London traders hit $500M jackpot when oil went negative
bloomberg.com
bloomberg.com
Matt Levine from Bloomberg explained it.
Here are some excerpt
> One fairly technical explanation that we discussed was the “trade-at-settlement” mechanism. In oil futures, you can do a TAS trade in which you agree, at some point during the day, to buy or sell oil futures at that day’s closing price, plus or minus a few pennies. So at 11 a.m. you can agree “I’ll sell futures at 2:30 today, at whatever the settlement price is then.”
...
> Here is one really dumb simple way for that to work. You buy 1,000 futures via TAS during the day. You conclude that a lot of people are selling and no one is buying (except you). You think, well, okay, I have to sell 1,000 futures before 2:30, because at 2:30 I am going to get 1,000 futures at whatever the price is then. So you start selling. You sell 100 futures at $10, and the price goes down. You sell another 100 at $5. You sell another 100 at $0. You sell another 100 at -$5. Et cetera; you keep selling—into very thin liquidity, because there are not a lot of natural buyers—and the price keeps going down. By the time you are done, it is 2:30 and the price is -$37.63. The average price that you got, selling your 1,000 contracts, was, say, -$15: You started selling at +$10 and finished at -$37.63 and averaged your way down. But then at 2:30 you buy 1,000 contracts—the contracts you prearranged to buy using the trade-at-settlement mechanism—for -$37.63. You paid people an average of $15 to take oil off your hands, and people paid you $37.63 to take oil off their hands, and you made an average of $22.63 per barrel moving the oil.
[0] https://www.bloomberg.com/opinion/articles/2020-08-04/some-p...
Both entertaining and educational.
https://www.npr.org/sections/money/2013/07/09/200401407/epis...
Lots of functional market participants, e.g. oil refiners, don’t precisely time their trades. Their jobs don’t reward getting the best price at a given second. But they do reward getting cheap trades and punish getting the worst price in a day.
One solution is to trade at a standard future price. “Give me the closing price and a 50% commission cut” is a common order. In some markets it can be the dominant order type. That causes low liquidity during the day and lots of it at a single instance: the close.
These oil markets close at 2:30PM. Say a bank got an order, at Noon, to sell at the close $1bn of oil. It’s 12:01PM and oil is at $15. The bank could wait until the close and trade all $1bn. The bank makes its commission. But there is a risk the whole amount won’t be able to be sold at that instance. In that case, the bank would be left holding the bag for the balance. So it hedges.
At 12:30 it sells $100mm. This nudges the price to $10. The bank sells another $100mm. Price moves to zero. Bank sells another $100mm. Price goes to -$10. Bank sells another $100mm, thereby paying to offload oil. Price moves to -$20. By the time the close comes around, the price might be -$25. The bank pays its blended price, which may be -$10. But the customer paid -$25, so the bank makes 15.
In the equity markets, this is addressed with VWAP [1]. The volume weighted average price at which the stock traded during the day. More difficult to game. But more expensive to implement and thus execute.
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.
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 big position in an illiquid stock ramping the stock before their reporting period ends).
But yeah, all the people involved with this trade were locals in London, and every local I have ever met has these "scams". London's forex market is huge, and the stuff that used to happen at the fix was legendary (I don't know how much business is done at the fix today, I used to know a big institutional trader, and all he talked about was rigging the fix...no, it wasn't illegal).
https://www.investopedia.com/articles/forex/031714/how-forex...
I can confirm that not only was rigging the fix common, it was so common that there was (is?) a blacklist of institutions whose trades would be discounted when figuring out what the price of each currency should be.
That is, the people who were responsible for calculating the spot FX rates knew there were enough people trying to game the system that the software was designed to mitigate that as far as possible. To a large extent, they even knew who those people were (by no means all were UK-based).
And then the Libor scandal comes along, and everyone's like "oh noes... who knew there was manipulation and collusion!". Hmmm...
