London traders hit $500M jackpot when oil went negative
bloomberg.comI'd greatly appreciate if any of you can explain how such a trade happened in layman's terms. Every time I try to look various vocab, I end up getting deeper into the glossary of hyperlinked words on investopedia and totally lose sight of the bigger picture.
> how such a trade happened in layman's terms
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.
If I understand it correctly, you agree to buy something at a market price at a given time. Then you sell until that point, driving the price down and essentially exiting the trade at the same time.
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...
This seems to work regardless whether prices are positive or negative.
The film 'Trading Places' shows this in action (although they're trading on frozen concentrated orange juice prices and not oil).
Both entertaining and educational.
indeed. Planet Money did an analysis of the film's future trade, and it was indeed plausible and legal (then)
https://www.npr.org/sections/money/2013/07/09/200401407/epis...
The crux of this trade was the TAS order type. It seems like these guys arbed the liquidity difference beyond their wildest dreams... But now they're probably spooked about it because it sounds borderline manipulation.
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.
It isn't an order type. In many institutional markets, trades are settled at a price that isn't known when the trade is booked. This happens in rates (LIBOR rigging was an example, it happens elsewhere), it happens in forex (the daily fix, masses of shenanigans there).
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 worked on the computer system that determined what the spot FX rates were at the "fix". This was almost 20 years ago, I guess. (Crazy to think how many trillions of dollars were touched by my contribution).
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...
For those that are curious about the fix that hog speaks of:
https://www.investopedia.com/articles/forex/031714/how-forex...
Also, Local = trades with their own money, rather than working for a bank or other financial institution.
Yes, it’s curious that the traders didn’t participate in similar trades in subsequent months — appears they may have been shocked and spooked at the outsized bonanza. If this is indeed just a good trade going great, the investigation will hopefully clear their names and they’ll simply get credit for their success.
If you do it once, it may have been an accident. If you try to repeat the success, it starts to look like intentional manipulation.
If you've just had a $500 million pay day, the action in subsequent months presumably was going to be pretty dull (and not lucrative) by comparison. Maybe they've just decided to take some time off to spend time with their families and think about how they're going to spend it!
Interesting read about how TAS destabilizes markets.
Good link. Relevant part on TAS from the link:
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?
You're not wrong that Order Type choices are complex and venues need to be careful what they allow. But at the same time, if you're a trader, you really should know all the order types a venue supports and what they let traders do. There are not that many of them. I did trade support from the IT side for a few years and I knew all the orders and which venues would accept which types and that was in European equities...
I've been on both sides (front office and IT). And it surprised me how much market structure knowledge some side had (and not always the front office) and other was clueless about.
I think most people saw the opportunity, but just didn't know how to properly capitalize on it. At least that's where I was. I wasn't going to take delivery of any oil, that's for sure. At least nothing that stood to make anything significant from. Then, there was also the whole contango thing too.
Just like we pass around code-stories/war stories, I remember reading a funny story about this stuck-up senior trader who ended up having to take delivery of a shipment of coal.
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-...
There is also this story from Bloomberg about when one of their journalists tried to buy a single barrel: https://www.bloomberg.com/news/articles/2015-11-03/that-time...
"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.
>"Could a barrel of crude really kill me?" I asked a petrochemical engineer
That's like asking an electrician if 120v will kill you. Maybe if you use it wrong enough but odds are it's just going to be unpleasant.
Thank you for that link. It gave me a good chuckle. I work for a lab that analyses air samples. H2S is indeed interesting stuff.
> I remember reading a funny story about this stuck-up senior trader who ended up having to take delivery of a shipment of coal.
Yeah, that was cited about a gajillion times back in May.
There was a risk you would have to take physical delivery.
It seemed like every retail-trading angle was a losing proposition.
Idunno, my oil ETF shares are still up 40% from March so.....
OIL closing was bullshit, though
It’s hard to find an equity that’s not up 40% since March lol —- the S&P is up 43% so that’s technically, shockingly a market underperform, and a bunch of tech companies are up 200% or more.
