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London traders hit $500M jackpot when oil went negative
- dmarlow 6y agoI 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.
- fnord77 6y agoIt seemed like every retail-trading angle was a losing proposition.
- tomc1985 6y agoIdunno, my oil ETF shares are still up 40% from March so..... OIL closing was bullshit, though
- arawde 6y agoThat's what you get with an ETF consisting of futures contracts...
- arcticbull 6y agoIt’s hard to find an equity that’s not up 40% since March lol —- the S&P is up 43% so that’s technically, shockingly a market underperform, and a bunch of tech companies are up 200% or more.
- tomc1985 6y agoYeah, though my outlook on oil is longer-term than current market trends. Don't worry I loaded up on tech stocks too
- arcticbull 6y agoI'm long oil too. There were a lot of great deals to be had back in March.
- justinzollars 6y agoThere was a risk you would have to take physical delivery.
- manigandham 6y agoNo retail trader is going to take delivery. The contracts would be forced closed or cash settled.
- totalZero 6y agoThe exchange cannot simply cut a break to a trader for being a retail speculator; that's not how these NYMEX futures work. A brokerage might be able to help a customer buyer by settling the delivery itself, but settlement other than physical would require consent from the matched seller. (There exist other oil futures that are cash settled.) https://www.cmegroup.com/content/dam/cmegroup/rulebook/NYMEX/2/200.pdf 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.
- manigandham 6y agoIt's not about the contract, it's about the trade and brokerage. 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.
- wodenokoto 6y agoJust 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.stackexchange.com/questions/47421/have-any-financial-traders-gotten-a-large-shipment-of-a-commodity-sent-to-themse https://skeptics.stackexchange.com/questions/47421/have-any-...
- gadders 6y agoThere 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-i-tried-to-buy-some-crude-oil 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.
- throwaway0a5e 6y ago>"Could a barrel of crude really kill me?" I asked a petrochemical engineer 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.
- Anther 6y agoThank you for that link. It gave me a good chuckle. I work for a lab that analyses air samples. H2S is indeed interesting stuff.
- brazzy 6y ago> I remember reading a funny story about this stuck-up senior trader who ended up having to take delivery of a shipment of coal. Yeah, that was cited about a gajillion times back in May.
- bitxbit 6y agoInterestingly enough crude options went zero bound for nearly half a day before market makers started to realize their quotes were off. One of the most thrilling experiences trading in a very long time.
- neonate 6y agohttps://archive.is/2yDfi https://archive.is/2yDfi
- FabHK 6y agoMatt Levine's take (author of the Bloomberg column Money Stuff): https://www.bloomberg.com/opinion/articles/2020-08-04/some-people-made-money-on-negative-oil-prices https://www.bloomberg.com/opinion/articles/2020-08-04/some-p...
- Ecco 6y agoI 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...
- MattGaiser 6y agoA lot of people gambled and they won.
- ClumsyPilot 6y agoYoun are kindsupporting his proposition - that nothijg evonomically productive has happened. Of trading is a zero sum game, liek OP is proposint, their winning just take from other parts of ecobomy
- Ecco 6y agoYeah, I understand the “when people gamble most will lose and someone will be lucky”. But the big difference I see in this case is that many legitimate businesses work with crude oil so not all of those people are gambling / willing to gamble.
- gruez 6y ago>But the big difference I see in this case is that many legitimate businesses work with crude oil so not all of those people are gambling / willing to gamble. 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.
- Ecco 6y agoI’m fine with the downvotes - I understand it can be a controversial opinion. But I’d love to get some more detailed feedback!
- kaycebasques 6y agoThere's an episode of MacroVoices that was recorded in real-time as prices were going negative. You can hear the pain in Erik's voice as he realizes how much profit he missed out on.
- tus88 6y agoSo which traders lost $500M?
- arcticbull 6y agoCommodities trading like this isn't really zero-sum like, for instance, options trading or equity futures trading. Oil producers who had a giant backlog of oil and nobody to sell it to (and full storage) were paying people to take it off their hands that month. Some enterprising folks were able to find some storage, hold on to the oil until the next expiration date, and were rewarded to playing a role in the market.
- hogFeast 6y agoEr no. It is. The losers were Chinese banks/investors. Chinese banks created a ton of financial products linked to oil futures, they didn't know what they were doing and left it to the last minute to roll (afaik, none of the products in the US blew up).
