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The Essex Boys: how nine traders hit a gusher with negative oil

228 points by RyanShook 6y ago

dhsysusbsjsi 6y ago
This is like a short version of The Big Short.
- bryan0 6y ago
  The Short Big Short
  - zhoujianfu 6y ago
    The Short Short
  - faheel 6y ago
    "The Short"
neonate 6y ago
https://archive.is/33zf6 https://archive.is/33zf6
kasey_junk 6y ago
“Hammering the close” is a daily occurrence in the commodities markets and has been for as long as they printed a closing price. Lots of market participants are pegged to the closing price so it’s a very attractive target. 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.
- hnracer 6y ago
  I think this kind of manipulation would only happen at quarter end, perhaps month end and derivatives expiries. It's otherwise normal to expect price volatility leading up to the auction because traders want to minimize information leakage going into it.
  - dmw_ng 6y ago
    The vast majority of bids entered into the opening and closing crosses occur as close to the submission deadline as physically possible. It's just another speed game, as with almost everything else
    - hnracer 6y ago
      That's sort of what I was saying. They're trying to prevent info leakage hence submit at last moment, which causes volatility in expected match. However, it's not the vast majority, most liquidity is there already more than one second before match. Many ppl have archaic systems and don't care about a bit of extra slippage. I've checked this in some detail.
- usefulcat 6y ago
  Does the exchange publish information about the number of TAS shares on each side prior to the close? Like the auction imbalance info published by NYSE, Arca and Nasdaq (among others). Edit: or even better, do they publish an estimate of the auction price? I think nasdaq calls it the 'near' imbalance price.
  - dmurray 6y ago
    The exchange publishes the details of TAS trades as they happen, but it's not right to think of it as an "auction". Those contracts have already changed hands, just at an undetermined price, so the number of contracts bought will always be the same as the number sold. Probably what you want to know is how many of the TAS contracts were bought/sold by market makers who intend to hedge the trade in the closing minutes of the day, as opposed to speculators who wanted to enter/exit/roll a position. 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.
- xx789 6y ago
  Trade on the close is not just for commodities, FX is the same - big clients would rather get the same official price than pay a bit extra commission for trader to get a good price for them. As for equities if you hold a pension fund you probably bought TSLA on Friday night at the closing price in your index fund.
- JumpCrisscross 6y ago
  The solution to hammered closed is the volume weighted average price (VWAP) [1]. [1] https://www.investopedia.com/terms/v/vwap.asp https://www.investopedia.com/terms/v/vwap.asp
osamagirl69 6y ago
Wild stuff! Hard to imagine being a day trader and taking $100,000,000 dollars home from a moonshot bet while sitting in front of your computer. I don't fully understand how the TAS agreement works, but it sounds like they started the day by essentially putting in $0 and a promise to pay up at the end of the day -- where they could have easily been out ~$10M each if the markets recovered. >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...
- Hokusai 6y ago
  > taking $100,000,000 dollars home 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.
  - vkou 6y ago
    It can afford the existence of a monied class which collectively commands tens of trillions of dollars in wealth, so it can probably afford it. Whether or not we want to afford it is a different question.
  - cma 6y ago
    Hopefully at worst it is just something like instead of artists working on cinematography and graphic art for Coke commercials and advertisements to give people diabetes, they will be making artwork for these people's mansions that might not be enjoyed as widely as they could be in a more rational system but that at least won't give people diabetes.
  - bsanr2 6y ago
    I don't see how it's different from what already exists. If you're questioning them, why not Gates, Bezos, [redacted], [unknown], etc.?
  - 6y ago
bsanr2 6y ago
>Now the authorities must decide whether anyone at Vega breached market rules by joining forces to push down prices—or if they simply pulled off one of the greatest trades in history. 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"?
- vmception 6y ago
  I approach the whole market as a MMORPG, with very real consequences (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.
  - specialist 6y ago
    With sysadmins, with discretion to selectively enforce, suspend, rewrite rules and transactions, with nominal accountability.
- qeternity 6y ago
  Trading absolutely is a game, and the “score” so to speak of this game being “price” is an extremely important piece of information to society. Price contains all known data (according to EMH) and then is freely (or cheaply) observed by all participants. It’s not a bad thing that it’s a game, in fact most games are calculated risk, just like trading. But like other games, you need fair and consistent rules. Source: former hedge fund trader
- quickthrower2 6y ago
  Rules are there so you can trust the system enough. Imagine if there were no rules: your bank might steal your money, a company might lie on its financial reports so a shareholder can dump some stock etc. Then all trust is lost and every deal with every entity needs to be worked out from scratch. You’d do extensive DD to open a bank account or buy a stock. This would cripple the system.
jgilias 6y ago
Looking forward to the movie!
treis 6y ago