Yeah, though my outlook on oil is longer-term than current market trends. Don't worry I loaded up on tech stocks too
I'm long oil too. There were a lot of great deals to be had back in March.
That's what you get with an ETF consisting of futures contracts...
No retail trader is going to take delivery. The contracts would be forced closed or cash settled.
The exchange cannot simply cut a break to a trader for being a retail speculator; that's not how these NYMEX futures work. A brokerage might be able to help a customer buyer by settling the delivery itself, but settlement other than physical would require consent from the matched seller. (There exist other oil futures that are cash settled.)
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.
It's not about the contract, it's about the trade and brokerage.
A retail broker will either not let you trade these contracts, force close the trade, make you retender, or cash-settle (or charge an equivalent bill to handle all the logistics in an extreme case). You are not going to have physical settlement unless you make prior arrangements with your broker and show that you can even accept them in the first place, but that's extremely unlikely at the retail level.
> There are also rules that forbid trading with the goal of deliberately affecting the settlement [price]
> 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?
The funny thing about these stories is that it probably can be proven, and the reason for that is that there's quite likely a text or an e-mail from some cocky idiot saying "We could make a tonne if we push the price down" or "Man I can't beleive we managed to push the price to -37, we're going to make a killing".
I get the impression traders very deliberately don't put things like that in email explicitly so it can't be proven.
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"
Yeah, that's the smart hollywood impression of what would happen if people were thinking, but often it looks more like this:
>Senior RBS Yen Trader: its just amazing how libor fixing can make you that much money
https://www.bbc.co.uk/news/business-21358362
And these messages weren't using some burner phones found in a raid, these were messages through their bloomberg terminals.
Great movie
Interestingly enough crude options went zero bound for nearly half a day before market makers started to realize their quotes were off. One of the most thrilling experiences trading in a very long time.
There's an episode of MacroVoices that was recorded in real-time as prices were going negative. You can hear the pain in Erik's voice as he realizes how much profit he missed out on.
Awesome now they can afford to pay London rents. :-D
#hurts
Can someone ELI5 how energy trading works? I understand stocks, where you earn a portion of the company in return for dividends/capital gains, and options, where you bet on the underlying movements on stocks. But how does this work?
Say you own oil that will arrive in the port of Rotterdam in a month. You can sell it now, delivery date in a month. It's now essentially a virtual good that can be traded, but becomes physical in a month. Somebody who owns a refinery might buy it because they think prices will rise; or someone might buy it to sell it half a month later, allowing them to trade on the price of oil without going through the hassles of storing actual oil.
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.
Doing God's work their every waking hour.
Matt Levine's take (author of the Bloomberg column Money Stuff):
https://www.bloomberg.com/opinion/articles/2020-08-04/some-p...
What scares me is that someone with $100M would (with only a little imagination) have an incentive to buy a biological lab, start a pandemic and make $500M. But perhaps I watch too many movies ...
You can bribe Russians for $100 and save $99 999 900.
No discussion here about the environment. This indirectly fuels demand.
How so?
Because someone owning an oil fired power plant can buy all these negative priced oil futures, take actual delivery, and burn the oil to produce electricity and get paid for that.
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.
But they don't have the storage capacity, otherwise prices would never have gone below zero.
You don't need storage if you immediately burn the oil?
To mirror fauigerzigerk's point: The power demand is already being met by the existing system. How could you profit by burning the oil immediately for power generation?
How much can they possibly burn immediately upon delivery and which other fuel would it replace?
I don't know for sure, but my hunch is that it's insignificant in terms of extra carbon emissions.
It's true that low oil prices will encourage oil fired plants to open back up,but I'm not sure that a very short term drop is going to have much effect since spinning up and down a power plant isn't exactly a short term decision.
Most of these plants are on 7 day standby - Ie. They need to be able to reopen within 7 days in case of war or disruption to gas supply.
Any news of gains like this raises optimism about oil prices, more people will be inclined to invest. More generally, engaging in the market is being complicit with it. Worth noting we’re all complicit, but trading is more voluntary.
