Rant part 2
April 23, 2020
THESE THOUGHTS ARE MY OWN AND HAVE NOTHING TO DO WITH ANYONE ELSE. I AM RESPONSIBLE FOR CONTENT. AS ALWAYS, I MIGHT BE WRONG.
–Terry Duffy, CEO of CME Group appeared on CNBC to give a defense of the May WTI expiration with negative prices. Forgive the Seinfeld references, but it’s like Elaine dancing. You can’t un-see it. Here’s a link.
https://www.cnbc.com/2020/04/22/cme-boss-says-his-exchange-is-not-for-retail-investors-and-its-no-secret-futures-can-go-negative.html
–The arguments Duffy put forth simply fall under their own weight. Where to start? Duffy’s two main points seem to be, 1) that the exchange doesn’t have any responsibility because we talked to regulators and 2) if the price wasn’t correct, then someone could have taken the other side. So let’s take the second one first. “Why didn’t someone just stand in there and take the other side?” That explanation would allow spoofing as well. Someone trying to muscle the markets with phantom bids and large buys of small offers which immediately cancel? If there’s a big bid and you think it’s phantom, just sell it. And then sell a couple more at the next price lower. Someone tries to bang the close? Just take the other side. The exchange has a responsibility to maintain orderly markets with integrity for price discovery. Otherwise, why would the exchange EVER get involved during an upside squeeze because the amount of open interest in futures dwarfs the physical supply? FAIL. He also tries to foist off responsibility on the regulators (and I am sure they bear responsibility as well). He mentions a previous CNBC segment with the head of the CFTC and then says the exchange is “a neutral facilitator of risk management.” Jackie Chiles could have made that one up. I am shocked and chagrined. Neutral. Innocent bystander. THAT’S WHY THERE ARE RULES. Look, the worst thing you can do in this business is not own up to a bad trade. But Duffy takes it farther. Much farther. “We worked with gov’t regulators two weeks prior [with emphasis] before making our announcement of allowing negative prices. This was no secret that this was coming at us.” Wait a second, it was OBVIOUS that there was a large chunk of open interest going into expiration and that the market would not be in balance due to storage issues. You knew it weeks before. Yet the CME and CFTC did nothing to order participants to pare back positions to allow a smooth expiration. EPIC FAIL. Oh, but wait a second, “we’re in constant contact with USO and that’s why they were out of the May contract.” [jaw hits ground] Duffy also tries to deflect the main topic by talking about Trump’s proposal to top off the SPR. The issue is that there was a clear imbalance going into expiration and the exchange did nothing to ensure orderly markets. Here’s another dilly: “the small retail investors are someone we do not target.” I guess the exchange came up with minis and micros to target Bill Gates.
–This is not simply about negative prices. Futures contracts reflect carrying costs, including storage, insurance, interest rates. If those carrying costs outweigh the value of the product, then I guess a negative futures price makes sense. And that’s why farmers occasionally burn their crops. That is not the main issue here. It’s that there was a clear imbalance going into expiration and the exchange stood aside and watched from the sidelines. The futures market “worked to perfection”. I CALL BULLSHIT.
