9 ms·
> 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 -
by elliekelly 7y ago
> 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 absolutely crazy and close at a price that has no economic justification,” Peterffy said. “The issue is whose responsibility is this?”
It’s pretty well known that commodity futures contracts are a game of hot potato for most investors as the expiration date approaches. But the Interactive Brokers CEO doesn’t offer an alternative solution. How would the contracts be structured instead that would avoid this? I don’t see how it would be possible.
- wbl 7y agoFinancial settlement against a spot market in a large port.
- curiousllama 7y agoCash settled contracts exist. These people just chose not to buy them. The question is how to structure physically settled contracts. After all, oil needs to get delivered to someone at some point.
- AnimalMuppet 7y agoIf you get into the market for physically settled contracts with no intention of taking delivery, then you're almost certainly a speculator. I'm not sure that it's the market's job to make that safer for you. I am not justifying inaccurate pricing. Burning speculators is fine, but give everyone accurate information.
- vardump 7y agoOr possibly someone who needs large amounts of oil and want to hedge against fluctuations? Freight industry, airliner, etc.
- AnimalMuppet 7y agoIf you need large amounts of oil, then either you plan on taking physical delivery, so you can just let the contract expire, or you don't plan on taking delivery of that oil, in which case you want cash settlement contracts.
- tempestn 7y agoThat would seem counter to, "with no intention of taking delivery," from your parent's comment.
- CydeWeys 7y agoAirlines buy futures in Jet A or Jet A-1. They have no interest in crude oil because they aren't refiners and they have nothing to do with it. The freight industry will similarly buy futures in bunker fuel, diesel, or whatever exactly they use to fuel their vehicles. Again, they're not refiners and have no use for raw crude. It's the oil refiners that buy futures in crude. Well, them and speculators.
- centimeter 7y ago> Airlines buy futures in Jet A or Jet A-1. They have no interest in crude oil It doesn't matter. Airlines absolutely buy crude futures to hedge against changes in fuel cost. It might be impossible to buy futures in the exact good you need, or it might be too expensive due to illiquidity and slippage. It's like how beer manufacturers buy aluminum futures even though they almost never take delivery on the futures. They're just going to buy the processed aluminum from their regular processed aluminum supplier, but they can still hedge some of the price changes with the easily available physical aluminum futures.
- CydeWeys 7y agoThere are jet fuel futures. If they speculate on crude and then jet fuel itself goes up because e.g. a big jet fuel refinery blew up, they're screwed, because the crude future didn't actually hedge against the specific problem they're facing, and now they have to pay a lot more for jet fuel. Or it could be any other problem that specifically affects jet fuel but not crude in general. Anyway, as usual, Wikipedia has a relevant article, and it seems that airlines do both: https://en.m.wikipedia.org/wiki/Fuel_hedging https://en.m.wikipedia.org/wiki/Fuel_hedging
- centimeter 7y ago> 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).
- AnimalMuppet 7y agoWould you list some of those reasons, instead of just making the bare assertion?
- deleted 7y ago[deleted]
- centimeter 7y ago* 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.
- TuringNYC 7y agoThese futures contracts are for delivery at a specific location. What if you just dont want a million barrels 2000 miles away? Cash settled seems a lot more flexible for lots of industrial use.
- evanpw 7y agoThe contract is for a particular kind of crude delivered at a specific location. Most hedgers would still be better off closing the futures contract and taking the delivery they actually want instead.
- defen 7y agoWTI (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.
- mathgenius 7y agoICE 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 https://www.theice.com/products/213/WTI-Crude-Futures
- defen 7y agoRight, 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.
- TuringNYC 7y agoCurious -- did they settle at a price where holders had to pay up on the below zero spot?
- akiselev 7y agoI've only recently started learning about how trading works in depth so I'm probably way off, but isn't he just avoiding the obvious answer? The broker and the clearing house. I thought that's a large part of why we have them? It just so happens that counterparty risk includes handling of massive amounts of physical goods so they'll have to charge larger commissions to cover the additional risk on the contracts. It would probably reduce the number of speculators at the same time, reducing the risk of this happening to begin with.
- brazzy 7y agoWhen the price mayhem was happening there was a discussion here on HN, and someone claimed that brokers would either never let retail investors handle contracts with physical delivers, or forcibly close the positions several days before the deadline. Looks like Interactive Brokers fucked up in more than one way here.
- fludlight 7y agoDon't know why you're being downvoted. Physical delivery IS a third rail for retail investors and brokers should absolutely have a field in their settings page that authorizes them to close the position x days or hours before maturity.
- jgalt212 7y agoIt's far from a solved problem. Similar issues, albeit not quite as volatile exist for TBA mortgage bonds--except it's not usually problem of storage and more a problem of delivery.