Very tired of these sorts of articles that bury the lede in a mountain of fluff. I don't care about the stereotype of someoen from Essex. I want to know if these people manipulated oil trades and, if so, how. Anyone have a TLDR?
- Dylan16807 6y ago
  Just about all of that text isn't fluff, it's the point of the article, telling the stories of these particular people and giving a detailed background of the market. 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.
- crazyideaman 6y ago
  A group of retail traders buy contracts requiring them to buy at settlement price. (TAS) They then sell contracts to get them to a flat position so they don't actually have to take physical stock. 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.
- ec109685 6y ago
  Agree, still not sure how much they risked for that huge profit.
svpg 6y ago
Can't quite get my head around their strategy. Can someone clarify? My understanding is that the bought WTI in the TAS market and at the same time sold WTI to drive the price down (It's not clear when did they buy this WTI or if they maded a profit selling them or were just driving the price down). When the price hit –$37.63 at the end of the day the WTI they bought at the TAS market had to pay them, right? That were they made their profit?
- crazyideaman 6y ago
  The TAS contracts required them to buy at settlement price. They obviously did not want inventory so they sold an equal number of contracts. (Sell high, buy low). That much is a routine short scenario. 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.
  - svpg 6y ago
    Another question. Once the future expires they have to take in that oil physically. Did they do that and sell in the regular market?
    - crazyideaman 6y ago
      No. They sold an equal number of future contracts so they were flat and did not need to take inventory. That part is a routine shorting scenario. The odd part of this is that market conditions caused demand to drop so far that sellers paid buyers to take the contracts (and inventory). So these guys were paid to honor their TAS contract but had already sold the inventory to others via the futures contracts.
      - xyzzyz 6y ago
        To put in a simpler terms, they didn’t have to take delivery, because they sold the oil earlier in the day to someone else. Since they didn’t have any oil at the time, they sold it “short”. Then, at the end of the day when they “bought” the oil at the negative prices, it was used to cover the contracts for the oil they sold earlier in the day.
Isamu 6y ago
Negative Oil does sound more interesting than negative oil pricing, so kudos to the editor for keeping us clicking those links.
kasey_junk 6y ago
The most interesting quote in this story to me is the trader suggesting it was impossible for oil prices to go negative. 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.
- alisonkisk 6y ago
  Only the retail trading rube (and a software program used by retail rubes) are quoted as saying they didn't think the price could go negative.
  - ineedasername 6y ago
    No, there was also a major Chinese firm that lost everything as well, and is on the hook for about $800,000,000 it's customers doi have.
  - phyalow 6y ago
    To be fair, Interactive Brokers is the least rubeish platform for a trader outside of an institution.
- cnst 6y ago
  It wasn't a trader who didn't know the price could go negative, it was a passive retail investor: https://archive.is/33zf6#selection-3201.1-3205.1 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 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. --- 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.
twic 6y ago
What i don't understand is how some random firm of wideboys had risk limits big enough to do this trade. 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.
- celticninja 6y ago
  Honestly I think they did a great bit of trading. But I think they drew a lot of heat and given the location of the traders and their Spanish links, I would not be surprised if the origin of the cash may be murky. They probably had a decent plan for general profits on that industry, but this trade will bring everything under scrutiny.
  - 55555 6y ago
    Spanish links? Because they vacation in Marbella?
    - KaiserPro 6y ago
      its a vague slur. THe costa del sol in spain is notorious for having lots of excrminals from essex living there.
- james1071 6y ago
  So, the question is how much margin they needed for the position - long the future, short TAS.
throwawaysea 6y ago
For those looking for a TLDR, here's the part of the article explaining the actual trades. You'll need to know what WTI is (https://www.investopedia.com/terms/w/wti.asp https://www.investopedia.com/terms/w/wti.asp) and Trade-at-Settlement is (PDF https://www.theice.com/publicdocs/futures_us/TAS_FAQ.pdf https://www.theice.com/publicdocs/futures_us/TAS_FAQ.pdf). > 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?
TedShiller 6y ago
Those type of returns are common among Vcs I’d say
choeger 6y ago
Call me stupid, but I don't quite understand the technicalities of that scheme. 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?
- growse 6y ago
  > Call me stupid, but I don't quite understand the technicalities of that scheme. > 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.
- hdkrrkgk 6y ago
  You can sell futures before having them (you will need to post some margin to cover a fraction of their worth). This will just create a negative position that must be made zero or positive before the contract expires.
- dan-robertson 6y ago
  Futures are created by trades so they don’t need to exist before they are sold. 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.
nailer 6y ago
This article has a lot of unneeded emphasis on the social class of the traders. 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.
- jeffrallen 6y ago
  The quote in the last paragraph almost makes up for it.
evan54 6y ago
Why would someone take the other side of the TAS contract?