No, I don't believe that. If anything, oil prices becoming extremely volatile hurts the oil & gas sector. It makes investment in real production capacity less attractive, more risky and more difficult to finance.
The gains you're talking about are tiny compared to the massive write-downs at oil companies.
I agree with you there, overall the situation isn't completely bad news. The only thing better than volatile is a fully downward trend however. I guess I'm just arguing that we owe ourselves a bit of moral decisionmaking rather than just continuing to believe in the providence of the Invisible Hand. These guys weren't doing this for the sake of the environment.
So which traders lost $500M?
Commodities trading like this isn't really zero-sum like, for instance, options trading or equity futures trading. Oil producers who had a giant backlog of oil and nobody to sell it to (and full storage) were paying people to take it off their hands that month. Some enterprising folks were able to find some storage, hold on to the oil until the next expiration date, and were rewarded to playing a role in the market.
Er no. It is. The losers were Chinese banks/investors. Chinese banks created a ton of financial products linked to oil futures, they didn't know what they were doing and left it to the last minute to roll (afaik, none of the products in the US blew up).
USO blew up. The held 25% of all the negatively priced contracts at close. The crux of this story is that investors piling into these ETFs created a massive sell side pressure at the close which this hedge fund found a way to arbitrage.
Just false. USO didn't "blow up". It's still very much trading and operated as expected.
Blaming retail investors is a very common trope of the financial markets recently. Truth is there just isn't that much retail fire power.
To your point: look at the USO roll schedule on the day the futures went negative you would have noticed that they were basically done 75 percent into the next month in the days before.
So we're now talking about a few 100 million USD exposure in the front month due to uso that needs to be rolled. That can't be the one to blame...
They didn't blow up. Blow up means lose all the money. Afaik, USO weren't trying to roll their whole book that day (the exchange put out a notice a month or so before telling people to roll...as the article says). The Chinese banks were literally attempting to roll the whole fund and investors lost 100% (afaik, they lost more than 100%...the sum I have seen is a loss of 200%+).
I really wonder if those guys really created $500M worth of “value” for the rest of the world. Because if they didn’t, it means it’s theft...
There needs to be a buyer and a seller for any trade. You don't know the stories of the other participants in those transactions - maybe if they didn't get rid of their oil on that day for pennies (or negative dollars), they would have been forced into far worse consequences, defaulted on their legal obligations, or forced into breaking a trade. If you read the terms of the futures market, it is very specific in how you must take delivery and where, and failing to fulfill those requirements exactly would result in way worse consequences (imagine an oil trader who is banned from trading... yeah way worse than losing a bit of money). There is a set of counterparties out there that collectively decided that paying those guys $500M was better than their next best alternative.
Super interesting. Thanks!
A good angle to think of for options trading is that writing out-of-the-money options is like selling insurance. Occasionally you have to make a big payout, but the rest of the time you're getting small payments.
Some of the market participants were effectively insuring others against the price of oil dropping too low.
Derivative trading is usually zero sum. There is a loser for every winner. I don’t understand in what world buying and selling oil on an open market could be considered theft. Everyone knows the rules of the game.
it is possible for two of the three parties to realise a profit at the strike, and the third to ultimately profit from holding the security.
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.
You can always 'create' more oil by pumping it out of the ground once the prices hit a certain amount. So it's not really 'zero-sum'. If the supply isn't locked or restricted it's hard to say that.
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.
It is zero sum in the sense that all the money has to be equal to all the stocks. Not in the sense of perceived value.
You can make more money though & you can make more stocks. That's where the notion you're addressing breaks down, even in the perceived sense:
The Hong Kong dollar is pegged at the moment, this also means it's not zero sum for a buyer or seller either, especially at the peg boundary like now. They simply make more Hong Kong dollars or withdraw them.
It is zero sum because it adjusts, no matter what you do. If you pump more oil from the ground, the prices will fluctuate until they reach the new zero-sum level that takes into account the new production level.
