Day traders may have played a role in oil's historic plunge into negative territory

Saloni Sardana

Jun 9, 2020, 00:00 IST

Day traders may have played a role in oil's historic plunge into negative territory

Crude oil storage tanks are seen in an aerial photograph at the Cushing oil hubReuters

Oil prices turned negative in April and day traders may be one reason why.
Bloomberg reported Monday that day traders at TDAmeritrade and ETrade suffered technical glitches meaning they couldn't sell once they realized prices had turned negative.
Traders on Interactive Brokers suffered a similar glitch.
A number of other factors have been blamed for oil's historic price crash, including lower demand during the pandemic and limited storage space in April.
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The crash in oil prices to below $0 in April has been blamed on scarce storage space and tanking demand during the pandemic. But day traders, or rather a lack of them, may also have played a part in the historic plunge.

Bloomberg reported Monday that traders at ETrade and Ameritrade faced a technical issue leading to them being frozen out of the market. Interactive Brokers' users also suffered a software glitch during the crash that meant they weren't informed that oil was in negative territory.

Only 41 small contracts were exchanged after oil prices sunk below $0, Bloomberg reported, potentially indicating that retail investors weren't active in the market at the time and unable to stabilize prices.

Only retail traders and a few commercial producers tend to be active when oil contracts are near expiration. That was the case on April 20, when oil prices fell through the floor.

John Kilduff, founding partner at Again Capital Management LLC, told Bloomberg: "Most commercials and managed money were long gone."

He added: "The retail players saw the abject price collapse and tried to swoop in, thinking that zero was the lower bound, when it turned out that negative infinity is the lower bound."

Ben Whitesades, an ETrade user, told Bloomberg that he bought three contracts for 500 barrels of oil each, at a price of about $0.75 a barrel. When he realized prices had tumbled below zero, he tried selling his barrels immediately but the platform wouldn't allow him, he said.

Whitesades told Bloomberg: "Their system had no ability to exit those contracts. I was at the mercy of the market with no ability to get in or out based on ETrade's system."

Similarly, an unnamed TD Ameritrade user told Bloomberg that he lost $92,000 after buying three contracts for about $21 each that same day. His attempts to sell were rejected by the platform as it couldn't handle negative prices, he said.

A TDAmeritrade representative told him two days later that the exchange was working fine and he should have used a different type of order, the user told Bloomberg

TD Ameritrade declined to comment when Bloomberg asked whether it would compensate its clients for the technical failure.

Mike Gatto, partner at law firm Actium LLP, told Bloomberg his firm is working with other attorneys to help ETrade customers recover some of their losses.

"When you buy a car, you expect to be able to accelerate — and brake. When you use a brokerage, you expect to be able to buy — and sell," Gatto said.

Oil's sharp decline

Oil prices first tumbled this year in March when Saudi Arabia and Russia began a price war. Widespread lockdowns also dampened demand for fuel, resulting in an oil glut that put storage under pressure, particularly in the key hub of Cushing, Oklahoma.

Prices have recovered since, partly due to production cuts that took effect in May, and because economies have gradually moved towards easing lockdowns. On Saturday, the OPEC+ extended production cuts to July.

Brent is trading at $41.20 a barrel, 2.6% lower, and West Texas Intermediate is down 3.4% at $38.20 a barrel as of 10:20 a.m. ET.