One way of facilitating this demand has been the introduction of trading-at-settlement (TAS) orders. TAS allows market participants to buy or sell relative to the daily settlement price before that price has been determined. Over the years, TAS has been associated with several efforts to artificially influence the settle. Exchanges respond to these signs of manipulation by stating that such trading activity will be subject to disciplinary action. But why does an exchange even offer an order type that at the very best can be used as a tool for market participants to walk away from their responsibility to negotiate a fair price?OIL closing was bullshit, though
https://www.cmegroup.com/content/dam/cmegroup/rulebook/NYMEX...
200109. ALTERNATIVE DELIVERY PROCEDURES
A seller and buyer matched by the Exchange under Section 105.E. may agree to make and take delivery under terms or conditions which differ from the terms and conditions prescribed by this Chapter. In such a case, clearing members shall execute an Alternative Notice of Intention to Deliver on the form prescribed by the Exchange and shall deliver a completed and executed copy of such notice to the Exchange. The delivery of an executed Alternative Notice of Intention to Deliver to the Exchange shall release the clearing members and the Exchange from their respective obligations under the rules of this Chapter and any other rules regarding physical delivery.
In executing such notice, clearing members shall indemnify the Exchange against any liability, cost or expense the Exchange may incur for any reason as a result of the execution, delivery, or performance of such contracts or such agreement, or any breach thereof or default thereunder. Upon receipt of an executed Alternative Notice of Intention to Deliver, the Exchange will return to the clearing members all margin monies held for the account of each with respect to the contracts involved.
A retail broker will either not let you trade these contracts, force close the trade, make you retender, or cash-settle (or charge an equivalent bill to handle all the logistics in an extreme case). You are not going to have physical settlement unless you make prior arrangements with your broker and show that you can even accept them in the first place, but that's extremely unlikely at the retail level.
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.stackexchange.com/questions/47421/have-any-...
"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.
That's like asking an electrician if 120v will kill you. Maybe if you use it wrong enough but odds are it's just going to be unpleasant.
Yeah, that was cited about a gajillion times back in May.
> Vega’s jackpot involved about a dozen traders aggressively selling oil in unison before the May West Texas Intermediate contract settled at 2:30 p.m.
I think it's safe to say the traders deliberately affected the settlement price. Granted they took on a lot of risk, it was still deliberate. Now the question is can that be proven, and was it deliberate enough?
There's a scene in one of my favourite movies Margin Call
"I'm well aware of the fucking time Sam, I'm telling you, you need to see this"
"See What? Email it to me"
"I don't think... that that would be a good idea...."
"I'm on my way"
>Senior RBS Yen Trader: its just amazing how libor fixing can make you that much money
https://www.bbc.co.uk/news/business-21358362
And these messages weren't using some burner phones found in a raid, these were messages through their bloomberg terminals.
Then of course there are funds that just buy these futures, hold them for a while, sell them shorty before delivery and use that money to buy fresh futures. That way they can have a fund that closely tracks the oil price without having any physical infrastructure.
The catch is that at some point the oil turns real. So if you own oil bound for Rotterdam but can't actually receive any oil, you have to sell to someone who can take the delivery. If nobody wants the oil you might have to pay money to have someone take the oil, effectively creating a negative oil price.
https://www.bloomberg.com/opinion/articles/2020-08-04/some-p...
The gains you're talking about are tiny compared to the massive write-downs at oil companies.
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.
I don't know for sure, but my hunch is that it's insignificant in terms of extra carbon emissions.
Blaming retail investors is a very common trope of the financial markets recently. Truth is there just isn't that much retail fire power.
To your point: look at the USO roll schedule on the day the futures went negative you would have noticed that they were basically done 75 percent into the next month in the days before.
So we're now talking about a few 100 million USD exposure in the front month due to uso that needs to be rolled. That can't be the one to blame...
But those aren't going to be the losers. Oil producers typically sell their future contracts immediately to lock in a good price. Likewise, oil consumers are typically going to be buying oil futures early, hold them until they expire, and take delivery. In either case they're not going to be affected by the price going negative on the day of expiry.
