Interactive Brokers must pay back $ 82 million and pay a fine for negative oil prices

You still remember "Negative" oil prices in April 2020when fuel contracts were priced at the start of the pandemic? The procedure has just ended Commodity Futures Trading Commission (CFTC) from the USA on this matter against Interactive Brokers. The commission announced that it is fining the brokerage house $ 1,75 million. But a much more severe penalty will be an order to cover customer losses. It turns out that speculators only work with this broker then they lost USD 82,57 million on oil contracts. The broker has done nothing to prevent this, so he will have to give the money back.

The quarters from and after the pandemic were record-breaking in the history of brokers around the world. They recorded enormous profits, often beating their previous achievements more than a dozen times. It turns out, however, that at least some of this money will go back to the clients of the brokers. This is the result of CFTC activities. 

Be sure to read: A year ago, oil was headed towards the bottom (and below). What has this taught us?

Why does Interactive Brokers have to give up the money?

Okay, but the clients themselves chose such and not other investments. They set up (or not) defense orders themselves and took responsibility for their choices. So why should the broker return money for their mistakes?

The investigation proved that IB is not without fault himself. The Commission found, inter alia, lack of careful supervision over customer account management. What was it about? First of all, the entire transaction system has not been properly prepared. It was therefore during the large drops in oil prices, which at the beginning of the pandemic did not find buyers and waited for tankers on the roadstead, not only to set negative prices for its contracts, but also to calculate incorrect margins. Down is the price of a futures contract on WTI oil hit a valuation of $ -37,63 apiece. It took place on April 20, 2020.

It turns out the broker expected the price to be negative but did nothing to prepare for it. What's more, the trading platform was not even prepared to recognize a negative price. Therefore, on the unlucky day, prices were not only not displayed to clients, but they were also unable to close or open positions in crude oil. 

A further consequence of this error and the lack of foresight was that the minimum margin was also incorrectly calculated, and what - especially those who like to risk large positions know - is a simple way to reset the account. 

The company pleaded guilty and is unlikely to appeal against it, because it received a smaller fine anyway than originally planned - precisely because it cooperated with the Commission and repaired its systems, which, if such a situation were to repeat, they will not disappoint for sure.

$ 9 million loss in one day

The most spectacular story is one of Interactive Brokers' clients. On April 20, 2020, he had 77 thousand. USD of margin. He had been waiting for a low in oil prices for several days to open a long position with the idea that it would eventually rebound. When the system displayed a price of $ 0,01, it seemed like a great deal. After all, it couldn't be cheaper. So he bought 212 contracts, taking a long position of course.

Nothing could be more wrong - it turned out that when the price was displayed at USD 0,01, in fact the contract was already negative at-USD 3,7. After a few hours, it was already at -37,63 USD per barrel. On the same day in the evening, the client received a bill to be paid from Interactive Brokers: USD 9 million. 

The agreement was reached after three days, but it is not difficult to guess that these were the longest three days in his life. But how many customers have lost smaller amounts and waved at it? This is not fully known, but everyone who has or had an IB account and invested in crude oil should review their archived transactions.