Rant

April 21, 2020

–What follows here is my own opinion.  Nothing to do with my employer or anyone else.  

–When globex (screen trading) was in its infancy, I was hanging around the floor late one day working at Refco, and by late I mean around 2:30, because eurodollars closed at 2:00pm, I saw that someone was offering the first serial eurodollar on the screen at a price of something like down 10.  I believe it was a May contract, and the June was only down 2.  Usually there’s a reason for something like that, but, it hadn’t been a particularly big day, so I bought a ten lot (maybe 50 were offered).  I hung around for about 15 minutes.  Someone else bought the others but there was no better bid in May, so I sold 10 June, thinking I had an edge of probably something like 5 bps at worst.  The next morning I came in and I check my statement.  No May.  I called up Refco balancing.  The CME busted the May trade.  “What?!”  Because they said it was “out of line with the market”.  I immediately called the CME.  “Look, that trade was out of line.  We tried to call you last night and couldn’t reach you.  We busted it.”  Me: “How do YOU know it was out of line?”  Because it was down 10.  More arguing.  I’m left short ten June which I cover for a loss of about 3 bps.  And in a bad mood.

–Another time I am on the floor, same desk, checking a call 1×3.  I check the quote (this was all through hand signals on a loud and crowded floor) at least three times.  I buy the 3 legs 100x for a client.  The clerk signals me a fill.  Next thing I know I have ZAL (the filling broker) and KAL (the local) at my desk, with KAL apoplectic saying I have to let him out because he thought it was a 1×2.  I said no way, your problem is with ZAL, not me.  I checked it 5 times.  Oh, and there was an exchange employee crowded in behind them in the aisle.  KAL screamed, you KNEW that price couldn’t be for the 1×3.  And I said I DIDN’T know that, and get the f out of my face.  And the exchange guy pipes in with this nugget, “You couldn’t buy a Mercedes for the price of a Cadillac, right?”  The f-yous were already going around, but it was at that point I almost threw out a punch which would have sent that smug asshole who didn’t even know what a 1×3 WAS, tumbling down the stairs. (It wasn’t BIGS btw).  That trade too, was busted.  

–Which brings me to May oil.  When the exchange was still owned by the members, I was at a meeting where Jack Sander, the fiery chairman, was shouting (as he always did), “We’re not in the TRADING business!  We’re in the RISK MANAGEMENT business.”  Integrity.  Price discovery.  Orderly markets.  All out the window yesterday with May WTI trading down to NEGATIVE $40/bbl.  Anytime there has been a potential squeeze in a market, the exchange steps in and says participants MUST reduce positions to maintain an orderly market.  I’ve seen it happen many times, in grains (Feruzzi in soybeans), and even in rates with a squeeze on the CTD relative to open interest in treasury futures. 

–Any idiot knows that there is NO WHERE to store oil, and that facilities in Cushing and everywhere else are sated.  That’s why May oil was trading at a 5 or 6 dollar discount to June.  That’s why there are thousands of tankers loaded with oil floating on the high seas.  “Why, these prices look odd.  You can buy the May contract, store it for a month, sell June forward, and pick up 25% in a month.”  No.  You can’t.  If there is one thing I have learned, if prices look like they are way out of line, and they are SITTING there for days, I don’t care what the market is, or how much I might think I know, there’s a VERY GOOD reason that prices are where they are.  The exchange obviously knew there is no storage available, and hasn’t been for weeks.  So they cavalierly send out a note yesterday, “Oh, by the way, all these energy prices can trade negative.”  I asked people if that was the first they heard of it and most said yes.  One person told me the exchange had discussed it in early April.  It was definitely the first I had heard, ONE DAY before today’s expiry.  So May WTI plunges over $50 barrel to negative 40.  Open interest coming into yesterday was about 108k contracts.  A drop of $50 on 100k contracts is $5 billion.  Every clearing firm with anyone long May oil was obviously clearing positions.  At any price.  That dentist in Omaha who figured he’d dabble in futures since his practice is iced, is now going to be recommending crowns for each and every patient with a tooth ache, as his five contracts just cost him a quarter of a million dollars on Monday afternoon.  What should the exchange have done?  Said there is a CLEAR IMBALANCE due to reduced storage and transportation, ALL PARTICIPANTS must reduce positions or prove capability to take or make delivery.  NO NEGATIVE PRICES.  The market would have cleared at positive numbers, because the exchange has the power to force liquidations.  Shorts may have bid ten cents, but prices would not have gone negative, but for the exchange giving the green light to cause a massive price dislocation at the last minute.  There is no economic benefit to be derived by negative prices.   That’s in rates.  That’s in oil.  I don’t know what business the exchange is in, but it’s not in risk management any more. 

• ABOUT:
  Former member of the CME specializing in interest rate options and yield curve strategies.