Also, if two people make a bet, and one person wins, is that theft?
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 the market.
It's not for you to judge whether the $40 is "worth" $40. It is.
The situation in the oil trading story is the same, in essence. It is "worth" $500M. Unless the traders intentionally manipulated the prices, which may nor or may be true. The same scenario could play out either way. So it could be that such a trade is worth $500M.
$500M may sound like rich compensation for this type of work, but everybody's compensation is determined by supply and demand, i.e., the rarity of people who can perform that work, and its utility. [1]
(There was also a lot of risk involved, and capital allocation is how a market economy coordinates its activities, but that feels too big to get into here.)
When you accuse honest people of theft, that's nasty. That's probably why you are being downvoted. Then again, people also get downvoted unfairly all the time, so who knows.
[1] Well, except when the government alters the curve. For instance, $500M can pay for 14,000 American teacher-years. But the government forcibly operates an education cartel and artificially holds down the salary of teachers. They are certainly worth far more than the $35K a year I used in that calculation.
> 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.
Type A is when all the players in a basketball game are the same height.
Type B is when all the players in a basketball game play by the same agreed-upon rules (i.e. don't cheat).
Trying to eliminate Type A fairness from the world is not in anyone's self-interest, except (maybe) the people who are extremely low in the hierarchy of wealth/earning power. (But I think they would be better served by climbing the hierarchy than trying to make the world type-A fair.) This is quite a claim that I won't try to justify here; just think about it.
Type B fairness is in the interest of almost everybody. If you think you can cheat successfully, you may be against Type B fairness. But that's foolish. Creating a rigged system in one game opens up the doors for others to rig the systems in the games where I don't have an advantage (or cannot sustain the cheating advantage). For instance, Republicans in power now are undermining property rights, and that will hurt them more than it helped when they are out of power. Even if there are a few people who can get away with this (e.g. if you are an elderly Republican who is about to die maybe you don't care), the rest of us should reign these people in, as we are the majority.
If we want, we can call these two types egalitarian-fairness and rule-fairness.
Going back to oil trading: it may or may not be Type B fair. It probably is fair, though, because there aren't many rules in trading. The regulators try to create some rules, but few of those (if any) are actually recognized as real rules by the players; rather, they are obstacles. If you can get around them, you're just a better player of the game. (I'm not a professional trader, but that's my assumption about most of what goes on in trading; a professional trader may be less cynical about it.)
If you break a real type-B rule, you are cheating if it's a game and committing fraud if it's business. However we judge that, it's in the interest of the majority to punish that, to dis-incentivize rule-breaking.
That in itself is ok, but you need a compelling argument as to why the two ideas of theft are equivalent or at least similar. And you haven't provided any argument let alone a compelling one.
The point of an internet forum is to debate ideas on their merits (in the best case). Asserting something not generally accepted, without argument, tends to annoy people because you're not even attempting to convince people of your idea's merits, which is the entire point of the game.
Its not that you're wrong, its that you didn't try to convince people you are right.
That currency is only used by people in a small island, and that island only exports clamshells and imports Big Macs.
In this scenario, and unless I’m mistaken, the FAKE/USD rate will vary depending on: - how much clamshell those people can export and how much US people value them - how much BigMacs those guys import and how much those guys value them
Enters a day trader - someone who will never buy a Big Mac nor any clamshell. The guy speculates and there are two possible outcomes :
- He fails. Technically he basically gave “value” to either USD holders or FAKE have holders. Too bad for him, but he kinda made this happen.
- He succeeds. Now what? Isn’t that kind of a parasitic behavior? Couldn’t that be considered theft to some extent?
I guess the question may boil down to “why would they even let the day trader be part of this?”.
If you think that is theft then I don't know what to tell you.
Though I guess it might be hard to deceive an entity that is literally everywhere.
why is it "too bad for him" when he loses (to the people he gave value to), but "theft" when he takes value from the people? That's just a double standard.
