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Oil Crash Busted Broker's Computers and Inflicted Big Losses (bloomberg.com) 87

Posted by BeauHD from the exposed-bugs dept.
An anonymous reader quotes a report from Bloomberg: Syed Shah usually buys and sells stocks and currencies through his Interactive Brokers account, but he couldn't resist trying his hand at some oil trading on April 20, the day prices plunged below zero for the first time ever. The day trader, working from his house in a Toronto suburb, figured he couldn't lose as he spent $2,400 snapping up crude at $3.30 a barrel, and then 50 cents. Then came what looked like the deal of a lifetime: buying 212 futures contracts on West Texas Intermediate for an astonishing penny each. What he didn't know was oil's first trip into negative pricing had broken Interactive Brokers Group Inc. Its software couldn't cope with that pesky minus sign, even though it was always technically possible -- though this was an outlandish idea before the pandemic -- for the crude market to go upside down. Crude was actually around negative $3.70 a barrel when Shah's screen had it at 1 cent. Interactive Brokers never displayed a subzero price to him as oil kept diving to end the day at minus $37.63 a barrel. At midnight, Shah got the devastating news: he owed Interactive Brokers $9 million. He'd started the day with $77,000 in his account.

To be clear, investors who were long those oil contracts had a brutal day, regardless of what brokerage they had their account in. What set Interactive Brokers apart, though, is that its customers were flying blind, unable to see that prices had turned negative, or in other cases locked into their investments and blocked from trading. Compounding the problem, and a big reason why Shah lost an unbelievable amount in a few hours, is that the negative numbers also blew up the model Interactive Brokers used to calculate the amount of margin -- aka collateral -- that customers needed to secure their accounts. "It's a $113 million mistake on our part," said Thomas Peterffy, the chairman and founder of Interactive Brokers, in an interview Wednesday.

Customers will be made whole, Peterffy 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."
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Oil Crash Busted Broker's Computers and Inflicted Big Losses More

Oil Crash Busted Broker's Computers and Inflicted Big Losses

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  • This entire Trading economy needs to burn (Score:5, Informative)

    by lessSockMorePuppet ( 6778792 ) on Friday May 08, 2020 @05:36PM (#60038476) Homepage

    All of it, especially high frequency trading, needs to die in a fire.

    • Re:This entire Trading economy needs to burn (Score:5, Funny)

      by Krishnoid ( 984597 ) on Friday May 08, 2020 @05:37PM (#60038480) Journal

      Welp, luckily oil is cheap.

    • As long as the network is designed to stop (or fight) front running, what's the problem with HFT? It's super difficult to regulate effectively, and there's no clear benefit in trying to do so.

      • what's the problem with HFT?

        There is nothing inherently wrong with HFT.

        HFT is now standard. All trades on public exchanges are HFT.

        Trying to restrict HFT will just push more trades into opaque internal or offshore "dark pools", where most trading already occurs.

        It will also raise transaction costs.

        This will hurt small investors and benefit large institutions trading under their own accounts.

        Most advocates of bans or restrictions on HFT have very weird mental models of how they think stock markets work.

        Dark Pool [wikipedia.org]

        • Most advocates of bans or restrictions on HFT have very weird mental models of how they think stock markets work.

          It's kind of interesting, but in a lot of articles where some new law about regulating the internet or computers is proposed, someone here invariably points out that the lawmaker doesn't have a damned clue how any of the technology works, and that person is almost certainly right.

          I think the world would be a better place in general if every time someone had a proposal for a new law or for banning restricting something they took a step back and reversed the roles. We know how it feels to hear a really dum

          • The laws are about putting road blocks down so you can get paid to lessen them. You don't have to know how things work. You just have to know how to stick a blender in other peoples' enterprises.

        • What you actually did was not produce an argument against regulating HFTs, but produced an argument in favor of a massive restructuring of financial regulations. Transparency should be required, there should be strong guards against regulatory capture, and there should be a transaction tax that's graduated in such a way that trades happening in less than a minute have a taxation of over 90%, and trades happening in over a decade after purchase have a taxation of less than 1%. Possibly 0.001%. And the equation driving this should be smooth, so that trades where the value is held for less than a second have a taxation of over 100%. Perhaps basing around a logarithmic function so the tax never quite goes to zero no matter how long you hold it. But it should approach infinity as the limit as the length of time the value is held approaches zero. (I suppose you could also do this with a "hyperbola of two branches", and perhaps that would be simpler, but the log functions I've seen have a better shape to the curve.)

          • Transparency should be required

            Good luck applying your American regulation to a dark pool in Singapore.

            there should be a transaction tax ...

            Did you hear a giant whooshing sound when Sarbanes-Oxley was passed?

            That was the sound of transactions moving offshore, and public ownership moving to private capital.

            We are already choking our financial industry with excessive regulation, and they are vetoing that regulation with their feet. Hundreds of thousands of well-paying jobs went with them to London, Hong Kong, and Singapore.

            Most transactions already occur in dark pools. The

            • Re: (Score:2)

              by HiThere ( 15173 )

              Thus the requirement for restructuring. That would imply that there was a heavy tax on importing unmonitored transactions. Or possibly on exporting to unmonitored locations. Or both.

