Wow! Reconfirms my trust in IB big time.

Sent using the futures.io mobile app

Here it's the full article:

https://www.bloomberg.com/news/articles/2020-05-08/oil-crash-busted-a-broker-s-computers-and-inflicted-huge-losses

WOW!

Then came what looked like the deal of a lifetime: buying 212 futures contracts on West Texas Intermediate for an astonishing penny each.

...

At midnight, Shah got the devastating news: he owed Interactive Brokers $9 million. He’d started the day with $77,000 in his account.

How is a guy with $77,000 in his account allowed to buy 212 futures contracts, approximate overnight margin requirement of $2.1 Million? That's day trading margins of 27+:1.

Not how markets and trading should work.

You make a trade, you live and die with it.

Not, when you can't exit... The moment I would have seen a minus bid of 1 CT.. I would have killed the trade in a heartbeat.. But.... I couldn't... System didn't let me...

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on their own website stated that there was a low limit of 0.01and no high limit... They even still had it a week after the event.. Recently they took the whole column out

Cme had the wrong info on their own product

Thanks for the CME photo, that is good evidence of their culpability.

I disagree. They explicitly documented the availability of negative pricing and the terms and conditions of the website specifically says they are under no obligation to update the Website.

I think Duffy's comment is actually out of place. They don't 'go for professional participants' they go for anybody. They like big traders because they trade more! If they don't want small traders why release the micro contracts? How many large institutional traders are trading a $15k Notional Equities contract?

He's running one of the largest casinos in the world, of course he wants everybody. He probably has performance metrics for his bonus structure as the CEO. But when a tour operator (FCM) brings in a group of people to gamble (retail customers) he wants the tour guide to be responsible for emanating the rules.

And, oh by the way the rules change, and I may not have sent you a notice

and my website shows inaccurate contract specifications.

Somewhere between 'Debatable' and 'Disagree'. The contract specifications are correct - there is a specific contract specifications tab. The rulebook is correct. A single column on a live quotes page has a questionable meaning. Personally I've never seen the column highlighted in that photo but I pay for live data so have no need for delayed data. Even so I'm not sure what it means. There's lots of information on almost every website that is out of date or even inaccurate. That's why the website has a disclaimer that it might not be accurate. I will say this though, there is no disclaimer on the rulebook saying it might be inaccurate! Which raises the question @futures trader, have you ever read the rulebook?

Having a floor would be a potential recipe for disaster. What if we hit $0 and suddenly a bunch of speculators without physical capabilities couldn’t find any willing buyers before expiration?



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The problem was not that, it was specific to the cash settled markets the day prior to delivery. There was never any risk of delivery with the contracts that blew up with interactive brokers and other FCM's that got hit.

You do realize the cash contracts settle against the official settlement price of the physical contract?


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Yes and delivery was at +9$

Okay, what is your point? You want the financial contracts to have some special floor that the contract they settle against doesn’t?


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My point is this was a take down. There were inconsistencies with FCM's, data, platforms and there was no level playing field. Interactve brokers went -110 million, nothing to see here?

Okay, what is your point?

My money’s on it being gross incompetence

IKBR really has no one to blame but themselves.

From April 8th:

https://www.cmegroup.com/content/dam/cmegroup/notices/clearing/2020/04/Chadv20-152.pdf

I'm not sure how often I get these (I believe weekly) but this was the latest I received:

CME Globex Notices: May 4, 2020

Your CME Globex notice for the week of May 4, 2020, is now available.

This weekly notice includes details and effective dates for:

Upcoming CME Globex Technology Impacts
CME Group Product Launches and Changes
Events and Announcements

+ + +

Then you click on link to read actual individual notices themselves.

Wants somebody to blame!


Mine to. I don't think it was as nefarious as some suggest. I think things got out of control, people thought it can't get any worse than it already is, and then panicked when it did. Add in the algos and things ran further than anybody believed.


Clearly. You would think they have a team that does nothing other the liaise with the exchanges.

So we agree, the FCM's are accountable to some extent.

