The Essex Boys: how nine traders hit a gusher with negative oil
bloomberg.com
bloomberg.com
The open price is similar and (at least on some symbols) based on a short term auction right before open. Anyone with a data feed sees crazy stuff during those 2 periods.
Getting paid on both sides of your trade though is a special event for a trader.
Edit: or even better, do they publish an estimate of the auction price? I think nasdaq calls it the 'near' imbalance price.
You can also get a pretty good estimate of the closing price by watching the trade prints during the 2-minute settlement window, which the exchange publishes in real time.
WTI futures are 1000 barrels per contract. The trading range for the day was 58.17 dollars per barrel. Assuming they sold their TAS at the top, it settled at the bottom, and they bought their normal contracts evenly over the whole range, they made 0.5 * 58.17 * 1000 dollars per contract. That's 29085 dollars per contract (!). If they made 700 million dollars, then they turned over 24067 contracts. So they sold 24k TAS, and then whittled that position down to being flat. 24k seems like a rather big position for a firm like this.
The story does mention that they changed clearing firm after this happened. So perhaps their clearer had been lax about setting their risk limits properly, and after this happened, realised it was a near miss and tried to tighten it up, at which point they jumped ship.
>If the group had made $7 million that day instead of almost $700 million, they’d probably be celebrating. But the size of their winnings, coupled with their backgrounds—and political pressure to understand what happened—means that Vega has the attention of regulators.
Indeed...
All this money allows this people to buy many things, properties, services... Do our society can afford for all that in exchange of some luck?
There are limited resources and society have decided that these people deserve a big chunk of that resources.
Weird.
Whether or not we want to afford it is a different question.
Is that still an argument after the housing collapse of 2008? Far from mitigating risk it seems that risk was increased.
But its not. Zero sum has to do with the utility provided to each side of the transaction. I may have a completely different desire to own a future than you. Perhaps my portfolio needs less risk or my predicted oil needs have changed. In those cases I gain a lot of utility by being able to move out of the future into cash, even if later you make more than I would have by selling it.
Think of a pawn shop on a street corner. They trade by making markets, engaging in a zero dollar sum game. But it's absolutely positive sum in utility.
I could make the same claim that you've made about pawn shops as a reductio ad absurdum. That individual with second hand jewellery gained X dollars when they sold it to the pawn shop and the pawn shop lost X dollars. So it's zero sum. Although it isn't except in the most myopic sense (that of dollars). Transactions (on financial markets or otherwise) are always subjectively positively sum in utility and that's what matters.
Here's some examples. Suppose someone gets a terminal illness and needs to sell all their stocks to a willing buyer in order to get cash. It's zero sum dollars (just like every material transaction in the economy) but utility was gained, the person that needed the liquidity got it immediately and with near zero slippage. Other examples: The farmer that needs to hedge their crop yields, the airliner that needs to hedge oil prices, the gold miner that needs to hedge gold prices. The supply side and demand side of this equation gains utility from engaging.
> "There are limited resources and society have decided that these people deserve a big chunk of that resources."
As if society decided collectively to pay an unfair amount to a good/lucky trader. They took it from other market participants and not from average joe. My intention with my initial comment was to point out that it simply doesn't matter if one market participant has 600 million more than before, because others in the market lost it.
If I stumble across gold in the ground, quietly buy the land and start to mine it, I don't 'deserve' that gold. But I've got it, and the system of property rights is there to dissuade me from just taking it by force instead of buying the land first (or other people taking it from me once I've got it).
"In most countries of the world, all mineral resources belong to the government. This includes all valuable rocks, minerals, oil and gas found on or within the Earth. Organizations or individuals in those countries cannot legally extract and sell any mineral commodity without first obtaining an authorization from the government"
In the USA is not exactly liked that but "Property rights and mineral rights were originally tied to the land. The owner owned both. However, mineral rights and property rights can be severed, meaning the owner can sell one and keep the other. So, the original owner of your land may have sold the property rights to one person and kept the mineral rights or sold it to another person. By the time you bought the land, the mineral rights may have been sold already."
So you could be committing a crime by mining gold with only the property rights, you also need mining rights.
We have one where when the banks and people make bad decisions and get bankrupted with valueless contracts, the government save the banks, and the corporations and let common people go bankrupt.
