
London traders hit $500M jackpot when oil went negative - Inconel
https://www.bloomberg.com/news/articles/2020-08-04/oil-s-plunge-below-zero-was-500-million-jackpot-for-a-few-london-traders
======
zahma
I'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
If 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-p...](https://www.bloomberg.com/opinion/articles/2020-08-04/some-
people-made-money-on-negative-oil-prices)

~~~
sukilot
This seems to work regardless whether prices are positive or negative.

------
anonu
The 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
It 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).

~~~
sloucher
I 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...

------
dmarlow
I 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.

~~~
wodenokoto
Just 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-...](https://skeptics.stackexchange.com/questions/47421/have-any-
financial-traders-gotten-a-large-shipment-of-a-commodity-sent-to-themse)

~~~
gadders
There 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...](https://www.bloomberg.com/news/articles/2015-11-03/that-time-i-tried-
to-buy-some-crude-oil)

"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
>"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.

------
jb775
> 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
The 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
I 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
Yeah, 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.

------
bitxbit
Interestingly 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.

------
kaycebasques
There'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.

~~~
tenkabuto
Could someone please provide a link to this?

~~~
cvhashim
[https://www.youtube.com/watch?v=d533KZsnVvY](https://www.youtube.com/watch?v=d533KZsnVvY)

------
gigatexal
Awesome now they can afford to pay London rents. :-D

~~~
sprusemoose
#hurts

------
neonate
[https://archive.is/2yDfi](https://archive.is/2yDfi)

------
person_of_color
Can 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
Say 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.

------
pauljurczak
Doing God's work their every waking hour.

------
FabHK
Matt Levine's take (author of the Bloomberg column _Money Stuff):_

[https://www.bloomberg.com/opinion/articles/2020-08-04/some-p...](https://www.bloomberg.com/opinion/articles/2020-08-04/some-
people-made-money-on-negative-oil-prices)

------
amelius
What 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
You can bribe Russians for $100 and save $99 999 900.

------
truckerbill
No discussion here about the environment. This indirectly fuels demand.

~~~
sgt101
How so?

~~~
londons_explore
Because 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.

~~~
fauigerzigerk
But they don't have the storage capacity, otherwise prices would never have
gone below zero.

~~~
amelius
You don't need storage if you immediately burn the oil?

~~~
MaxBarraclough
To mirror fauigerzigerk's point: The power demand is already being met by the
existing system. How could you profit by burning the oil immediately for power
generation?

------
tus88
So which traders lost $500M?

~~~
arcticbull
Commodities 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
Er 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
USO 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.

~~~
anonu
Just 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...

------
Ecco
I 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...

~~~
throwaway1777
Derivative trading is usually zero sum. There is a loser for every winner. I
don’t understand in what world buying and selling oil on an open market could
be considered theft. Everyone knows the rules of the game.

~~~
Ecco
Well, let’s consider a simplistic example: an obscure currency, let’s call it
FAKE, that can be traded for USD.

That currency is only used by people in a small island, and that island only
exports clamshells and imports Big Macs.

In this scenario, and unless I’m mistaken, the FAKE/USD rate will vary
depending on: \- how much clamshell those people can export and how much US
people value them \- how much BigMacs those guys import and how much those
guys value them

Enters a day trader - someone who will never buy a Big Mac nor any clamshell.
The guy speculates and there are two possible outcomes :

\- He fails. Technically he basically gave “value” to either USD holders or
FAKE have holders. Too bad for him, but he kinda made this happen.

\- He succeeds. Now what? Isn’t that kind of a parasitic behavior? Couldn’t
that be considered theft to some extent?

I guess the question may boil down to “why would they even let the day trader
be part of this?”.

~~~
lmm
It's not theft, it's honest trading. Traders buy things from willing sellers
and sell to willing buyers, in financial products as in any other market.

There are two ways to make money as a pure market player: connecting buyers
and sellers who wouldn't trade directly (and taking your cut) aka arbitrage,
or getting paid to take on risk. Maybe the trader notices that people on the
far side of the island are hungry but can't get a big mac without a long walk,
so he buys as many as he can carry, walks over to the other side of the
island, and sells them for a bit more than they'd cost on the dockside -
that's the first kind of trading. Maybe a clamshell farmer wants to make sure
they can afford enough big macs over the next year. They might agree to sell
their next year's clamshell harvest at a fixed price (that's lower than the
average), or buy their big macs for the next year at a fixed price (that's
higher than the average), or both; the farmer loses value on average, but they
offloaded their risk, while the trader makes money on average but has to
carefully manage their risk.

The third thing is to actually take an active position in the market, if you
can predict what's coming. E.g. if you realise the clamshell harvest will be
big this year, maybe you sell a bunch of clamshells short. That should send a
useful signal to all the farmers, and it means you make money if you predicted
right.

~~~
Ecco
Awesome explanation. Thanks!!