I'm not looking to set blame on any one party, but rather get a better understanding of how the exchange, technology/data providers, FCM's and their customers all participated in the outcome. Interactive Brokers is not the only one impacted by this, other platform providers and FCM's have come out and stated that they were unable to handle negative pricing as well.

WOW!

Then came what looked like the deal of a lifetime: buying 212 futures contracts on West Texas Intermediate for an astonishing penny each.

...

At midnight, Shah got the devastating news: he owed Interactive Brokers $9 million. He’d started the day with $77,000 in his account.

How is a guy with $77,000 in his account allowed to buy 212 futures contracts, approximate overnight margin requirement of $2.1 Million? That's day trading margins of 27+:1.

@SMCJB
do you have some data about the monthly cost development of US fracking oil?
This might be interesting to compare and see it to the rest of US oil gaining costs.

Thanks
GFIs1

@SMCJBdo you have some data about the monthly cost development of US fracking oil? This might be interesting to compare and see it to the rest of US oil gaining costs.

There are no universal costs in oil exploration, drilling, refining and transporting. There are multiple regions and competitors and qualities of crude throughout the world, including fracking in the U.S. Some companies are well capitalized, some are not. Although even the well capitalized ones are struggling these days.

Nobody wants the same thing to happen with June...

Including the CFTC

Have a read. A rather strong reminder to the FCM's to be on top of this with their customers

London Traders Hit $500 Million Jackpot When Oil Went Negative

Regulators look into a small group of investors who got rich on the unprecedented drop.
By Liam Vaughan, Kit Chellel, and Benjamin Bain
4. August 2020, 06:01 MESZ Updated on 4. August 2020, 20:23 MESZ

On April 20 the price of a barrel of oil for delivery the following month plummeted $40 in an hour, settling at –$37. It was the first time crude had ever crossed into negative territory. Regulators, oil executives, and investors have struggled to understand how a commodity at the heart of almost every aspect of global trade had fallen so far that sellers had to pay counterparties to take it off their hands.

But for a small group of veteran traders at a tiny London firm called Vega Capital London Ltd., the mystery mattered less than the results: They pocketed as much as $500 million that day, according to people familiar with the matter, who spoke to Bloomberg Businessweek on condition of anonymity.

Vega’s jackpot, which hasn’t been previously reported, involved about a dozen traders aggressively selling oil in unison before the May West Texas Intermediate contract settled at 2:30 p.m. in New York, the people say. It’s a tactic Vega’s traders used regularly, according to another person familiar with the firm’s strategy, but that day its trading coincided with a period of unprecedented volatility, when demand for fuel was wiped out by the coronavirus pandemic, and storage space in Cushing, Okla., where buyers take physical delivery of WTI crude, had all but disappeared.
Now regulators at the U.S. Commodity Futures Trading Commission, the U.K.’s Financial Conduct Authority, and CME Group Inc., owner of the Nymex exchange where the trading took place, are examining whether Vega’s actions may have breached rules on trading around settlement periods and contributed to oil’s precipitous fall, according to people with knowledge of the probes.

Within 24 hours of the crash, the May WTI contract had bounced back to about $10 a barrel. And oil futures prices have continued to climb, with the active contract trading as high as $42.08 a barrel on August 4. But the plunge, however brief, created some big losers. They include thousands of Chinese and American retail investors who, lured by oil’s recent slump, had piled into instruments whose value was pegged to the contract’s April 20 settlement price.

Whether Vega’s windfall was a result of savvy trading, blind luck, or something else, the idea that a relative minnow could have such a profound impact calls into question CME Chief Executive Officer Terry Duffy’s April 22 declaration that the futures market had “worked to perfection.”

“The idea that the anomalies that day were a function solely of supply and demand is fanciful at best,” says Joe Cisewski, special counsel to Better Markets, a lobbying group that advocates for tougher regulation. “Oil producers, brokers, and other market participants have been sent into serious financial distress. Regulators need to objectively and thoroughly investigate what happened.”

Spokespeople for the CFTC, FCA, and CME declined to comment. The CFTC has said it’s looking to release a report on the crash later this year. Vega didn’t return emails seeking comment.