A pegged dollar is the same, it only takes a little longer. When they print they dilute the value of the current dollars in circulation but not immediately, because of the peg. But eventually, because it is zero-sum, so much pressure is pent-up trying to maintain that non-zero-sum peg that the system begins to crack and they have to re-peg it. Which happens often with pegged currencies.
This does not mean there are no winners and losers, personal finance is of course not a zero-sum game. And because the adjustments are not instantaneous there is a lot of room to profit if you know what is happening, which gives the impression of it not being zero-sum.
Actually with the lag it changes everything, because you can earn interest/dividends on the amounts. You can die in the meantime so its someone elses. The variations are endless. When someone discusses it as being zero-sum there is always just a scenario you can describe where it isn't, and if even just $1 can't be accounted for the whole argument breaks apart.
It is never really instantaneous and can take more than months, years. You would have thought printing 6 trillion would have changed something but not really.
The interests and the dividends come from someone, they don't magically appear from the heavens. That person had to add value to the system in order to be able to pay the interest, maintaining the zero sum.
> You would have thought printing 6 trillion would have changed something but not really.
I know these are crazy times, but that money did something: it delayed the inevitable by keeping alive zombie companies that should've gone bankrupt the minute the crisis started, if not before. The whole point of printing 6 trillions was to maintain the status quo, not change it, to maintain it and not face economic reality. It didn't work 100% as a lot of that money went directly into assets such as TSLA, AAPL and HTZ(??), some of it went to gold and bitcoin and a lot of it went into bribes and corruption, which prevented companies who could've used that money to stay afloat for a few more months to do so. But because it's a zero sum system it will crash eventually, just that for now it appears to be holding if we stay completely still and don't make any sudden moves.
There is positive supply of oil, or Tesla shares.
However, the net supply of derivatives (such as options, forwards, futures) is zero.
> the net supply of derivatives (such as options, forwards, futures) is zero.
so we believe, but yes.
also CDOs have entered the chat
But CDOs have to have someone on each side the deal, hence net zero.
Liquidity risk has entered the chat
you mean the same person on all three sides of the deal, unbeknownst to them
Well, let’s consider a simplistic example: an obscure currency, let’s call it FAKE, that can be traded for USD.
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?”.
It's not theft, it's honest trading. Traders buy things from willing sellers and sell to willing buyers, in financial products as in any other market.
There are two ways to make money as a pure market player: connecting buyers and sellers who wouldn't trade directly (and taking your cut) aka arbitrage, or getting paid to take on risk. Maybe the trader notices that people on the far side of the island are hungry but can't get a big mac without a long walk, so he buys as many as he can carry, walks over to the other side of the island, and sells them for a bit more than they'd cost on the dockside - that's the first kind of trading. Maybe a clamshell farmer wants to make sure they can afford enough big macs over the next year. They might agree to sell their next year's clamshell harvest at a fixed price (that's lower than the average), or buy their big macs for the next year at a fixed price (that's higher than the average), or both; the farmer loses value on average, but they offloaded their risk, while the trader makes money on average but has to carefully manage their risk.
The third thing is to actually take an active position in the market, if you can predict what's coming. E.g. if you realise the clamshell harvest will be big this year, maybe you sell a bunch of clamshells short. That should send a useful signal to all the farmers, and it means you make money if you predicted right.
Awesome explanation. Thanks!!
A speculator does one thing only: takes assets not in (peak)demand today and bets they are gonna be in demand in the future. He takes a calculated risk and a lot of times it doesn't pay off. Everybody involved is getting paid and all the transactions are voluntary.
If you think that is theft then I don't know what to tell you.
Well, a theft can be voluntary: that’s what con-artists do all the time!
Now that you've reached the point of calling everything theft, there is nowhere to go. Congratulations.
Well according to Matt Levine, everything is securities fraud...
Con artists are getting your consent via deception. Is this the case what derivative traders are doing?
Well, one could argue that they are just smarter than other people and manage to find market opportunities. Good for them I guess. But technically since it’s mostly a zero-sum game would it be wrong to consider that they use their smarts to deprive other people of value?
