There seems to be some thought that some skullduggery went on here. How, just how possibly, could some handful of youngsters in Essex – Essex of all places! – make $660 million on oil trades?
Must be summat, right, stands to reason.
Well, yes, there is summat. Futures – and options – markets, like all speculation, are zero sum. That also means that commodity markets are zero sum.
Nine independent traders operating from their homes in Essex made $660m (£500m) in a single day of trading oil futures when prices briefly went negative earlier this year.
The traders, all affiliated with the small trading firm Vega Capital London, hit the jackpot by capitalising on complex oil market mechanisms to sell oil contracts on falling prices and buy with prices as low as minus $37.
Typically, the description of what they did is garbled. The arts graduates writing the newspapers. Sufficiently garbled to not know specifically what it is they did. But, roughly, they were short as the price fell, then covered at the bottom and perhaps even went long as it recovered.
Their success has caught the eye of regulators at the Commodity Futures Trading Commission in Washington DC who are examining Vega Capital according to Bloomberg, which first reported their profits.
Well, yes. Maybe. There’s always that possibility of skullduggery, of course there is.
Regulators may be considering whether their tactics simply aimed to anticipate price falls or tried to create them, which could be regarded as market manipulation.
Most unlikely, as the problems were in the physical market on options/futures delivery date. Not in the speculative markets themselves.
But there will be those who start shouting that if someone made $660 million then it must have been some skullduggery. And that’s where someone would be wrong. For, again, speculative markets are zero sum.
Across market participants profits and losses always add up to zero. Therefore if some people lost money on those plunging prices then some people made money. This is definitional, it’s not an oddity or even an anomaly.
It’s not zero sum for all the people over in the physical markets. The great value of the speculation to them is that risk gets transferred over to those speculators who then fight over who wins and loses. The point of all the speculation being that risk transfer. But it is exactly that which says that if someone over here has lost $300 million then someone – somewhere, who knows who – has made the equal and opposite $300 million. Because that’s just the definition of what is going on.
That someone made $660 million – and a lot more – over that negative oil price is a certainty, Simply because we know that some people lost that and greater sums. Therefore, by definition, someone must have made it. That it happened to be some wide boys in Essex is just who it happened to be.
Again, that doesn’t exclude nefarity but the existence of profits like that out there, somewhere, is a certainty. Thus the existence of the profits isn’t even a guide to nefarity, let alone a proof of it.