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

https://www.bloomberg.com/news/features/2020-12-10/stock-market-when-oil-when-negative-these-essex-traders-pounced

by RyanShook • 6 years ago

228 105 6 years ago

bloomberg.com

dhsysusbsjsi• 6 years ago

This is like a short version of The Big Short.

bryan0• 6 years ago

The Short Big Short

zhoujianfu• 6 years ago

The Short Short

faheel• 6 years ago

"The Short"

neonate• 6 years ago

https://archive.is/33zf6

kasey_junk6• 6 years 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.

hnracer5• 6 years 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• 6 years 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

usefulcat2• 6 years 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• 6 years 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.

xx7892• 6 years 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• 6 years ago

The solution to hammered closed is the volume weighted average price (VWAP) [1].

[1] https://www.investopedia.com/terms/v/vwap.asp

osamagirl69• 6 years 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...

Hokusai3• 6 years 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• 6 years 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• 6 years 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.

bsanr22• 6 years 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.?

WA5• 6 years ago

Trading is a zero-sum game.

bpodgursky• 6 years ago

This profit is a forcing function to punish producers and middlemen who didn't build enough oil storage infrastructure.

morlockabove2• 6 years ago

Deserve? No. Get? Yes.

If I stumble across gold in the ground, quietly buy the land and start to mine it, I don't 'deserve' that gold. But I've got it, and the system of property rights is there to dissuade me from just taking it by force instead of buying the land first (or other people taking it from me once I've got it).

retube6• 6 years ago

whilst luck plays its part, this is the reward for taking risk (a lot of risk). and without the possibility of reward for risk taking, there'd be no incentive to invest in anything.

mulmen• 6 years ago

Money is not a consumable resource. They didn’t remove $100,000,000.00 from the economy. If they buy things, properties and services then the money is reallocated to the providers of those things, properties and services.

laurent92• 6 years ago

If we lived in USSR, economy would be driven by the central planners. In capitalism, economy is driven by decisions at every level to allocate funding. Those who forecast the future best are the ones who get rich, because it allows the right companies to receive funding. Our economy wouldn’t be so big if it were organized by central planners, so I pardon those, although it does seem extreme here.

varvar• 6 years ago

Who the heck is society? That's just us. But we don't come together and decide like that, so I don't think society exists in the abstract the way you think it does.

It's more like this is how reality is. You've probably never been a trader, most traders lose their money, it's an extremely risky profession. For every win you hear about there are at least 10 losers.

At the end of the day the activity of traders readjusts the asset prices on ongoing basis closer to their true valuation. The more trading occurs the more precise the price is. Without enough trading activity an end user might be forced to overpay for an asset.

crazyideaman7• 6 years ago

Last year Goldman Sachs made 18 billion dollars and were profitable 236/251 days. 41 of those days they made more than 100 million dollars. Institutional traders like this routinely manipulate prices to temporarily raise/lower prices on low volume to take out stop losses and so on. News is routinely put out at the top and bottom of markets that happens to provide liquidity for these institutions. Yet, no investigations...

retube6• 6 years ago

Goldman sachs employ 30,000 people across dozens of separate business units and have a balance sheet of nearly a trillion dollars. And a vast chunk of their income is net interest income and advisory fees. It's in no way comparable.

xx7892• 6 years ago

source? yeah I know its fashionable to say that wall street keeps ripping people off, but banks are so crippled by regulations most hedge funds and small trading firms run circles around them. Big banks only make money from clipping tiny commissions on billions of transactions like a whale eating krill.

bsanr22• 6 years 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• 6 years 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• 6 years ago

With sysadmins, with discretion to selectively enforce, suspend, rewrite rules and transactions, with nominal accountability.

qeternity• 6 years 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• 6 years 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.

ada1981• 6 years ago

Could you imagine?

leetcrew• 6 years ago

the idea (or the lie, depending on your perspective) is that the market price converges to a fair valuation, based on the information available at the time. true or not, it is important that market participants mostly believe this, lest the whole thing unravel at once.

I'm not sure exactly what these traders are suspected of doing, the article is rather scant on details.

im3w1l• 6 years ago

Having the same actions be allowed or prohibited depending on intents in your heart only you can observe is not very game-like.

jgilias• 6 years ago

Looking forward to the movie!

treis• 6 years 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• 6 years 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.

crazyideaman7• 6 years 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• 6 years ago

Agree, still not sure how much they risked for that huge profit.

svpg2• 6 years 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?

crazyideaman7• 6 years 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.

svpg2• 6 years 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?

retube6• 6 years ago

their view was the price was going to drop during the day. so they entered into contracts to buy oil at the end of the day, at whatever the prevailing price was. Now they are long oil. During the day they sell oil futures, flattening their position. Net at end of day, they're contracted to buy at some price, but contracted to sell at a bunch of higher prices. Hence in the money.

My basic maths implies they sold - and bought - 10k lots, which is 10m barrels. So a huge position.

joejohnson• 6 years ago

When did they buy these oil futures which they were selling throughout the day?

kasey_junk6• 6 years ago

The interesting part of this trade is that their TAS trade was “in the money” at the same time their long positions were.

That’s not supposed to happen. Your hedge should cost you profit but because of oil going negative both sides of their trade were profitable.

theginger• 6 years ago

I think the point is they buy them as TAS, then sell what they've bought before they've settled.

Isamu• 6 years ago

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

kasey_junk6• 6 years 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• 6 years 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.

ineedasername2• 6 years 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• 6 years ago

To be fair, Interactive Brokers is the least rubeish platform for a trader outside of an institution.

cnst• 6 years 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

>>> “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

>>> 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.

ineedasername2• 6 years ago

"extremely naive"

Especially because there apparantly a warning 17 days earlier that negative prices were a.possibility. A tourist trader might not follow industry news well enough, but I would think outfits like the Chinese firm that lost everything would be a bit more savvy.

fouc• 6 years ago

It's interesting that Interactive Broker's software couldn't handle negative prices. Whoops.

twic• 6 years 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• 6 years 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• 6 years ago

Spanish links? Because they vacation in Marbella?

james1071• 6 years ago

So, the question is how much margin they needed for the position - long the future, short TAS.

throwawaysea• 6 years 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) and Trade-at-Settlement is (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• 6 years ago

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

choeger• 6 years 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• 6 years 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• 6 years 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• 6 years 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.

ampersandy• 6 years ago

As a trading noob, what then happens when you sell a future but do not buy one later (and you obviously don't have X amount of crudge to deliver to Cushing)?

Also, any suggestions on good books to learn more (not necessarily to start trading in futures, but just to understand the market dynamics)?

nailer• 6 years 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• 6 years ago

The quote in the last paragraph almost makes up for it.

evan54• 6 years ago

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

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

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