Prop-trading firms like Vega give independent traders access to the world’s exchanges, back-office services, and extra capital to trade with in exchange for a desk fee, a commission on every trade, and sometimes a share of any profits. In a trillion-dollar energy ecosystem dominated by the likes of BP, Glencore, and Royal Dutch Shell, prop firms are bit players.

Vega was started in 2016 by Adrian Spires and Tommy Gaunt, friends who’d worked together on the management team at another London prop firm, Tower Trading Group, before branching out on their own. In 2017 about 20 of Tower’s energy traders quit to join Vega, sparking a legal dispute that was settled out of court. Gaunt quit as a director last year, and Spires, 44, now owns all of the business. He left school at 18 to take a job in the trading pits of the London International Financial Futures and Options Exchange. Some of Vega’s traders spent time at the International Petroleum Exchange, buying and selling barrels of oil using hand signals, before commodities trading migrated from open outcry onto screens.

The firm has an office a short walk from Liverpool Street station, above one of London’s All Bar One pubs, which it shares with a group of mostly recent college graduates trading cryptocurrencies for another company also owned by Spires. But most of Vega’s traders work from home, according to people familiar with the firm, even more so since the U.K.’s lockdown came into force.

While more than two dozen individuals trade through Vega’s omnibus account, finding information about them is difficult. Only a few list Vega as their employer on LinkedIn. The company’s website has remained under construction since Vega was founded.

One oil investor describes the firm as something of a throwback to the days of the pits, when rowdy so-called locals made or lost fortunes before heading to the pub to celebrate their winnings or drown their sorrows. Many of Vega’s traders know each other socially, playing golf and taking ski trips. They also trade together during key periods to maximize their impact on the market, the people familiar with the firm say.

To understand how Vega wound up making so much money that day, it’s helpful to consider some of the idiosyncrasies of the oil market. Among the most popular ways to trade oil is Nymex’s WTI futures contract, which allows buyers and sellers to agree on a price for 1,000 barrels of light sweet crude for delivery at a future date. New contracts are released every month, and they settle at 2:30 p.m. on or near the 20th of the month.

Nymex also offers a corollary instrument called Trading at Settlement, or TAS, in which buyers and sellers agree to transact at whatever the settlement price turns out to be. The settlement price is based on a volume-weighted average of trades occurring in the two minutes before 2:30 p.m. While it might seem curious that anyone would agree to buy something without knowing the price, the TAS market is popular among exchange-traded funds and other funds whose mandate is to track the price of oil rather than to get the best deal. It was also central to Vega’s strategy.

One of the quirks of the oil futures market is that to take a long-term position, investors must keep buying new monthly contracts, then sell them before they expire and buy future months’ contracts, a process known as rolling. A significant proportion of the market’s participants are speculators with no interest in taking possession of any oil, so before each contract expires they have to close out any residual positions, creating a flurry of buying and selling.

In the lead-up to the April 20 settlement, rumors were circulating that there would be significant downward pressure on the May contract. The recent slump in prices had attracted bargain-hunting retail investors into funds that track oil, including the Bank of China Ltd.’s Treasure, a vehicle linked to the price of oil. To manage its position after the influx, Bank of China and the banks it uses to help execute trades needed to sell large numbers of the May contracts and buy June ones. Two weeks before the settlement, CME, which monitors market activity, issued a rare public warning that negative prices were a possibility.

On April 20, as Bank of China and others were selling May contracts, Vega’s traders were hoovering them up in the TAS market, according to people familiar with the matter, agreeing to buy oil at whatever the settlement price turned out to be. Then, as the settlement time approached, they aggressively sold outright WTI contracts and other related instruments, contributing to the downward pressure on the price. Vega stood to profit if it managed to buy oil through the TAS market more cheaply than the oil it sold through the day.

Vega’s selling collided with an exodus of buyers, and the May contract tumbled from about $10 at noon to zero at 2 p.m., then all the way down to settle at –$37. Oil’s dive into negative territory meant that Vega ended up being paid for many of the contracts it sold as the market was falling—and for all those it bought at the –$37 settlement price via TAS, locking in a huge profit.

