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May 8, 2020 10:30 pm

Oil Crash Busted Broker's Computers and Inflicted Big Losses

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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