Lots of functional market participants, e.g. oil refiners, don’t precisely time their trades. Their jobs don’t reward getting the best price at a given second. But they do reward getting cheap trades and punish getting the worst price in a day.
One solution is to trade at a standard future price. “Give me the closing price and a 50% commission cut” is a common order. In some markets it can be the dominant order type. That causes low liquidity during the day and lots of it at a single instance: the close.
These oil markets close at 2:30PM. Say a bank got an order, at Noon, to sell at the close $1bn of oil. It’s 12:01PM and oil is at $15. The bank could wait until the close and trade all $1bn. The bank makes its commission. But there is a risk the whole amount won’t be able to be sold at that instance. In that case, the bank would be left holding the bag for the balance. So it hedges.
At 12:30 it sells $100mm. This nudges the price to $10. The bank sells another $100mm. Price moves to zero. Bank sells another $100mm. Price goes to -$10. Bank sells another $100mm, thereby paying to offload oil. Price moves to -$20. By the time the close comes around, the price might be -$25. The bank pays its blended price, which may be -$10. But the customer paid -$25, so the bank makes 15.
In the equity markets, this is addressed with VWAP [1]. The volume weighted average price at which the stock traded during the day. More difficult to game. But more expensive to implement and thus execute.
Matt Levine from Bloomberg explained it.
Here are some excerpt
> One fairly technical explanation that we discussed was the “trade-at-settlement” mechanism. In oil futures, you can do a TAS trade in which you agree, at some point during the day, to buy or sell oil futures at that day’s closing price, plus or minus a few pennies. So at 11 a.m. you can agree “I’ll sell futures at 2:30 today, at whatever the settlement price is then.”
...
> Here is one really dumb simple way for that to work. You buy 1,000 futures via TAS during the day. You conclude that a lot of people are selling and no one is buying (except you). You think, well, okay, I have to sell 1,000 futures before 2:30, because at 2:30 I am going to get 1,000 futures at whatever the price is then. So you start selling. You sell 100 futures at $10, and the price goes down. You sell another 100 at $5. You sell another 100 at $0. You sell another 100 at -$5. Et cetera; you keep selling—into very thin liquidity, because there are not a lot of natural buyers—and the price keeps going down. By the time you are done, it is 2:30 and the price is -$37.63. The average price that you got, selling your 1,000 contracts, was, say, -$15: You started selling at +$10 and finished at -$37.63 and averaged your way down. But then at 2:30 you buy 1,000 contracts—the contracts you prearranged to buy using the trade-at-settlement mechanism—for -$37.63. You paid people an average of $15 to take oil off your hands, and people paid you $37.63 to take oil off their hands, and you made an average of $22.63 per barrel moving the oil.
[0] https://www.bloomberg.com/opinion/articles/2020-08-04/some-p...
Both entertaining and educational.
https://www.npr.org/sections/money/2013/07/09/200401407/epis...
Order types are constantly getting traders or exchanges in trouble. If you know about the less popular ones you always stand to beat out your competitors who dont. TAS reminds me of D-quotes on NYSE.
You also find it in derivative markets (equity options on expiry dates) or, indeed, in any situation where certain dates matter (fund manager with a big position in an illiquid stock ramping the stock before their reporting period ends).
But yeah, all the people involved with this trade were locals in London, and every local I have ever met has these "scams". London's forex market is huge, and the stuff that used to happen at the fix was legendary (I don't know how much business is done at the fix today, I used to know a big institutional trader, and all he talked about was rigging the fix...no, it wasn't illegal).
I can confirm that not only was rigging the fix common, it was so common that there was (is?) a blacklist of institutions whose trades would be discounted when figuring out what the price of each currency should be.
That is, the people who were responsible for calculating the spot FX rates knew there were enough people trying to game the system that the software was designed to mitigate that as far as possible. To a large extent, they even knew who those people were (by no means all were UK-based).
And then the Libor scandal comes along, and everyone's like "oh noes... who knew there was manipulation and collusion!". Hmmm...
https://www.investopedia.com/articles/forex/031714/how-forex...
One way of facilitating this demand has been the introduction of trading-at-settlement (TAS) orders. TAS allows market participants to buy or sell relative to the daily settlement price before that price has been determined. Over the years, TAS has been associated with several efforts to artificially influence the settle. Exchanges respond to these signs of manipulation by stating that such trading activity will be subject to disciplinary action. But why does an exchange even offer an order type that at the very best can be used as a tool for market participants to walk away from their responsibility to negotiate a fair price?Probably an urban legend, but still funny.
This thread seems to support the idea that you can't just receive your futures at home. But I guess even with a designated warehouse, you're stuck with the warehouse bill.
https://skeptics.stackexchange.com/questions/47421/have-any-...
"Could a barrel of crude really kill me?" I asked a petrochemical engineer captive to my persistent, doubtlessly annoying questions. It absolutely can, he said. Hydrogen sulfide gas—H2S, for short—has a terrible propensity to evaporate from crude, knock out your olfactory capabilities, and slowly suffocate you to death.
Yeah, that was cited about a gajillion times back in May.
OIL closing was bullshit, though
https://www.cmegroup.com/content/dam/cmegroup/rulebook/NYMEX...