Do you really need me to explain why fraud is wrong? Fraud is wrong because you're betraying someone's trust. It's bad for society because it adds friction to business dealings. When you can't trust your counterparty, you have to expend tons of money doing due diligence. This is true regardless if you're smart or not. Being the smartest person in the world isn't going to help you if you're being deceived (assuming you're not omnipresent).
*Omniscient
Though I guess it might be hard to deceive an entity that is literally everywhere.
This is also the case I make against bitcoin re: the value of trust.
That’s called fraud, otherwise known as theft by deception. Trading is transparent, people know all the details upfront and are not being deceived.
> Too bad for him, but he kinda made this happen ... Couldn’t that be considered theft to some extent?
why is it "too bad for him" when he loses (to the people he gave value to), but "theft" when he takes value from the people? That's just a double standard.
And you also mis-understand derivatives trading's purpose - to offload risk to a third party that is willing to take it.
The double standard question is totally legitimate and a very good one!
My point of view is that the trader willingly entered the market with the sole intent of trying to make a profit, whereas the other two just wanted to actually trade goods.
Which is why the situation is asymmetrical in my opinion, and why the way we judge it could be as well.
> whereas the other two just wanted to actually trade goods.
They wanted to trade excess goods, in other words, unrealized profits, for something usable to them to realize the profits of their labor.
Everyone's intention is to profit, that is the reason you sell to the market.
Everyone's intention is to profit, even the con artist, but the buyer and the seller are providing and receiving goods, meaning they actually have a reason to be involved in this specific trade. One party produces oil, a second party consumes oil, and the third party is just there to take his cut because he thinks he's smarter than everyone else.
It shouldn't be surprising when one of these parties isn't trusted by the other two...
It's essentially scalping. Do you trust the people who buy concert tickets in advance and sell them to you at a 100% markup? They're serving the exact same role in society as these market players. No one likes them for a very good reason.
> One party produces oil, a second party consumes oil, and the third party is just there to take his cut because he thinks he's smarter than everyone else.
One party produces oil and a second party consumes oil, but those events do not occur at the same time. A third party 'stores' the oil meanwhile and charges for it. You are welcome do it for free, I'm sure you'd be a hero to society.
making a profit and trading goods are the one and same goal. it's not asymmetrical at all. After all, isn't the point of trading goods to produce excess value after the trade (i.e., profit)?
When he is successful he is providing liquidity to the market, which is value, not theft.
If you were selling oil and had the option of either getting $45/barrel for all the oil you sell next month or somewhere in the $0-$100 range, which decision would you take?
This would essentially mean that most winners on every trade in equities, crypto, forex (except for central banks I guess) etc. are committing theft. When individuals enter a trade on these markets its soley to make a profit, very rarely is it to take physical delivery of a good that will be used. You make a trade based on your assumption of which way the price of that asset will go. Someone else makes an equal and opposite trade. One person is right. There is not always a loser on every transaction as one person can think an asset has peaked and exit in profit while the asset continues to gain value, but eventually there will be a loser.
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.
There is a non-trivial number of people who believe the very concept of private property is theft. Quite a few of them post comments on HN.
I think you have it a bit confused. We think property is violence not theft.
I believed the idea was originally popularised by the slogan “La propriété, c'est le vol”, where vol does translate to theft. But violence would certainly be quite similar to Proudhon‘s original meaning for the phrase.
Marx didn’t like the idea because he said it presupposes that property exists, which he obviously had a problem with. Fun fact, this disagreement was the primary conflict that split the IWA into seperate anarchist and Marxist movements. With the anarchists later going on to adopt national socialism, which at the time was known as fascism.
A lot of people gambled and they won.
Youn are kindsupporting his proposition - that nothijg evonomically productive has happened. Of trading is a zero sum game, liek OP is proposint, their winning just take from other parts of ecobomy
Yeah, I understand the “when people gamble most will lose and someone will be lucky”. But the big difference I see in this case is that many legitimate businesses work with crude oil so not all of those people are gambling / willing to gamble.