It's more like this is how reality is. You've probably never been a trader, most traders lose their money, it's an extremely risky profession. For every win you hear about there are at least 10 losers.
At the end of the day the activity of traders readjusts the asset prices on ongoing basis closer to their true valuation. The more trading occurs the more precise the price is. Without enough trading activity an end user might be forced to overpay for an asset.
And besides, the majority (if not all, given Volcker restrictions) of sales and trading is from market making, rather than risk taking / directional punts on the markets.
I'm not trying to pick on Goldman. They were just an example of a large institution that makes huge amounts of money by doing exactly what these guys did. Betting against the market is absolutely routine behavior.
As for Goldman, do you really think they are clearing 100 million a day by being market neutral and just collecting premiums? When they buy/sell it absolutely moves the markets just on the sheer volume.
“Do you know how naive you sound, Michael? Presidents and senators don't have men killed.”
“Oh. Who's being naive, Kay?”
https://www.goldmansachs.com/s/2012annual/assets/downloads/G...
I was just contrasting that large institutions can short the market and easily move price due to the volume they trade at without being investigated but there is outrage when handful of random guys do and the price collapses.
That would be seen as extremely naive by any commodities trader I’ve met, given physical delivery is almost always viewed as a worst case scenario in trading.
This feels like one of those situations where sophisticated insiders just get to skin new money. Those lessons happen everyday in the markets but these days the VaR is crazy high.
https://archive.is/33zf6#selection-3201.1-3205.1
>>>> “It didn’t occur to us” oil could go negative, A’Xiang Chen, a 26-year-old investor from Shenzhen, told Bloomberg News.
https://archive.is/XBP6v#selection-2457.0-2478.0
>>>> Thousands of miles away, in the Chinese metropolis of Shenzhen, a 26-year-old named A’Xiang Chen watched events unfold on her phone in stunned disbelief. A few weeks earlier, she and and her boyfriend had sunk their entire nest egg of about $10,000 into a product that the state-run Bank of China dubbed Yuan You Bao, or Crude Oil Treasure.
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I guess that's exactly the part about regulation that would normally prevent people from doing these things without having full understanding of the consequences. Obviously to your point, though, it does sound like the fund managers of that fund didn't exactly have their act together, either.
Especially because there apparantly a warning 17 days earlier that negative prices were a.possibility. A tourist trader might not follow industry news well enough, but I would think outfits like the Chinese firm that lost everything would be a bit more savvy.
Couched in these terms, it's really difficult not to think of trading as a sort of game. What are these rules, why is breaking them a bad thing, who set them up, and why is foul play suspected and investigated with aplomb when relative small-timers make out like bandits but not when big establishment institutions drop the ball to the tune of "generalized economic ruin"?
(Massive Multiplayer Online Role Playing Game)
It is always surprising for me to discover that there are people that debate about that. Or more so comforting to understand my competition is not that competitive.
Source: former hedge fund trader
I'm not sure exactly what these traders are suspected of doing, the article is rather scant on details.
I don't care they couldn't pronounce a 'th', that they go on holiday in Marbella, or that they consume conspicuously.
The writer would probably say this is to inject colour, but it comes off as class condescension.
1. They bought via TAS, but that's a promise to buy futures, no? So it's a promise on a promise?
2. They sold futures over the course of the day.
3. With a negative price, they bought futures again at the end of the day.
Where did they get the futures from, they sold in point 2? Seems to me they did not have them yet, so they could only sell promises of promises again, so why was someone buying at that moment's price instead of buying at the closing price?
> 1. They bought via TAS, but that's a promise to buy futures, no? So it's a promise on a promise?
The TAS contract is a future itself to buy actual oil, but at a price determined in the future. The holder of the TAS ends up with physical oil, just like any other future.
> 2. They sold futures over the course of the day.
Selling a future is providing a place for the oil that you're going to end up with to go. Futures traders often don't want the actual commodity, so if they commit to buy something, they have to also commit to selling it to someone else. The trick is to buy low, sell high.
I don't think there's any "future-on-a-future" thing here, it's just straightforward futures arbitrage. What makes it special is the mechanics of the TAS contract, which effectively means you're contracted to buy/sell oil at a price you don't know yet.