      • It doesn't produce anything of value. People are just moving money around, pushing little numbers around on a screen like a videogame.

        • They're performing price discovery and providing liquidity. Both of those seem like valuable services...

          • Price discovery assumes that this model of finding prices has some correlation to physical value, which sky-high PE ratios and bubbles should suggest to you that the model is broken.

            Repeatedly trading back and forth for the sake of arbitrage at greater and greater speed has been tried, and the results have been demonstrated to be lacking in stability.

            Why is this a dogma to you? It's a model and it's broken.

        • Re: (Score:2)

          by HiThere ( 15173 )

          It produces lots of value. Unfortunately, many of those values are negative. E.g. it efficiently promotes centralization of control of wealth.

      • Re: (Score:2)

        by peter303 ( 12292 )
        Easiest way to regulate is to charge a tiny tax, like a tenth of a cent per share per trade. That would put friction in the system. I believe Elizabeth Warren proposed this.

    • If you're not day trading, you have nothing to worry about. The day-to-day market gyrations shouldn't affect long term stock holders.

      People who day trade should be aware of and assume all the risks that come with it.

    • The real problem is that they put "#define NASSERT 1" in their production code.

      Don't ever do that.

    • All of it, especially high frequency trading, needs to die in a fire.

      And do what? Every concept of trading has a purpose. HFT ads liquidity. Futures ads flexibility. Hell the idea that you're complaining on an article about a glitch in oil futures is ironic given that the nature of the industry where the value of goods can change dramatically between purchase and delivery to say nothing of processing time meant that they use an entirely different accounting method to report profit and loss to investors. RCOP - Replacement Cost of Purchase, rather than Net Profit.

      Saying these

  • Day Trader = Professional Gambler (Score:5, Informative)

    by cusco ( 717999 ) <brian@bixby.gmail@com> on Friday May 08, 2020 @05:37PM (#60038478)

    A day trader? Who cares? If someone decides to make a living "investing" on what number a roulette wheel will turn up next I am not going to feel sorry for them if they lose.

    • Day trading is more akin to gambling with a coordinated group of players, like the MIT crew that beat Vegas. Proper day trading is about things like hedging, which is like playing multiple tables at once.

    • Gambling = you lose money on average.

      Trading = you make money on average.

      People who equate trading with gambling = people who are less likely to succeed in life because they can't tell the difference between a slight disadvantage versus a slight advantage. Over time, one converges towards minus infinity, the other towards plus infinity. Big difference.

      • Re: (Score:2)

        by ceoyoyo ( 59147 )

        Day trading doesn't necessarily make you money on average. Investing has a positive expected return. Day trading is dominated by noise. It's pretty random. Particularly if you "follow the rules" such as never holding a stock for longer than X, where X is less than a day.

      • Gambling = you lose money on average

        It's more like gambling = the result is determined by chance rather than by skill.

      • Trading: "I'm gambling so someone else doesn't have to."

        Much of the financial sector exists for the management of risk. Including the futures market. The risk is unavoidable - the world is a complicated place, and sometimes unexpected things happen. Futures trades mean that traders take the risks - they make money on average, with an occasional big loss - instead of the companies that actually own the oil drills and refineries.

      • This really isn't true most day traders lose money or lag the market. Investing and trading are two different things

    • Re:Day Trader = Professional Gambler (Score:4, Interesting)

      by thegarbz ( 1787294 ) on Friday May 08, 2020 @06:10PM (#60038638)

      A day trader? Who cares?

      I care. This is news for nerds, and an interesting article about financial training systems not coping with a negative sign resulting in all sorts of calculations going off is fascinating regardless of what profession the impacted person has.

      This "day trader" article is a damn sight better than the usual political slagfest that Slashdot has degraded to.

      • Re: (Score:2)

        by Kjella ( 173770 )

        I care. This is news for nerds, and an interesting article about financial training systems not coping with a negative sign resulting in all sorts of calculations going off is fascinating regardless of what profession the impacted person has.

        Why? From a nerd's perspective this is an incredibly mundane bug, someone failed to add a test case for a negative value. It is rare but not unheard of for commodity futures with a lot of seasonal variation and products that spoil quickly, it's just never happened for oil. It was just a costly bug but the broker has acknowledged it's their fault and the customers will be "made whole" which is legal speak for accepting liability, since they'd definitively lose a lawsuit from their customers. And a quick goog

        • Re: (Score:2)

          by guruevi ( 827432 )

          Negative trades have happened in the market. It's news for nerds because generally the wrong abs() or unsigned integer gives mundane results or a crash. In this case it gave a very interesting result.

        • Mundane bugs have huge consequences and this is a good example. The fact that we refer to bugs as "mundane" is indicative that they happen way too often and we are desensitized to it. This should remind us that we are still in need of new techniques to develop higher-quality software. In this article the day trader is super-lucky. In the absence of the bug, he wouldn't have been down $9M but his losses still may have been staggering and the broker wouldn't have bailed him out! Now he gets a free ride.