228 points by RyanShook 6y ago

dhsysusbsjsi 6y ago

This is like a short version of The Big Short.

bryan0 6y ago
The Short Big Short
- zhoujianfu 6y ago
  The Short Short
- faheel 6y ago
  "The Short"

neonate 6y ago

https://archive.is/33zf6 https://archive.is/33zf6

kasey_junk 6y ago

“Hammering the close” is a daily occurrence in the commodities markets and has been for as long as they printed a closing price. Lots of market participants are pegged to the closing price so it’s a very attractive target. 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.

hnracer 6y ago
I think this kind of manipulation would only happen at quarter end, perhaps month end and derivatives expiries. It's otherwise normal to expect price volatility leading up to the auction because traders want to minimize information leakage going into it.
- dmw_ng 6y ago
  The vast majority of bids entered into the opening and closing crosses occur as close to the submission deadline as physically possible. It's just another speed game, as with almost everything else
  - hnracer 6y ago
    That's sort of what I was saying. They're trying to prevent info leakage hence submit at last moment, which causes volatility in expected match. However, it's not the vast majority, most liquidity is there already more than one second before match. Many ppl have archaic systems and don't care about a bit of extra slippage. I've checked this in some detail.
usefulcat 6y ago
Does the exchange publish information about the number of TAS shares on each side prior to the close? Like the auction imbalance info published by NYSE, Arca and Nasdaq (among others). Edit: or even better, do they publish an estimate of the auction price? I think nasdaq calls it the 'near' imbalance price.
- dmurray 6y ago
  The exchange publishes the details of TAS trades as they happen, but it's not right to think of it as an "auction". Those contracts have already changed hands, just at an undetermined price, so the number of contracts bought will always be the same as the number sold. Probably what you want to know is how many of the TAS contracts were bought/sold by market makers who intend to hedge the trade in the closing minutes of the day, as opposed to speculators who wanted to enter/exit/roll a position. 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.
xx789 6y ago
Trade on the close is not just for commodities, FX is the same - big clients would rather get the same official price than pay a bit extra commission for trader to get a good price for them. As for equities if you hold a pension fund you probably bought TSLA on Friday night at the closing price in your index fund.
JumpCrisscross 6y ago
The solution to hammered closed is the volume weighted average price (VWAP) [1]. [1] https://www.investopedia.com/terms/v/vwap.asp https://www.investopedia.com/terms/v/vwap.asp

osamagirl69 6y ago

Wild stuff! Hard to imagine being a day trader and taking $100,000,000 dollars home from a moonshot bet while sitting in front of your computer. I don't fully understand how the TAS agreement works, but it sounds like they started the day by essentially putting in $0 and a promise to pay up at the end of the day -- where they could have easily been out ~$10M each if the markets recovered. >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...

Hokusai 6y ago
> taking $100,000,000 dollars home 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.
- vkou 6y ago
  It can afford the existence of a monied class which collectively commands tens of trillions of dollars in wealth, so it can probably afford it. Whether or not we want to afford it is a different question.
- cma 6y ago
  Hopefully at worst it is just something like instead of artists working on cinematography and graphic art for Coke commercials and advertisements to give people diabetes, they will be making artwork for these people's mansions that might not be enjoyed as widely as they could be in a more rational system but that at least won't give people diabetes.
- bsanr2 6y ago
  I don't see how it's different from what already exists. If you're questioning them, why not Gates, Bezos, [redacted], [unknown], etc.?
- 6y ago

bsanr2 6y ago

>Now the authorities must decide whether anyone at Vega breached market rules by joining forces to push down prices—or if they simply pulled off one of the greatest trades in history. 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"?

vmception 6y ago
I approach the whole market as a MMORPG, with very real consequences (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.
- specialist 6y ago
  With sysadmins, with discretion to selectively enforce, suspend, rewrite rules and transactions, with nominal accountability.
qeternity 6y ago
Trading absolutely is a game, and the “score” so to speak of this game being “price” is an extremely important piece of information to society. Price contains all known data (according to EMH) and then is freely (or cheaply) observed by all participants. It’s not a bad thing that it’s a game, in fact most games are calculated risk, just like trading. But like other games, you need fair and consistent rules. Source: former hedge fund trader
quickthrower2 6y ago
Rules are there so you can trust the system enough. Imagine if there were no rules: your bank might steal your money, a company might lie on its financial reports so a shareholder can dump some stock etc. Then all trust is lost and every deal with every entity needs to be worked out from scratch. You’d do extensive DD to open a bank account or buy a stock. This would cripple the system.

jgilias 6y ago

Looking forward to the movie!

treis 6y ago

Very tired of these sorts of articles that bury the lede in a mountain of fluff. I don't care about the stereotype of someoen from Essex. I want to know if these people manipulated oil trades and, if so, how. Anyone have a TLDR?