200109. ALTERNATIVE DELIVERY PROCEDURES
A seller and buyer matched by the Exchange under Section 105.E. may agree to make and take delivery under terms or conditions which differ from the terms and conditions prescribed by this Chapter. In such a case, clearing members shall execute an Alternative Notice of Intention to Deliver on the form prescribed by the Exchange and shall deliver a completed and executed copy of such notice to the Exchange. The delivery of an executed Alternative Notice of Intention to Deliver to the Exchange shall release the clearing members and the Exchange from their respective obligations under the rules of this Chapter and any other rules regarding physical delivery.
In executing such notice, clearing members shall indemnify the Exchange against any liability, cost or expense the Exchange may incur for any reason as a result of the execution, delivery, or performance of such contracts or such agreement, or any breach thereof or default thereunder. Upon receipt of an executed Alternative Notice of Intention to Deliver, the Exchange will return to the clearing members all margin monies held for the account of each with respect to the contracts involved.
> Vega’s jackpot involved about a dozen traders aggressively selling oil in unison before the May West Texas Intermediate contract settled at 2:30 p.m.
I think it's safe to say the traders deliberately affected the settlement price. Granted they took on a lot of risk, it was still deliberate. Now the question is can that be proven, and was it deliberate enough?
There's a scene in one of my favourite movies Margin Call
"I'm well aware of the fucking time Sam, I'm telling you, you need to see this"
"See What? Email it to me"
"I don't think... that that would be a good idea...."
"I'm on my way"
Then of course there are funds that just buy these futures, hold them for a while, sell them shorty before delivery and use that money to buy fresh futures. That way they can have a fund that closely tracks the oil price without having any physical infrastructure.
The catch is that at some point the oil turns real. So if you own oil bound for Rotterdam but can't actually receive any oil, you have to sell to someone who can take the delivery. If nobody wants the oil you might have to pay money to have someone take the oil, effectively creating a negative oil price.
https://www.bloomberg.com/opinion/articles/2020-08-04/some-p...
Normally, burning oil to make electricity is uneconomic, since gas, coal, and even renewables are cheaper. Oil fired plants were sitting mostly mothballed for the last decade in most of the world, for use only in emergencies.
it does follow that a and then b could have made more profit by not lending or selling, but it is far from zero-sum.
Same thing with Tesla shares, or whatever it is. If you can create more Tesla shares its not zero sum (which is done often).
Currencies too are printed when needed. About the only thing really zero sum are some cryptocurrencies.
You could argue in some way that it is zero-sum, but if the price goes down and oil companies don't pump oil out, they don't really lose anything - especially with derivatives as it is on a future outcome.
That currency is only used by people in a small island, and that island only exports clamshells and imports Big Macs.
In this scenario, and unless I’m mistaken, the FAKE/USD rate will vary depending on: - how much clamshell those people can export and how much US people value them - how much BigMacs those guys import and how much those guys value them
Enters a day trader - someone who will never buy a Big Mac nor any clamshell. The guy speculates and there are two possible outcomes :
- He fails. Technically he basically gave “value” to either USD holders or FAKE have holders. Too bad for him, but he kinda made this happen.
- He succeeds. Now what? Isn’t that kind of a parasitic behavior? Couldn’t that be considered theft to some extent?
I guess the question may boil down to “why would they even let the day trader be part of this?”.
Its a game that people play and there are winners and losers, but if everyone willingly enters then it is not theft.
It could be considered legalized gambling I guess but everyone involved is a gambler.
That in itself is ok, but you need a compelling argument as to why the two ideas of theft are equivalent or at least similar. And you haven't provided any argument let alone a compelling one.
The point of an internet forum is to debate ideas on their merits (in the best case). Asserting something not generally accepted, without argument, tends to annoy people because you're not even attempting to convince people of your idea's merits, which is the entire point of the game.
Its not that you're wrong, its that you didn't try to convince people you are right.
Without people like me, Arthur might have gotten a much worse deal (possibly $0). Again, without people like me, Bob might have gotten a much worse deal (possibly $100, or maybe he wouldn't be able to buy at any price).
That's the service that active traders provide to everyone else in the market.
It's not for you to judge whether the $40 is "worth" $40. It is.
The situation in the oil trading story is the same, in essence. It is "worth" $500M. Unless the traders intentionally manipulated the prices, which may nor or may be true. The same scenario could play out either way. So it could be that such a trade is worth $500M.
$500M may sound like rich compensation for this type of work, but everybody's compensation is determined by supply and demand, i.e., the rarity of people who can perform that work, and its utility. [1]
(There was also a lot of risk involved, and capital allocation is how a market economy coordinates its activities, but that feels too big to get into here.)
When you accuse honest people of theft, that's nasty. That's probably why you are being downvoted. Then again, people also get downvoted unfairly all the time, so who knows.
[1] Well, except when the government alters the curve. For instance, $500M can pay for 14,000 American teacher-years. But the government forcibly operates an education cartel and artificially holds down the salary of teachers. They are certainly worth far more than the $35K a year I used in that calculation.
Also, if two people make a bet, and one person wins, is that theft?