      • Re: (Score:3)

        by cusco ( 717999 )

        article about financial training systems not coping with a negative sign resulting in all sorts of calculations going off is fascinating

        True enough, I just didn't care if the day trader got hosed. If they didn't check for a negative number it makes me wonder what other issues they didn't check for.

    • no sympathy for day traders sure. but being fed false information by your brokerage firm is a whole other level of wrong and at least they have said they will make customers whole. If you were a specifically a gambler it would be like betting on a horse at 10 to 1 only to find out later it was you had to pay 10 dollars for every dollar you bet if the horse lost.

    • On the other hand, trading companies should not allow one to invest more than they can afford to lose. While it's unusual that the price went zero, it is not the first time that customers have been allowed to hold futures prices beyond what they could afford to cover.

      • That would be the part where the program's margin calculations were also messed up by the bug. Their software didn't know it was allowing customers to lose more than they had available + their credit limit.

    • Re: (Score:2)

      by fermion ( 181285 )
      So what does it say about the losers who provide the software to day traders. Especially as incompetent as these. Twenty years ago, it was not unreasonable to break because of Berkshire Hathaway A. Now these people deserved to be sued into oblivion.
  • bwahahahahahaha
    ha.

  • Why are you letting a guy with $77k in his account trade 212 futures contracts? How does his account meet the margin requirements to trade that many futures? (Maybe there's a good answer? I don't trade futures.)

    Good that they're paying for their mistakes. It's a lesson IBKR can afford.

    • Re: (Score:2)

      by thogard ( 43403 )

      Someone is going to have to collect that oil. That is the reason it went negative, the oil has been evicted and all the pipelines are booked so there is no cheap way to get it out of there. If this is the oil I think it is, there is a 3 day window to collect it. 212 contracts are for 1000 barrels each and so someone is going to need about 212 oil train cars or about 1000 fuel trucks or they are going to pay the storage place to burn it.

      In most futures trades, the money moves around and then on the last da

    • It is impossible. Something is incorrect in the article. Oil futures typically require between $3000 to $20000 of margin per contract, so he would have needed at minimum $636K in his account to buy 212 contracts.
      • The article is correct. IB asked for $30 margin for long positions, they thought price can't go below 0, so there was no risk, so no need for a margin. Remember margin is calculated with SPAN method, that consider 16 scenarios of risk, there was no risk scenarios in IB calculations, so no margin.
    • Margin for futures is not fixed, it's dinamically calculated taking in consideration all scenarios in which you can lose money, and price can go against your position. For this contract, IB thought minimum price was 0, they also told that to their customers: contract specs said that. So as they bought at 0.01, there was not possibility that they could lose money, price could only go up. So IB asked for $30 margin as Bloomberg says. The result, the clients lost 1250 times their margin.

      • Re: (Score:2)

        by Kohath ( 38547 )

        Ok, thanks for explaining. That’s something else they are going to need to adjust.

    • Re: (Score:2)

      by hawk ( 1151 )

      speaking as an economist:

      once the prices went negative, it's simple math: a penny is more than thousands of negative price contracts.

      outside of this Alice in Wonderland scenario, having a balance greater than the value of the contracts you order means that you can't lose more than is in your account, even if the bottom falls out.

      I can't name another time, ever, when prices went. negative. It's long been a theoretical concept, but not one that folks generally worried about. For that matter, there are a v

  • Theoretically, if they designed the price to use unsigned integers, and subtraction went below zero, then the system would have halted with an "Attempt to subtract with overflow" error message and a traceback to the line of code where it happened. Although I suppose an especially determined programmer could have decided to use the saturating_sub function.
  • very interesting this article I will recommend this article as well as one of the other favorite pages like what it is moviepilot.supply [slashdot.org] I really liked when you mounted another?
  • You should know that brokers require you to have a certain amount of money, called "margin", in your account for each futures contract that you want to buy or sell. Based on what I read on trading forums around that time, IB might have had a $3000 margin per futures contract. The margin is the same no matter what the futures price is, whether it's $3.30 or $0.01. So in order for this guy to buy 212 contracts, at $3000 margin, would require him to have $636K in his account. But the article says he only had

    • Re: (Score:1)

      by rot16 ( 4603585 )

      From the summary:
      Compounding the problem, ... is that the negative numbers also blew up the model Interactive Brokers used to calculate the amount of margin -- aka collateral -- that customers needed to secure their accounts.

  • Call me when you actually worked for that money. Because otherwise, all you are, is a thief. And if your society allows that, you money is worth nothing, since I can never be sure you actually worked for it about as much as I have to work to get fucking 9 million! Oh noes, you only got $77,000! That's what other people make in a year! Honest people, who do the actual work, you thief!

    • Re: (Score:2)

      by vasanth ( 908280 )
      he did work for it by accepting to take the risk the producer of the oil was unwilling to take...

  • I am not even a trader and figured it was heading into negative territory. And I was watching the price with a small delay on a publicly availabe site that could (sort-of) handle the negative. (Displayed it correctly, but did not show the negative value in the history.)

    He was a trader and did not realize the liability of almost free oil that he had no intention of taking delivery on near the end of the month’s contract.

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