Tuesday, May 12, 2020

A day trader who bought hundreds of oil contracts was told he owed $9 million after a trading-platform issue meant it failed to show oil's historic plunge below $0

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  • A day trader who bought hundreds of oil futures contracts during its historic price crash last month was told he owed $9 million after a technology issue prevented his trading platform from displaying negative oil prices, Bloomberg reported on Friday.
  • On April 20, Syed Shah, a day trader in Canada, bought 212 futures contracts for what he thought was $0.01 each, not knowing that oil was actually trading at -$3.70 per barrel at the time, according to Bloomberg.
  • The platform he used, Interactive Brokers, could not display negative prices, so Shah and other traders were oblivious to the huge drop.
  • "It's a $113 million mistake on our part," Thomas Peterffy, the founder and chairman of Interactive Brokers, told Bloomberg, adding that customers who suffered losses as a result of the issue would get their money back.

As oil crashed, Shah bought 212 futures contracts for what he thought was $0.01 per barrel, not realizing that oil was actually trading at negative $3.70 per barrel, Bloomberg said.

Shah couldn't see the price in real time, as Interactive Brokers' system was unable to display a price below zero.

"I was in shock," Shah told Bloomberg. "I felt like everything was going to be taken from me, all my assets." Shah added that he didn't sleep for three days after the incident.

As oil crashed, Shah bought 212 futures contracts for what he thought was $0.01 per barrel, not realizing that oil was actually trading at negative $3.70 per barrel, Bloomberg said.

Shah couldn't see the price in real time, as Interactive Brokers' system was unable to display a price below zero.

"I was in shock," Shah told Bloomberg. "I felt like everything was going to be taken from me, all my assets." Shah added that he didn't sleep for three days after the incident.

Thomas Peterffy, the founder and chairman of Interactive Brokers, told Bloomberg that oil turning negative revealed bugs in the company's software.

"It's a $113 million mistake on our part," Peterffy told Bloomberg. (That estimate was later revised down to $109 million, Bloomberg said.)

"We will rebate from our own funds to our customers who were locked in with a long position during the time the price was negative any losses they suffered below zero."

Meanwhile, in Europe, another Interactive Brokers customer, Manfred Koller, faced a similar situation as Shah on April 20, according to the report.

Koller, who lives near Frankfurt, Germany, purchased oil contracts for his friends at $11 and between $4 and $5 on the platform. His trading screen froze just after 2 p.m. ET.

"The price feed went black, there were no bids or offers anymore," Koller told Bloomberg, adding that his trading account didn't indicate any problems.

Later, Koller received a notification from the brokerage that he owed $110,000.

It was widely known that the derivatives exchange CME Group's benchmark oil contracts could go negative, and it had alerted its clearing-member firms that they should test negative prices on their systems, Bloomberg said.

An alert sent on April 8 said: "If major energy prices continue to fall towards zero in the coming months, CME Clearing has a tested plan to support the possibility of a negative options underlying and enable markets to continue to function normally." There was another alert on April 15.

While Peterffy acknowledged that Interactive Brokers received this notification, he told Bloomberg it needed more time to upgrade its software.

"Five days, including the weekend, with the coronavirus going on and a complex system where we have to make many changes, was not a sufficient amount of time," he said.

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