Buying TAS and selling outrights before and during the settlement is a well-known strategy that dates back to the pits, according to market participants, but it carries considerable risk. Selling futures can quickly turn into losses if a bigger player shows up and starts buying. “It’s a big poker game,” says Greg Newman, founder of energy-trading firm Onyx Capital Group.

There are also rules that forbid trading with the goal of deliberately affecting the settlement. In 2008, Dutch firm Optiver was sanctioned by the CFTC for abusing the TAS mechanism and boasting about its exploits in emails. And in 2011 the agency introduced a rule prohibiting a practice known as “banging the close,” which it defines as trading heavily during the settlement period in one market to influence a larger position elsewhere.

But proving manipulation requires the government to demonstrate intent, which is difficult without incriminating communications such as text messages. And winning cases has been difficult, even with the new rules. “They’re not in any way slam-dunks,” says Aitan Goelman, a former head of the CFTC’s enforcement division and now a partner at Zuckerman Spaeder.

It seems unlikely that Vega’s traders could have predicted just how far oil would fall on April 20. Its selling that day met a whirlwind of other factors that spooked potential buyers and exaggerated all participants’ impact on the market. As a result, Vega’s traders made more money than they could have dreamed of—and found themselves in the authorities’ spotlight. That may explain why its traders, usually active on settlement days, weren’t active in May, June, and July, according to a person familiar with the firm’s trading. —With Jack Farchy

...
By the way the negative oil price number that is thrown around is not actually true because few contracts maybe 5-6 were traded at that price and then it was halted...

Uhh no!

"In all, 14,913 crude oil contracts exchanged hands at negative prices on April 20, according to CME data. In other words, on average, sellers were paying buyers to take oil off their hands at a rate of more than 31 million gallons a minute. May 6, 2020"

https://www.institutionalinvestor.com/article/b1lhy2h328jhpt/Inside-the-Biggest-Oil-Meltdown-in-History

I still remember reading article where people were suggesting best deal ever to rent oil tankers to store oil near zero and sell later after it recovers.

"In all, 14,913 crude oil contracts exchanged hands at negative prices on April 20, according to CME data.

since they only lasts minutes

And what we are talking about was what, 5 hours?

In all, 14,913 crude oil contracts exchanged hands at negative prices on April 20, according to CME data.

I think we're addressing different things. Time Negative vs Time of Reversal Bar.

It didn't trade positive again until 7pm at night, after the reopen.
So it was negative for the last 3hrs on the 20th and for the first 2hrs on the 21st.

Hence

to me means that 14,913 contracts traded negative over a period of 3 hours not minutes.

Pretty fascinating article

Yeah pretty interesting, in related news, it looks like a lawsuit has been filed alleging manipulation by those Vega traders.

Also looks like TD Ameritrade has been hit with a class action lawsuit regarding negative oil futures.

Reuters: United States Oil Fund faces possible SEC action: filing

All related to changing their 'investment philosophy' mutiple times in multiple days back when WTI went to $0 (and beyond!)

"The notice, known as a Wells notice, says SEC staff have made a preliminary recommendation against USO, United States Commodity Fund LLC and its chief executive officer, John Love, saying it may have violated securities laws related to misstatements or fraud, according to the filing."

Regulatory action overseas from FSC (Financial Supervisory Commission) - Republic of China. 12 FCM's held accountable and fined 5.1 million

https://www.fsc.gov.tw/en/home.jsp?id=54&parentpath=0,2&mcustomize=multimessage_view.jsp&dataserno=202009100015&aplistdn=ou=news,ou=multisite,ou=english,ou=ap_root,o=fsc,c=tw&dtable=News

John Lothian News :- Joel Fingerman of Fundamental Dynamics Weighs in on CFTC Oil Crash Report
An Analytical and Fundamental Response to the CFTC Interim Staff Report: Trading in NYMEX WTI Crude Oil Futures Contracts Leading up to, on, and Around April 20, 2020

https://johnlothiannews.com/joel-fingerman-of-fundamental-dynamics-weighs-in-on-cftc-oil-crash-report/

Good read. Love this chart, really puts the oversupply into perspective.

From Crude Thread.