Beware: Abnormal Markets


Apr 20

Today the front month in crude oil went negative for the first time. While, it is reported that other commodities can do that– it was not common knowledge. There are reports that some retail traders bought it near zero and could not liquidate due to system problems. Some traders likely blew out their accounts and may even owe their broker: it is a terrible situation for the retail trader. Frankly, I did not know it go negative, either. But, the abnormal pricing behavior of any kind should be a warning based on history.

Some examples of traders getting hurt in abnormal markets or the possibility:

  • Traders who bought stocks for a penny in the flash crash, scalp a small profit, and then had their trades busted leaving them net short.
  • Traders who got trapped in “lock limit” up or down markets and only get suffered the gap.
  • Traders who bought stocks which get halted and may not reopen or gap
  • Swing traders who get caught in gaps.
  • Traders who bought VIX based products (XIV? TVIX?) that went to zero.
  • Traders who tried to arbitrage Bitcoin at Mt. Gox– and likely other similar scenarios
  • Traders not understanding time decay inherit in leveraged ETFs
  • Forex traders caught due to central bank action, i.e. black swans
  • Natural gas options sellers or other naked options sellers who get on the wrong side of strong trends

What is the commonality in every case? Abnormal markets and not fully understanding the risks of the trading product and often technicalities that prevent stops from working as risk management. Importantly, most traders want dollar constant losses, i.e. trader is willing to lose x$ on a trade but doesn’t expect to lose their entire account.

Let’s ask a tough question: probably everyone reading my blog likes to trade futures. But, what is the primary reason that new traders gravitate toward futures?

Everyone knows most retail traders gravitate to the futures due to PDT rule and they are also billed as a simple instrument to trade. Don’t get me wrong: I like futures too. But, among professional traders with sub million dollars or not managing programs where liquidity is required: I have seen far fewer verified futures account statements compared to equity and options statements: perhaps I am wrong and they just are extremely low key. But, in a recent post, I shared how one can trade options in a directional way and similar to futures with completely limited risk.

Also, who drives these emergency rule changes? Obviously, institutions have much greater impact on futures. Why were retail brokers even allowing retailers to trade without a qualified warning? These are good questions, and I truly hope no retail trader or, for that matter, any independent trader was ruined today.

As for this specific case, it highlights the importance of rolling on physically delivered contracts well before the expiry.

About the Author

The author is passionate about markets. He has developed top ranked futures strategies. His core focus is (1) applying machine learning and developing systematic strategies, and (2) solving the toughest problems of discretionary trading by applying quantitative tools, machine learning, and performance discipline. You can contact the author at