- rsuelzer 6y agoUSO blew up. The held 25% of all the negatively priced contracts at close. The crux of this story is that investors piling into these ETFs created a massive sell side pressure at the close which this hedge fund found a way to arbitrage.
- hogFeast 6y agoThey didn't blow up. Blow up means lose all the money. Afaik, USO weren't trying to roll their whole book that day (the exchange put out a notice a month or so before telling people to roll...as the article says). The Chinese banks were literally attempting to roll the whole fund and investors lost 100% (afaik, they lost more than 100%...the sum I have seen is a loss of 200%+).
- anonu 6y agoJust false. USO didn't "blow up". It's still very much trading and operated as expected. 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...
- anonu 6y agoThe 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.
- hogFeast 6y agoIt 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 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).
- lbotos 6y agoFor those that are curious about the fix that hog speaks of: https://www.investopedia.com/articles/forex/031714/how-forex-fix-may-be-rigged.asp https://www.investopedia.com/articles/forex/031714/how-forex...
- gadders 6y agoAlso, Local = trades with their own money, rather than working for a bank or other financial institution.
- sloucher 6y agoI worked on the computer system that determined what the spot FX rates were at the "fix". This was almost 20 years ago, I guess. (Crazy to think how many trillions of dollars were touched by my contribution). 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...
- gigatexal 6y agoAwesome now they can afford to pay London rents. :-D
- sprusemoose 6y ago#hurts
- pauljurczak 6y agoDoing God's work their every waking hour.
- jb775 6y ago> There are also rules that forbid trading with the goal of deliberately affecting the settlement [price] > 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?
- Traster 6y agoThe funny thing about these stories is that it probably can be proven, and the reason for that is that there's quite likely a text or an e-mail from some cocky idiot saying "We could make a tonne if we push the price down" or "Man I can't beleive we managed to push the price to -37, we're going to make a killing".
- dageshi 6y agoI get the impression traders very deliberately don't put things like that in email explicitly so it can't be proven. 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" https://youtu.be/W7Jqwpnw9Lo?t=23 https://youtu.be/W7Jqwpnw9Lo?t=23
- Traster 6y agoYeah, that's the smart hollywood impression of what would happen if people were thinking, but often it looks more like this: >Senior RBS Yen Trader: its just amazing how libor fixing can make you that much money https://www.bbc.co.uk/news/business-21358362 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.
- jb775 6y agoGreat movie
- truckerbill 6y agoNo discussion here about the environment. This indirectly fuels demand.
- sgt101 6y agoHow so?
- truckerbill 6y agoAny 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.
- fauigerzigerk 6y agoNo, I don't believe that. If anything, oil prices becoming extremely volatile hurts the oil & gas sector. It makes investment in real production capacity less attractive, more risky and more difficult to finance. The gains you're talking about are tiny compared to the massive write-downs at oil companies.
- truckerbill 6y agoI agree with you there, overall the situation isn't completely bad news. The only thing better than volatile is a fully downward trend however. I guess I'm just arguing that we owe ourselves a bit of moral decisionmaking rather than just continuing to believe in the providence of the Invisible Hand. These guys weren't doing this for the sake of the environment.
- londons_explore 6y agoBecause 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.
- person_of_color 6y agoCan someone ELI5 how energy trading works? I understand stocks, where you earn a portion of the company in return for dividends/capital gains, and options, where you bet on the underlying movements on stocks. But how does this work?
- wongarsu 6y agoSay you own oil that will arrive in the port of Rotterdam in a month. You can sell it now, delivery date in a month. It's now essentially a virtual good that can be traded, but becomes physical in a month. Somebody who owns a refinery might buy it because they think prices will rise; or someone might buy it to sell it half a month later, allowing them to trade on the price of oil without going through the hassles of storing actual oil. 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.
- zahma 6y agoI'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.
- bko 6y agoIf I understand it correctly, you agree to buy something at a market price at a given time. Then you sell until that point, driving the price down and essentially exiting the trade at the same time. 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-people-made-money-on-negative-oil-prices https://www.bloomberg.com/opinion/articles/2020-08-04/some-p...
- sukilot 6y agoThis seems to work regardless whether prices are positive or negative.
- amelius 6y agoWhat scares me is that someone with $100M would (with only a little imagination) have an incentive to buy a biological lab, start a pandemic and make $500M. But perhaps I watch too many movies ...
- brutt 6y agoYou can bribe Russians for $100 and save $99 999 900.