Shares in Interactive Brokers fell as much as 10 per cent in early trading on Wednesday after the US broker took an $88m loss from the collapse in value of short-term oil futures contracts.
The Greenwich, Connecticut-based broker, founded by electronic trading pioneer and billionaire Thomas Peterffy, said late on Tuesday that several of its customers had been caught on the wrong side of Monday’s plunge, forcing it to step in and pay the margin calls owed to clearing houses.
In a separate quarterly earnings report also released on Tuesday, Interactive said it was co-operating with a Department of Justice inquiry into the group’s anti-money laundering and privacy practices.
Its disclosure is the first indication of the impact on market intermediaries of this week’s unprecedented moves in West Texas Intermediate, the benchmark US oil contract. WTI dropped as low as minus $40 a barrel on Monday as it headed towards its expiry date for May delivery, amid fears over the lack of space to store oil in the key hub of Cushing, Oklahoma.
This marked the first time it had gone negative in its history — meaning that producers or traders were in effect paying other market participants to take the oil off their hands.
Interactive said several customers held long positions on cash-settled WTI futures at both CME and ICE Futures Europe, the main exchanges for trading the contracts. The negative settlement price meant customers incurred losses in excess of the equity in their accounts.
The broker said it settled the margin calls from the CME and ICE clearing houses, causing it to register a provisional aggregate loss of around $88m. It said the losses would not have a material effect on its financial condition.
Mr Peterffy told analysts during the call on Tuesday that Interactive had 15 per cent of the open interest in the May oil contract. “I think there are other people out there with various problems having to do with exchange-traded notes and funds that are holding oil futures,” he said. “And there is also a big winner out there, at least one or many, who was holding the opposite side.”
The losses mainly came from individual clients, he added. “[They] tend to be all traders and people that usually know what they are doing.”
The head of the Commodity Futures Trading Commission, the main US regulator, said on Tuesday that most investors closed their positions when the contracts were close to expiry.
“Very few people were actually in the contract compared to normally . . . so that reduces counterparty risk. No one missed margin payments,” CFTC chairman Heath Tarbert told CNBC.
Interactive also said it was working with authorities reviewing its past anti-money laundering practices and privacy practices. The Securities and Exchange Commission, the CFTC and Finra, which oversees brokers, have indicated that they believe that Interactive’s historical practices and procedures were inadequate. The company said it was in discussions to settle with the agencies.
Mr Peterffy, who was born in Hungary, was among the first traders in the 1970s to use computers to speed up the valuation and trading of securities and options. His systems ultimately helped to usher a wave of automated trading on to Wall Street.