If you buy one of these oil futures then you are required to receive a certain amount of a certain kind of crude oil at Cushing, Oklahoma on a certain date after expiration. You don’t pay anything at that time as you already paid for the oil by buying the future. Likewise if you sell a future then you are required to deliver a certain amount of oil to Cushing, Oklahoma, and you were already paid when you sold the future. In this sense it is quite reasonable to hold a negative position in a future (you can have a negative position in a stock too but this requires selling short—you need to first borrow the stock from someone else).
One thing to note is that futures are fungible: because the contract doesn’t say who you have to give oil to, you can sell a future at one price and buy it at another price and the two sides of the contract cancel out and you have no obligation to move any physical oil around. Most market participants cannot take or deliver physical oil and so they will make sure they get their position to 0 before the futures expire.
It’s a weird question as to when futures are created. The invariant is that the total of everyone’s position is 0, so every obligation to deliver oil is matched by an obligation to take delivery, and you can then say that the number of created contracts is equal to the sum of all the positive balances, and each trade either creates or destroys futures depending on how the balances change.
Also, any suggestions on good books to learn more (not necessarily to start trading in futures, but just to understand the market dynamics)?
The unusual part of this scenario is that contracts were expiring (it required someone to take actual inventory) so prices at settlement went negative. So when they "bought" to cover their shorts at settlement they were paid to do so.
1. Sell futures contract At $15 (bearish position)
2. Buy futures at TSA when it’s negative - an equal amount to the ones u sold- to cover the futures you initially sold
So basically they sold the contract earlier in the day for a higher price and then and covered their position at a much lower price.
Assuming I’m correct: My question is, doesn’t this require margin? If so, how much? What was their initial cash position?
My basic maths implies they sold - and bought - 10k lots, which is 10m barrels. So a huge position.
That’s not supposed to happen. Your hedge should cost you profit but because of oil going negative both sides of their trade were profitable.
> Here’s how it works: Imagine a trader sees that WTI is at $10 and predicts it’s going to end the day at $5. To capitalize, he buys 50,000 barrels in the TAS market, agreeing to purchase oil at wherever the price ends up by 2:30 p.m. At the same time, he starts selling regular WTI futures: 10,000 barrels for $10 and then, if the market is falling as predicted, 10,000 more at $9, and again at $8. As the settlement window approaches, the trader accelerates his selling, offloading a further 10,000 contracts at $7, then another chunk at $6, helping push the price lower until, sure enough, it settles at $5. By now he is “flat,” meaning he’s sold as many barrels as he’s bought and isn’t obliged to take delivery of any actual oil.
> The trader’s bet has come off. His profit is $150,000, the difference between what he sold oil for (50,000 barrels at prices ranging from $10 to $6, for a total of $400,000) and what he bought it for in TAS contracts (50,000 barrels at $5 a barrel, or $250,000). All of this is perfectly legal, providing the trader doesn’t deliberately try to push the closing price down to an artificial level to maximize his profits, which constitutes market manipulation under U.S. law. Manipulation can result in civil penalties such as fines or bans, or even criminal charges carrying a potential prison sentence of up to 10 years. It’s also illegal in the U.S. to place trades during or before the settlement with “intentional or reckless disregard” for the impact.
What surprises me is that this can be considered illegal due to “intentional or reckless disregard”, which seems like an extremely subjective thing to evaluate. Are our regulations really written in this manner?
I'm also unclear on if such trades SHOULD be considered wrong. Take this quote from the article concerning another organization that was investigated for illegal market manipulation:
> Email and phone records showed Optiver’s traders talking about trying to “hammer” and “bully” the settlement after accumulating TAS. Such clear-cut evidence of intent is rare.
Why is "intent" important? Isn't it rational to try to "win" in a psychological game of price-prediction/setting where all the participants are adversaries, in a way? Isn't every consideration of a potential trade an act of "market manipulation" to some extent? What makes it problematic - is it collusion?
Anyone have a TLDR?
I'll happily tell you that there appears to be no evidence of manipulation, so you can avoid reading an article that doesn't interest you, but I don't think it's fair to call it a buried lede.
This part is very routine. The unusual thing is that the price actually went negative so when they "bought" to cover they were actually paid nearly $40. So they profited both off the short position and again to buy to cover.