FIA Negative Price Webinar Emphasizes Proactive Communications

John Lothian

John Lothian

Executive Chairman and CEO

During the webinar put on today (Wednesday, May 13, 2020) by the FIA about negative prices and their impact, panelists emphasized the importance of proactive communications with the trading community in mitigating their potential risk.

Near the end of the discussion, CME Group’s Derek Sammann went so far as to say the Bachelier options model was “well known” to the industry and its customers. 

I am not sure that is the case, especially with the retail traders who participate in their markets. I would point out that while the CFTC website’s glossary mentions the Black-Scholes options model, it makes no mention of Bachelier.

The CME Group website’s glossary makes no mention of either Black-Scholes or Bachelier. The Nasdaq website glossary mentions Black-Scholes, but not Bachelier. A search for the term “Bachelier” on TheICE.com website comes up with 0 replies.

There is also no mention of negative prices on these glossaries. 

From the stories in the media about retail traders participating in the May contract, I would say Bachelier was not something they were up on either.

Sammann also pointed out that the CME Group proactively decided not to issue a press release about the potential for negative prices, but rather chose to put out notices and advisories to their clearing members and the trading infrastructure community.

He said they did not want to create a self-fulfilling result by putting forces in motion that were not reflective of the underlying fundamentals. They did not want any “unintended consequences,” he said. Surely this was a proper strategy for the neutral platform they are. 

Sammann drew attention to three different stories in the press going back as far as March 18 with a Business Insider story. This is a bit of cherry picking, as a March 27 Business Insider story on negative prices quoted an analyst at BloombergNEFF saying “The prices of Brent or the US benchmark, known as West Texas Intermediate, are not likely to go negative.”

A March 19 Bloomberg story about negative prices in oil does not specifically mention WTI, but rather local varieties.

A March 27 Bloomberg story told how oil prices had already turned negative at one location, the obscure Wyoming Asphalt Sour, which had limited storage and too much supply.

The previous examples, and those in the press, seemed to be about contracts or relationships in the periphery of the actively traded contracts like Brent and WTI. And neither story indicates that officials from the CME or ICE had weighed in on what was happening at their exchanges.

No offence to my friends at Business Insider, but they often traffic in “click bait” stories that harken to some risk that may not completely reflect the content of the story.

My take is that despite Sammann’s claim that the concept and practical risk of negative energy prices were well communicated, I would suggest there is some cherry-picking to get that conclusion.

On April 23, three days after WTI traded below zero, John Lothian News had a story in our options newsletter with the headline that options on negative prices where now available on CME and ICE for WTI and certain other energy contracts. 

An April 22 story from Barron’s may have captured this best. Again, this was a lead story in the JLN Options Newsletter, with a title of “Why Negative Oil Prices Are the Latest Financial Innovation to Cause Mischief, “ by Randall W. Forsyth. Forsyth’s lead was:

“The financial world has been turned upside down by extraordinary events in recent years. First there were negative interest rates, something that had never happened in 5,000 years of recorded history. Now it’s negative oil prices , a phenomenon that sparked headlines Monday far beyond financial news.”

OK, that is a bit of cherry-picking on my part, but there it shows the possibility that negative prices in oil was not a widely known or accepted concept. And I would note, no CME or ICE representatives were quoted in these articles, nor from the FIA. A truly proactive response would have included such sources.

The CME Group’s strategy of advisories and notices to members and ISVs was proactive and comprehensive. From April 5 to 16 they had 5 communications, Sammann said. However, if that strategy was an effective means of informing the greater trading community, then there would never have been a John Lothian Newsletter.

Too many times when things were happening back in the late 1990s, a notice from the exchange would make its way to the desk of an FCM executive and die there. Or it would be shared selectively. Certainly, they were not shared comprehensively or virally. Don’t get me started on the dysfunctionality of Man Financial/MFGlobal.

That was a spark of the John Lothian Newsletter, the need for viral communication of critical information amid a torrent of change that was too frequent for the pace of publication of the journals and magazines that covered the industry. Something viral, daily and pushed out to everyone was needed, not just for senior executives or those who could pay high end prices. Something that could be pulled from a website was not enough; there was a need to push the content too. And sometimes to make boring industry plumbing and inside baseball stuff interesting by adding some personality to it.

But this is not about JLN or me, it is about proactively sharing information. There are many ways to do this, as JLN is a megaphone for many other sources of information, as the Barron’s and Bloomberg stories above reveal, having been lead stories in the day’s newsletters.

One tool Sammann highlighted when talking about the upcoming roll of June WTI futures was the “Pace of the Roll.” This tool allows you to see how the current open interest drawdown of the expiring contract relates to historical numbers. Add this to your toolbox if you are in physical commodities. You will need a CMEGroup.com account to access it.

As a futures broker from another lifetime, I was involved with many different delivery expiration contracts on behalf of clients. The first time was in the soft red wheat market in Chicago when Bill Mallers, Sr. was recommending a bull spread to clients of First American Discount Corporation because a high profile wheat pit trader (and friend) was trying to squeeze the commercials. 

The last time I was involved in an expiration was in July soybeans when a client went into the last five minutes with a July-November spread to liquidate. The broker ended up filling the order backwards and had to get out of the position in the cash market after the contract stopped trading. It cost him over $100K to make the customer right and get himself righted.

I am not sure how these things are handled today in this electronic trading world, but in my day if a customer had the margin many times they could trade almost anything they wanted. 

That was not the story we were told today in the webinar. Only traders who have the ability to make or take delivery were allowed in the May contract. Having been a broker, I question this.

Sammann did say all the ETFs were out of May WTI futures on April 20 and did not participate in the May 2020 WTI futures trading that day. Some of the ETFs have made an effort to roll out into a combination of further contracts and are now distributed in long positions across the price curve.

There is concern that current price action in European gas is indicating that negative prices may be in the future. No one wanted to predict whether negative prices were in the future for the June WTI contract, though it was noted many of the “markers” the exchanges looked at were more positive, and spreads were likely to continue to be under pressure. 

The FIA and Walt Lukken did a good job of presenting information about the oil market and what occurred. However, the event did not include anyone from the FCM side. Richard Haigh from SocGen is a research guy, not a broker.  

The market worked, conversion happened at expiration, though the penultimate day was historical in terms of price discovery. Margins were collected, and exchange systems worked. Rob Creamer said all his systems worked too at Geneva Trading. 

Traders will be more ready for the next time this happens, Creamer said. And that is the name of the game: stay in it so there can be a next time. Challenge assumptions. Educate yourself that anything is possible. Just because you haven’t seen it does not mean it can’t occur. 

The larger public – those who only notice something going on in futures trading when there is a car wreck – was left out of this proactive communication about negative prices. They were most likely surprised by negative prices in WTI and given more grist that the markets are biased against the small traders. This seminar was a good start, but the industry needs to create a lot more communication and education about negative commodity and interest rate prices for the message to stay proactive.

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