Dylan16807 6y ago
Just about all of that text isn't fluff, it's the point of the article, telling the stories of these particular people and giving a detailed background of the market. 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.
crazyideaman 6y ago
A group of retail traders buy contracts requiring them to buy at settlement price. (TAS) They then sell contracts to get them to a flat position so they don't actually have to take physical stock. 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.
ec109685 6y ago
Agree, still not sure how much they risked for that huge profit.

svpg 6y ago

Can't quite get my head around their strategy. Can someone clarify? My understanding is that the bought WTI in the TAS market and at the same time sold WTI to drive the price down (It's not clear when did they buy this WTI or if they maded a profit selling them or were just driving the price down). When the price hit –$37.63 at the end of the day the WTI they bought at the TAS market had to pay them, right? That were they made their profit?

crazyideaman 6y ago
The TAS contracts required them to buy at settlement price. They obviously did not want inventory so they sold an equal number of contracts. (Sell high, buy low). That much is a routine short scenario. 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.
- svpg 6y ago
  Another question. Once the future expires they have to take in that oil physically. Did they do that and sell in the regular market?
  - crazyideaman 6y ago
    No. They sold an equal number of future contracts so they were flat and did not need to take inventory. That part is a routine shorting scenario. The odd part of this is that market conditions caused demand to drop so far that sellers paid buyers to take the contracts (and inventory). So these guys were paid to honor their TAS contract but had already sold the inventory to others via the futures contracts.
    - xyzzyz 6y ago
      To put in a simpler terms, they didn’t have to take delivery, because they sold the oil earlier in the day to someone else. Since they didn’t have any oil at the time, they sold it “short”. Then, at the end of the day when they “bought” the oil at the negative prices, it was used to cover the contracts for the oil they sold earlier in the day.

Isamu 6y ago

Negative Oil does sound more interesting than negative oil pricing, so kudos to the editor for keeping us clicking those links.

kasey_junk 6y ago

The most interesting quote in this story to me is the trader suggesting it was impossible for oil prices to go negative. 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.

alisonkisk 6y ago
Only the retail trading rube (and a software program used by retail rubes) are quoted as saying they didn't think the price could go negative.
- ineedasername 6y ago
  No, there was also a major Chinese firm that lost everything as well, and is on the hook for about $800,000,000 it's customers doi have.
- phyalow 6y ago
  To be fair, Interactive Brokers is the least rubeish platform for a trader outside of an institution.
cnst 6y ago
It wasn't a trader who didn't know the price could go negative, it was a passive retail investor: https://archive.is/33zf6#selection-3201.1-3205.1 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 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. --- 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.

twic 6y ago

What i don't understand is how some random firm of wideboys had risk limits big enough to do this trade. 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.

celticninja 6y ago
Honestly I think they did a great bit of trading. But I think they drew a lot of heat and given the location of the traders and their Spanish links, I would not be surprised if the origin of the cash may be murky. They probably had a decent plan for general profits on that industry, but this trade will bring everything under scrutiny.
- 55555 6y ago
  Spanish links? Because they vacation in Marbella?
  - KaiserPro 6y ago
    its a vague slur. THe costa del sol in spain is notorious for having lots of excrminals from essex living there.
james1071 6y ago
So, the question is how much margin they needed for the position - long the future, short TAS.

throwawaysea 6y ago

For those looking for a TLDR, here's the part of the article explaining the actual trades. You'll need to know what WTI is (https://www.investopedia.com/terms/w/wti.asp https://www.investopedia.com/terms/w/wti.asp) and Trade-at-Settlement is (PDF https://www.theice.com/publicdocs/futures_us/TAS_FAQ.pdf https://www.theice.com/publicdocs/futures_us/TAS_FAQ.pdf). > 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?

TedShiller 6y ago

Those type of returns are common among Vcs I’d say

choeger 6y ago

Call me stupid, but I don't quite understand the technicalities of that scheme. 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?

growse 6y ago
> Call me stupid, but I don't quite understand the technicalities of that scheme. > 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.
hdkrrkgk 6y ago
You can sell futures before having them (you will need to post some margin to cover a fraction of their worth). This will just create a negative position that must be made zero or positive before the contract expires.
dan-robertson 6y ago
Futures are created by trades so they don’t need to exist before they are sold. 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.

nailer 6y ago

This article has a lot of unneeded emphasis on the social class of the traders. 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.

jeffrallen 6y ago
The quote in the last paragraph almost makes up for it.

evan54 6y ago

Why would someone take the other side of the TAS contract?