Fuck IB and this “trader”, idiots should lose their shirts, that’s one of the intended outcomes of an efficient market.
That said, there is an issue here with futures contracts: you can get very very large leverage when the price is near zero. This is the real issue with instruments that can negative price and just like their are “circuit breakers” in markets for big price swings, there should be breakers for entering the “near zero” range.
An efficient market that don't let traders operate? Did you even read the article?
Futures contracts that CAN BECOME NEGATIVE don't let large leverage when price is near zero, that's NOT TRUE. Future contracts margin is calculated with SPAN, and if it's done correctly, it considers the scenarios where price can go below 0.
>Futures contracts that CAN BECOME NEGATIVE don't let large leverage when price is near zero, that's NOT TRUE
It clearly is. If I can buy a contract for 1c, I can get 100,000 contracts for 1000usd. Then if the price rises of falls by 1usd, I'm up/down 100,000 dollars. Can you think of any retail product with that sort of leverage?
That's the danger of putting zero in a denominator.
Assuming your broker is competent (which the broker in this story is not), they won't let you buy 100,000 contracts for 1000 USD unless you can cover the potential downside, which would be of millions (possibly tens of millions) of dollars. So you can't actually leverage $1000 into going up for down $100,000; you would be tying up $X,000,000 to go up for down $100,000.
Unfortunately IB was not competent and they did not calculate the margin requirements correctly, which allowed their customers to leverage themselves improperly.
You can't buy a contract for 1c. You need to pay the margin, and the margin for futures is not calculated based on current price, it's calculated with SPAN, that considers different scenarios in which you can lose money.
For example, for this contract Bloomber says IB asked for $30 margin. But the margin is usually $7000 for this contract, that it was IB should have requested as collateral at least for each contract. in a day with that volatility should be much higher in IB, as they take that also in consideration, probably around $20000 per contract.
The problem was that IB didn't consider scenarios in which the price can go below 0. The software was designed in that way. But it shouldn't.
That said, there is an issue here with futures contracts: you can get very very large leverage when the price is near zero. This is the real issue with instruments that can negative price and just like their are “circuit breakers” in markets for big price swings, there should be breakers for entering the “near zero” range.