>But the big difference I see in this case is that many legitimate businesses work with crude oil so not all of those people are gambling / willing to gamble.
But those aren't going to be the losers. Oil producers typically sell their future contracts immediately to lock in a good price. Likewise, oil consumers are typically going to be buying oil futures early, hold them until they expire, and take delivery. In either case they're not going to be affected by the price going negative on the day of expiry.
You’re committing theft by earning more on the marketplace than some other person by this logic
I’m fine with the downvotes - I understand it can be a controversial opinion. But I’d love to get some more detailed feedback!
You redefined a word with an accepted meaning (theft) to mean something different than the generally accepted definition - e.g. what you would see in the dictionary.
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.
Let's take an example. If I buy a stock at $20 from Arthur and sell it the next day for $60 to Bob, have I made $40 of value? Yes.
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.
I am fine with your tautology:
> It's not for you to judge whether the $40 is "worth" $40. It is.
What other sensible quantative way of defining value is there?
The question is do we think the position leveraged to extract that value is fair. You seem to think that price manipulation (presumably of some explicitly prohibited forms) can be unfair. So I assume you amenable to some extrinsic definition of fair play.
In your example what might be the form of advantage you exploited? It could be informational or it could be based on capital. Perhaps your informational advantage is based on diligent study of a situation or perhaps it is based on cronyism. Similarly perhaps your ability to take on the risk is based on hard work or inherited wealth. I'm not saying any of these is inherently wrong but people can and do take moral/social positions on such advantages exploited for profit. Even though that discussion might be rather intractable.
So we can define the value of the trade by the spread but that says little about whether the information/capacity asymmetries were fair. If a well functioning market is meant to approximate fairness with sufficient diversity of participants then a market anomaly like this seems like more like an exception to that rule.
I do not think it is justified to call it theft.
There are two kinds of fairness. Let's call them A and B.
Type A is when all the players in a basketball game are the same height.
Type B is when all the players in a basketball game play by the same agreed-upon rules (i.e. don't cheat).
Trying to eliminate Type A fairness from the world is not in anyone's self-interest, except (maybe) the people who are extremely low in the hierarchy of wealth/earning power. (But I think they would be better served by climbing the hierarchy than trying to make the world type-A fair.) This is quite a claim that I won't try to justify here; just think about it.
Type B fairness is in the interest of almost everybody. If you think you can cheat successfully, you may be against Type B fairness. But that's foolish. Creating a rigged system in one game opens up the doors for others to rig the systems in the games where I don't have an advantage (or cannot sustain the cheating advantage). For instance, Republicans in power now are undermining property rights, and that will hurt them more than it helped when they are out of power. Even if there are a few people who can get away with this (e.g. if you are an elderly Republican who is about to die maybe you don't care), the rest of us should reign these people in, as we are the majority.
If we want, we can call these two types egalitarian-fairness and rule-fairness.
Going back to oil trading: it may or may not be Type B fair. It probably is fair, though, because there aren't many rules in trading. The regulators try to create some rules, but few of those (if any) are actually recognized as real rules by the players; rather, they are obstacles. If you can get around them, you're just a better player of the game. (I'm not a professional trader, but that's my assumption about most of what goes on in trading; a professional trader may be less cynical about it.)
If you break a real type-B rule, you are cheating if it's a game and committing fraud if it's business. However we judge that, it's in the interest of the majority to punish that, to dis-incentivize rule-breaking.
but you are just adding possible unfair/unethical things that might have happen. What about good things? The 1st seller was aware there was a big chance for the stock to grow, but was in need of liquidity for other ventures or needs. And the second buyer, know that it was bought much cheaply, but he is bullish on that stock. If the trade happened that means it was the best possible trade on those moments, but there will always be external factors because we are all humans, we all have different reasons, different needs and different experience and knowledge.
If you accuse someone of theft, shouldn't the burden of proof be on you?
Also, if two people make a bet, and one person wins, is that theft?
If one person knows the probable outcome and the other one does not, you can certainly frame it as theft.
Didn’t accuse anyone though :)
You accused people who make transactions that don't create value of theft