- deleted 7y ago[deleted]
- curiousllama 7y agoThe other issue here is that there IS an economic justification: everybody bid up the price of storage. If it costs me $60 to store a barrel I can sell for $10 later, then I'll pay someone $40 to take it off my hands now. An asset became a liability, hardly a rare concept to anyone who has owned a car they had to pay someone to tow away... CEO is just passing blame.
- elliekelly 7y agoInteresting point. Have we commoditized and securitized the storage of commodities yet? Can someone purchase oil storage futures contracts to mitigate this risk?
- darkwizard42 7y agoI think there might be a market for that but probably not as formal as the trading of oil futures themselves. Basically a more private transaction on a marketplace that isn't as visible or as liquid as the futures.
- hchz 7y agoOTC-traded contracts are just as formal. I’d say that these markets are generally more formal in practice due to the lack of retail actors who don’t understand the microstructure, sources of risk, or how to price their assets individually and across their book.
- bsdz 7y agoYou can buy FFAs
- jldugger 7y agoGo betweens exist and on Planet Money one was interviewed: https://www.npr.org/2020/04/22/842095406/episode-993-negative-oil https://www.npr.org/2020/04/22/842095406/episode-993-negativ... Their website: https://www.thetanktiger.com https://www.thetanktiger.com > The objective of the Tank Tiger is to serve as a clearinghouse and a single point of contact for parties who desire terminal tank services or utilization of midstream assets and to bring them together with the companies who own these assets and seek further utilization. It also provides for tenants who are leasing storage to find subleasing opportunities, when it makes sense for them to do so. Our expertise in this field provides a fast and efficient connection so that the uncertainty of storage availability is eliminated from the supply and trading equation. The Tank Tiger can facilitate and reduce market inefficiencies and illiquidity by providing this service.
- wpietri 7y ago> It’s pretty well known that commodity futures contracts are a game of hot potato Very much so. I wrote software for financial traders in the 1990s, and I heard tell of a couple of clerks (in this context, sort of "trader intern") who thought they were smart enough to do a little commodity metal trading on the side. However, they didn't quite understand the details of contract expiration, and so supposedly they ended up with 25,000 pounds of copper delivered to somebody's parents house. Oops!
- sulam 7y agoSounds apocryphal.
- wpietri 7y agoCould be! It was definitely a friend-of-a-friend territory. But often legends of failure are used to warn against real dangers. Little Red Riding Hood is surely fictional, but wolves in the woods definitely weren't. And at least in Chicago in the 1990s, traders and clerks could definitely be wild. During slow periods on the CME floor somebody would get a transparent trash bag, declare it a $20 bag, and then walk around with it. People would write their names on $20s and throw them in. Once they'd made the rounds, they'd shake the bag and have somebody draw from it. I myself saw thousands of dollars change hands like this. And clerks would regularly bet one another about jumping into the Chicago river from Upper Wacker, which is a fair drop. Or there was one incident that was witnessed by a couple of our traders, as it happened in their pit at the CBOT. One afternoon among all the colored coats, they see somebody in a polar bear costume walking around the trading floor between the pits. One trader turns to another and says, "I'll pay you $100 if you punch the polar bear." The trader thinks about it, takes the $100, goes over, lays out the polar bear, and then in the chaos goes back to his pit. This turned out to be a bad trade, as the polar bear was there as a fundraiser for the Lincoln Park Zoo, and one of the people on the zoo's board was also on the exchange's board. Oops!
- aluminussoma 7y agoAlso told on Page 34 of Ron Insana's Traders Tales: https://books.google.com/books?id=NyeVNsWvJHAC&pg=PA32&lpg=PA32&dq=cbot+polar+bear&source=bl&hl=en&sa=X&#v=onepage&q=cbot%20polar%20bear&f=false https://books.google.com/books?id=NyeVNsWvJHAC&pg=PA32&lpg=P...
- andy_wrote 7y agoThere 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 their value to fluctuate in counterintuitive ways. There's still a lot to be cautious about. However, compared to the actual futures, they're more suitable for casual investors, for reasons such as what we see here. They can't go below 0 and don't necessarily involve margin. And the ETF will typically deal with things like rolling the futures position ahead of expiry.
- haltingproblem 7y agoSorry 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.
- andy_wrote 7y agoI'm not recommending USO or oil itself as an investment, and I agree that you will be paying money to the ETF manager if you get involved in it. But I don't agree that USO is _more_ dangerous for a casual trader to trade than oil futures, for the reasons I mentioned. Removing the overall fluctuations of the oil market, the relative problem with ETFs is that they bleed away value over time. That's a real issue, but I wouldn't compare that to juggling a live hand grenade. Edit: you did not say it was more dangerous, my mistake. I do think that ETFs are less dangerous, for the reasons I mentioned.
- tramtrist 7y agoI owned USO and sold it on 4/21. I lost money of course. It seems USO could never go negative according to what you said and I could only go to 0 but I learned my lesson to stay out of futures for good