Interactive Brokers pays $1.75M over platform failure during oil crash

abdelaziz Fathi

Interactive Brokers LLC (NASDAQ:IBKR) will pay $1.75 million and restitution of $82.57 million to settle the Commodity Futures Trading Commission’s charges that its platform failed to handle oil’s trip into negative pricing in April 2020.

The U.S. markets regulators said on Tuesday the discount broker didn’t configure its electronic trading system to receive negative prices and calculate margin on April 20, 2020.

Even though it was technically possible, Interactive Brokers’ platform couldn’t cope with the minus sign, the CFTC said.

Interactive Brokers LLC revealed that it had been forced to cover $104 million worth of its customers’ losses when prices plunged below zero for the first time ever. The Greenwich, Connecticut-based broker reported earlier that it had suffered an aggregate provisionary loss of $88 million, but the figure swelled after IBKR made its final calculations for the first quarter.

Thomas Peterffy, the chairman and founder of Interactive Brokers, then said that his firm revised its maximum loss estimate to $109.3 million.

Several customers had been caught on the wrong side of the April plunge, having held long positions on cash-settled WTI futures at both CME and ICE Futures Europe. The negative settlement price meant customers incurred losses in excess of the equity in their accounts, forcing the broker to step in and pay the margin calls owed to clearing houses. However, it said the $104 million mistake on their part hadn’t a material effect on its financial condition.

The huge losses came on the heels of the black Monday’s price crash, which took U.S. oil futures into negative territory for the first time. Desperate traders at one point paid potential buyers up to $40 a barrel to take oil that they can’t accept for delivery on May’s expiring futures contract.

The incident prompted investors to ask US regulators to probe whether market manipulation, failed systems or computer programming failures was behind the unprecedented plunge in West Texas Intermediate, the U.S. crude benchmark.

The CFTC’s order finds that Interactive Brokers was on notice of the possibility of negative oil futures prices, but the firm did not prepare its electronic trading system to recognize negative prices.

The statement further reads:

“Specifically, Interactive Brokers failed to deploy necessary system changes before negative prices occurred resulting in two significant systems issues on April 20, 2020: (1) negative prices were not displayed to customers and customers were unable to place orders with negative-priced limit orders to buy or sell; and (2) internal minimum margin requirements were not correctly enforced prior to trade execution for trades in the WTI contract. These issues impacted hundreds of customer accounts that held long QM or WTI futures positions into settlement, and those customers experienced trading losses on April 20, 2020, initially determined by Interactive Brokers to exceed $82.57 million.”

Commenting on the news, Interactive Brokers said in an emailed statement:

As announced today, Interactive Brokers LLC (“IBKR”) has agreed to pay a penalty of $1.75 million to the Commodity Futures Trading Commission (“CFTC”) related to certain electronic trading systems issues it experienced on April 20, 2020, when certain crude oil futures products traded at negative prices for the first time in history.

The events of April 20, 2020 were one-of-a-kind in the history of the oil futures markets and presented unique challenges to all market participants, including other FCMs.  Although IBKR had engaged in extensive systems testing and had begun implementing necessary coding changes in advance of April 20, it was not able to fully deploy new software before crude oil futures traded in negative territory.  After April 20, 2020, IBKR promptly put in place measures to ensure that our systems are prepared for similar negative-pricing of futures products going forward.

Within a short time after this unprecedented negative pricing event, IBKR voluntarily and proactively made payments of more than $102 million to customers it determined were potentially impacted by its systems issues.  Today’s order includes a restitution obligation of $82.57 million (a portion of the $102 million already paid) and the CFTC has acknowledged that IBKR’s previous payments satisfy any restitution obligation IBKR owed its customers as a result of its systems issues.  The CFTC specifically credited IBKR for its substantial cooperation in this matter.

IBKR is proud of its history of developing and maintaining state-of-the-art electronic systems for our customers to access securities and futures markets around the globe. We are pleased to resolve this matter and pleased that the CFTC recognized our proactive compensation of our affected customers (exceeding our restitution obligation) and substantial cooperation in reaching this settlement.

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