And you also mis-understand derivatives trading's purpose - to offload risk to a third party that is willing to take it.
My point of view is that the trader willingly entered the market with the sole intent of trying to make a profit, whereas the other two just wanted to actually trade goods.
Which is why the situation is asymmetrical in my opinion, and why the way we judge it could be as well.
They wanted to trade excess goods, in other words, unrealized profits, for something usable to them to realize the profits of their labor.
Everyone's intention is to profit, that is the reason you sell to the market.
It shouldn't be surprising when one of these parties isn't trusted by the other two...
It's essentially scalping. Do you trust the people who buy concert tickets in advance and sell them to you at a 100% markup? They're serving the exact same role in society as these market players. No one likes them for a very good reason.
One party produces oil and a second party consumes oil, but those events do not occur at the same time. A third party 'stores' the oil meanwhile and charges for it. You are welcome do it for free, I'm sure you'd be a hero to society.
There are two ways to make money as a pure market player: connecting buyers and sellers who wouldn't trade directly (and taking your cut) aka arbitrage, or getting paid to take on risk. Maybe the trader notices that people on the far side of the island are hungry but can't get a big mac without a long walk, so he buys as many as he can carry, walks over to the other side of the island, and sells them for a bit more than they'd cost on the dockside - that's the first kind of trading. Maybe a clamshell farmer wants to make sure they can afford enough big macs over the next year. They might agree to sell their next year's clamshell harvest at a fixed price (that's lower than the average), or buy their big macs for the next year at a fixed price (that's higher than the average), or both; the farmer loses value on average, but they offloaded their risk, while the trader makes money on average but has to carefully manage their risk.
The third thing is to actually take an active position in the market, if you can predict what's coming. E.g. if you realise the clamshell harvest will be big this year, maybe you sell a bunch of clamshells short. That should send a useful signal to all the farmers, and it means you make money if you predicted right.
Same thing with Tesla shares, or whatever it is. If you can create more Tesla shares its not zero sum (which is done often).
Currencies too are printed when needed. About the only thing really zero sum are some cryptocurrencies.
You could argue in some way that it is zero-sum, but if the price goes down and oil companies don't pump oil out, they don't really lose anything - especially with derivatives as it is on a future outcome.
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.
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 zero-sum, so much pressure is pent-up trying to maintain that non-zero-sum peg that the system begins to crack and they have to re-peg it. Which happens often with pegged currencies.
This does not mean there are no winners and losers, personal finance is of course not a zero-sum game. And because the adjustments are not instantaneous there is a lot of room to profit if you know what is happening, which gives the impression of it not being zero-sum.
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.
> You would have thought printing 6 trillion would have changed something but not really.
I know these are crazy times, but that money did something: it delayed the inevitable by keeping alive zombie companies that should've gone bankrupt the minute the crisis started, if not before. The whole point of printing 6 trillions was to maintain the status quo, not change it, to maintain it and not face economic reality. It didn't work 100% as a lot of that money went directly into assets such as TSLA, AAPL and HTZ(??), some of it went to gold and bitcoin and a lot of it went into bribes and corruption, which prevented companies who could've used that money to stay afloat for a few more months to do so. But because it's a zero sum system it will crash eventually, just that for now it appears to be holding if we stay completely still and don't make any sudden moves.
However, the net supply of derivatives (such as options, forwards, futures) is zero.
so we believe, but yes.
also CDOs have entered the chat
it does follow that a and then b could have made more profit by not lending or selling, but it is far from zero-sum.
Some of the market participants were effectively insuring others against the price of oil dropping too low.
Its a game that people play and there are winners and losers, but if everyone willingly enters then it is not theft.
It could be considered legalized gambling I guess but everyone involved is a gambler.
Marx didn’t like the idea because he said it presupposes that property exists, which he obviously had a problem with. Fun fact, this disagreement was the primary conflict that split the IWA into seperate anarchist and Marxist movements. With the anarchists later going on to adopt national socialism, which at the time was known as fascism.