mostlymeme wrote: post #94

Earlier quoted context omitted.

They are cash-settled.

They are deliverable https://www.cmegroup.com/trading/energy/crude-oil/light-swee...

That's no the contract in which IBKR has lost money.

These are: QM NYMEX, and WTI ICE. Both cash-settled.

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

#100

Post by 0x8BADF00D »

centimeter wrote: post #88
derriz wrote: post #38

Earlier quoted context omitted.

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 alw…

Kind of orthogonal, but I’ve often faced pushback from Product Managers when trying to future proof a feature that I’m going to ship. The pushback is usually “oh, there’s no way our customers will ever need that!”. Only until many years later will it blow up in your face, with costly consequences.
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