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Negative oil price triggers trading software bug, wipes out traders
For the non-professional trader, dabbling in futures or FX contracts is generally a recipe for financial ruin. There’s so much leverage in those contracts that it doesn’t take much of a move against your position to get wiped out. When the underlying commodity does something weird, like say, flash crashing or something weirder (see below), all bets are off. The situation is exacerbated if the trading desk software isn’t equipped to handle such an unprecedented move.
Bloomberg reports the tale of Toronto-based Syed Shah, who normally trades stocks and currencies on his Interactive Brokers account. On April 20, Shah picked the absolute wrong day to try his hand at trading oil futures. That’s the day oil went negative for the first time in history, at one point printing a negative $37/barrel handle.
Shah waded into what he thought was an unsustainable discount on oil: spending $2,400 from his account on futures contracts at $3.30/barrel, $0.50/barrel, culminating in a tranche at the unbelievable price of one penny a barrel. Except not only did oil fall to 0.01/barrel, it kept going, below zero, negative and further negative – only Shah, and all of the other traders on Interactive Brokers system didn’t know that, because the platform wasn’t coded to handle negative oil prices. None of them knew the contracts they were buying were actually costing them money the further oil went below zero.
When the end-of-day settlement notices went out, Shah, who started the day out with a balance of $77,000 in his account, now owed the house $9,000,000.
Interactive Brokers has since acknowledged the negative price exposed bugs in their own system, and IB will be making all traders affected whole out of their own book. It’s estimated that will cost the brokerage around $113,000,000.
Charles Hugh Smith, Jesse Hirsh and I discussed this type of unprecedented signal distortion in our first AxisOfEasy Salon, available here.
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That’s a horror story.
This “casino” is NOT for the faint of heart!
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