Interactive Brokers Books Loss of 88M relating to Oil Futures Contracts

Investing / Brokers
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Looks like IB had clients speculating highly leveraged oil futures who didn’t really understand them. When the contracts hit 0 IB tried to close all their positions selling into a market with no bids (they held 15% of OI in the contracts in question) which seems to be part of why the front contract closed negative. I read one guy in CH who managed to turn a 3k long position into a -184k loss. Ouch. Welcome to the world of leverage.

Play stupid games, win stupid prizes.

I’m just worried that people speculating in highly leveraged products they don’t understand leaves the brokerages (in particular IB who facilitates it) highly exposed. IB has now had to settle with the exchanges on behalf of the clients. IB will now essentially be on the hook for a lot of these losses if they cannot recover them from the speculators who incurred them.

Deeply concerning for me as I have a lot of investments held with IB! I know they should be segregated in client accounts, but when it all hits the fan… will they really remain segregated?

Interactive Brokers Issues Statement on Crude Oil Contracts and Margin Loss

GREENWICH, CT, April 21, 2020 – Interactive Brokers Group, Inc. (Nasdaq: IBKR) today noted that, as has been widely reported, the energy markets yesterday exhibited extraordinary price activity in the New York Mercantile Exchange (NYMEX) West Texas Intermediate Crude Oil contract. The price of the May 2020 contract dropped to an unprecedented negative price of $37.63. This price was the basis for determining the settlement price for cash-settled contracts traded on the CME Globex and also on a separate, expiring cash-settled futures contract listed on the Intercontinental Exchange Europe (“ICE Europe”).

Several Interactive Brokers LLC (“IBLLC”) customers held long positions in these CME and ICE Europe contracts, and as a result they incurred losses in excess of the equity in their accounts. IBLLC has fulfilled the firm’s required variation margin settlements with the respective clearinghouses on behalf of its customers. As a result, the Company has recognized an aggregate provisionary loss of approximately $88 million.

The Company does not believe that any anticipated losses will have a material effect on its financial condition.

About Interactive Brokers Group, Inc.:

Interactive Brokers Group affiliates provide automated trade execution and custody of securities, commodities and foreign exchange around the clock on over 135 markets in numerous countries and currencies, from a single IBKR Integrated Investment Account to clients worldwide. We service individual investors, hedge funds, proprietary trading groups, financial advisors and introducing brokers. Our four decades of focus on technology and automation has enabled us to equip our clients with a uniquely sophisticated platform to manage their investment portfolios. We strive to provide our clients with advantageous execution prices and trading, risk and portfolio management tools, research facilities and investment products, all at low or no cost, positioning them to achieve superior returns on investments. Barron’s ranked Interactive Brokers #1 with 5 out of 5 stars in its February 24, 2020, Best Online Broker Review.

For Interactive Brokers Group, Inc. Investors: Nancy Stuebe, 203-618-4070 or Media: Kalen Holliday, 203-913-1369.

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I understand your fear but am absolutely not qualified to explain or reassure.

Actually I have a question: what does it actually mean that an “oil contract” has a negative price ?

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Where does it say it was highly leveraged? Wouldn’t a simple margin account do it?

4

Futures contracts are by their very nature typically highly leveraged.

5

The front month went negative as speculators tried to roll their physically settled (i.e. as opposed to cash settled) futures positions forward to avoid physical delivery. Not enough physical buyers, too many speculative sellers (and forced sellers as risk systems automatically tried to close out the positions) sent the price negative. If you had ample storage and were in a position to take delivery - you get paid to take oil (woo hoo!), but mostly I’m guessing this was just speculators who can’t take physical delivery. The price recovered the next day as physical participants stepped in to take advantage of the dislocation.

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So why is that so important…

If you buy an oil future at IB, it is only speculation. You cannot get the physical delivery through them so they will anyway close the contract before expiration. And then shit hits the fan.

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Well, if you’re booking unexpected $88m hits you very clearly don’t have a handle on managing your exposures. It’s indicative that IB are letting clients gamble with a lot more exposure/risk than they are able to cover, and now IB will likely have to absorb those losses where they cannot be recovered. “Luckily” this was only 88m - but what if it had been 1b?

Talk is very cheap. Lot’s of business have claimed “everything is fine, nothing to see here” right up to the point where the shutters are rolled down.

I’m concerned as I have a large portion of my net worth held with them (in boring equity ETFs). I’m already retired, so if that somehow gets wiped out I’m really in the sh!t. :slight_smile: The concentration risk [with IB as a broker] has always been at the back of my mind, but this has certainly given me a sleepless night last night and brought it into focus for me.

Client assets should be segregated, but if it all goes to pot, who knows what might happen and how it would be unwound, or how long it might take. I really love IB - I think it’s the best retail broker out there in terms of functionality / liquidity / pricing / reporting / api’s etc by a long shot, but this situation is making me sweat, in large part due to my concentrated exposure to them as a counterparty. :slight_smile:

1 Like
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I think it was @Bojack who was thinking about moving part of his ETF to Postfinance, just to not have all eggs in one basket.

I’m not sure how much will it cost, other than the 90chf/year afterwards.

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I’ve left CH and am now semi-retired in Bali, so I don’t think Postfinance is an option for me.

But as much as I love IB, spreading the eggs around might not be a terrible idea. I will try and find some other options in Indonesia.

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I already have a part of my portfolio in CT, but not because I planned it like this. I just opened the CT account first and never closed it, after opening IB. I just thought, since I have a bank account with PF, it would have been slightly more convenient to have it all at PF.

Would such a portfolio split make sense?

  • cash in bank: allowing you to survive 3-12 months (5%)
  • local broker: allowing you to survive 4 years (20%)
  • IB: the rest (75%)

Wow, we have such people in the forum, and we don’t hear from them very often. Did you already share your story?

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I’d do the same. Do you know how much will it cost to move from IB to PF?

Would you trust them?

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Is it worth it, though? Just save up a sum, open brokerage with PF, and invest there. Or you want to trade exclusively via IB? Anyway, I would only recommend this move to people close to reaching their FIRE. When you still have a job, then you don’t need to access the money that is with the broker.

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You might try, just to see how it works, but I am pretty sure it will cost X for position, so it’s not worth doing it a lot of times.
If you buy VT on IB it will cost you maybe 3-4 dollars FX included, if you buy the same on PF surely more.

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CHF 20’001 - 30’000: CHF 95 pro Trade
CHF 30’001 - 50’000: CHF 130 pro Trade
CHF 50’001 - 100’000: CHF 180 pro Trade

The 90 CHF annual fee is deducted from these fees.

So if you only make one 30’000 trade per year, you will only pay 5 CHF on top.

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  • stamp tax. etc etc.
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Yes, stamp duty, but no etc etc. That’s it. Here the total cost for making 1x30’000 trade per year.

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No stock exchange fees or anything else?

Then it might cost less than moving 1000 VT from IB to PF.

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How’s the situation there ? I had planned holidays in Bali between 27/6 and 17/7 but yesterday got cold shower from Emirates (flights cancelled…). :sob:

I still have to understand what will happen with my internal flights (Batik Air, Lion Air) which were not cancelled (yet)…

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That is correct, with the small add-on for non-“Swiss ETF”… if you buy beloved VWRL this is “foreign” and the Stamp Duty doubles.

2 Likes
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Depends on who I can find. Maybe Vanguard Australia or a bank in HK or SG might let me in if I commit to deposit a big enough sum. I think the key will be to spread the eggs to multiple baskets. The probability of two different brokers going under is likely to be extremely slim.